Since 2005, UM Financial offered mortgages to homebuyers who wanted to avoid paying any interest on a loan, which follows strict Sharia law. But CBC News reported Thursday that the company was ordered into receivership by the Ontario Superior Court. The reason given was that the credit union UM Financial partnered with wanted to end the relationship.
While customers were allowed to pay no interest, as it is forbidden under Sharia law, they had to pay an alternative fee similar to rent if they are to get money from a mortgage.
A problem with some Islamic financing is that if the client defaults on a payment at the due date, the price can’t be increased. With an interest-based loan, interest keeps accruing according to the period of default. But in Islamic financing, once the price is fixed, it can’t be increased. For example, if a homeowner owes 250 months of fees before ownership and misses a month, the total amount of months owed are 250 at the same cost. Banks have the right to reclaim properties eventually, however, if payments end.
CBC News reported the credit union, Central 1, pointed to a number of instances when payouts owed to it from UM from discharged mortgages were delayed or not paid at all. Some 132 mortgages are still under UM, valued at $32 million, and little direction yet as to what will happen. UM Financial also offers interest-free credit cards.
The report said mortgage clients were notified that UM Financial had terminated their investment in client homes thanked for their business, giving each $10 in Tim Hortons gift cards, a prayer mat, and an English-version of the Qur’an.
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