The Sharia solution to sub-prime

04 March 2009

There was a widely available form of consumer credit called “rent-to-own” which, though still available, has been much less common since, roughly, the 1970s. For the previous hundred years or so it had been a very common form of installment plan purchasing. Rent-to-own began with a court case in England which effectively legalized the contract, which then spread throughout the countries using Anglo-Saxon Common Law. Quite simply you rented the product, paying a slightly higher rent, and when the cost of purchase plus interest had been paid off, you became owner of the product. In the court case the product was a piano – a very substantial, but important, purchase, for a family in Victorian England. Such contracts became common for other major purchases such as furniture, cars and, from the 1950s onwards, consumer goods such as TVs and washing machines.

The arrangement suited families who could not buy expensive goods at one go, and stores. Because the store remained owner of the product until the last payment was made it was easy for them to repossess the goods. If ownership had changed hands the store would need to take an expensive legal action to get a lien on your property, and might end up with goods they don’t want. The piano store might get possession of your sofa, which they would not be able to sell, instead of your piano which they could.

The arrangement has been much less fashionable since the 1970s. In part this is because stores now have arrangements with specialist banks to provide consumer credit. The bank doesn’t want your piano back. They wouldn’t know what to do with it. In part it is because people have much better credit. Far more people are paid by check, have bank accounts, and have utility bills. Without such things the most trustworthy and creditworthy person in the county cannot document his credit.

The one purchase for which rent-to-own was uncommon was the biggest of them all – real estate. (Though tenants of public housing sometimes had the right to have their rental payments construed as mortgage payments and purchase at a deeply discounted price). When you think about it, purchasing a house by rent-to-own makes little sense. The vendor doesn’t have the means to offer you credit so you arrange it with a third party, usually a bank or savings and loan.

Since rent-to-own has little or no connection to the mortgage market and most people think of Sharia religious law as referring to brutal criminal punishments – amputation for theft, stoning of gay people and beheading adulterous women – readers may be wondering what connection this history of rent-to-own has with either Sharia or sub-prime.

Sharia law has criminal sanctions which no civilized country could contemplate, but extends far beyond that. It bans usury (the payment of interest), just as Christianity used to. Sharia mortgages therefore are rather like rent-to-own. The bank buys the house and rents it to you, selling it to you years later. Such an arrangement is utterly inappropriate for most people. But for people with poor credit it allows a bank to assist with home purchase at much less risk. Using a Sharia-mortgage a bank can lend to people who might not qualify for an ordinary mortgage. While no more than five or ten percent of people would ever use such an arrangement, to have it available for the sub-prime market seems common sense.

First published in the Common Sense series for Lake Champlain Weekly

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