Ministers are considering asking Muslim investors to help fund social housing in Scotland to ease pressure on the government’s budget.
The Islamic Finance Council, which promotes the use of finance from Muslim sources in Scotland, is to meet Alex Neil, the housing minister, to discuss how Muslim wealth could be used to develop shared-ownership homes, in accordance with the principles of sharia — Islamic law.
The partnership could potentially save the Scottish government millions of pounds at a time when its budget is under unprecedented pressure because of the recession, and lead to a rise in the availability of affordable homes.
Shelter Scotland, the housing charity, claimed earlier this month that the number of council and housing-association homes for rent in Scotland has fallen to the lowest level for 50 years. There are about 599,000 socially rented properties across the country — 18% fewer than in 1998 and the lowest figure since 1959.
Under the Scottish government proposals, Muslim financiers would fund new properties with backing from the government. Under sharia, Muslims are forbidden from charging usury — or interest rates — in their financial dealings, so householders with a stake in properties would pay a rent set at a level similar to mortgage rates.
Unlike those with conventional British mortgages, householders would be largely insulated from negative equity.
If the occupier had a 10% stake in a property worth £200,000 that later fell in value to £150,000 and wanted to sell, the financier with a 90% stake would, unlike banks offering conventional mortgages, be unable to recover the £180,000 they had put in initially.
Instead, they would have to settle for 90% of the sale price, recovering only £135,000, while the householder received £15,000 and avoided having to cover the bank’s £45,000 shortfall.
The attraction for Islamic financiers would be that, if and when property prices rise, they could qualify for a higher share of the profits when homes are sold, gaining not only 90% of the final value but an extra bonus from the proceeds. The scheme would be open to non-Muslims, as long as they agreed not to charge interest on their investment.
Omar Shaikh, a member of the Islamic Finance Council, which has been discussing a wide range of investment opportunities with ministers, said that the model would prove attractive to ethical investors and Scots looking for affordable or mid-range housing.
“The industry is very young but very energetic and growing at a rapid pace and, with the liquidity that is backing it from the Gulf, there is absolutely an appetite for this,” he said.
“It could also be a very attractive product in the current climate for people of all faiths and none. The ability to avoid negative equity is a very powerful message that would resonate for many in the middle classes who can’t afford to be stuck in such an awkward situation.”
Neil said he is interested in learning from Islamic practices to fund new homes. “I would be happy to sit down and talk to them [The Islamic Finance Council] about their ideas.”