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Advisers told of potential flaws in Islamic loans

Advisers who offer Islamic mortgages are being warned of potential flaws compared with standard mortgages.

Interest in Islamic mortgages to service the estimated 1.6 million Muslims in the UK is expec-ted to rise after the FSA last month opened a consultation on the regulation of home-purchase plans, as they are also known. The regulations are expected to come into force in spring next year alongside home-reversion plans.

But a leading compliance consultant is warning of a basic potential flaw for unsuspecting intermediaries and consumers.

FSA Compliance Consultants managing director Mazhar Manzoor warns that as Islamic law does not permit the payment of interest, the lender is effectively the homeowner, with the borrower paying rent to live in the property until the value is paid off. He says if a lender goes bust, the customer could be in trouble.

Manzoor says: “There are all sorts of treating customers fairly issues with this. The customer is making an investment with the risk to capital and returns but without the rewards necessarily. This will become a massive area as more and more banks dip their toes into the market.”

FSA director of retail policy Dan Waters says: “We have already done a lot of work in the field of Islamic financial services to improve consumer access to these products. We shall be working to promote wider public understanding of both of these products as part of our consumer edu-cation objective.”

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