Islamic Finance is the known solution to West housing debts

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solution to west housing debt

The 2008 financial crisis has been quite hard to recover from already but newer crisis like the current international banking system and its link to the elevating housing debt crisis is something which has added to the problems too. The Citigroup’s chief economist Willem Buiter has said that the best solution to this problem is Islamic banking.

Whenever a person wants to mortgage in the western societies to buy a home, he approaches a bank to ask for a loan for the same as he is short of cash. Hence the property is purchased by the bank’s name for him which is transferred when the loan is paid back,

This way a legal agreement allows a homeowner to transfer the ownership to the creditor i.e. the bank until the loan is paid off by the buyer with due interest. Hence people often do this after moving out of their own homes and starting their own families in the West.

But according to Buiter this is a very poor financial decision because households are the last things to take up on debt stakes as they have human capital which isn’t collateral besides the property being hard to realize as well. Hence this does not make houses suitable for debts at all and the solution to this is definitely Islamic banking.

When one buys a home through Islamic mortgage then the bank owns the house in the start but he has two ways in front of him. The first is the rental market way which isn’t affected as long as the payment is done and the other is the discretion limit that can be set according to how much percent they can buy from the bank each year. This way there is less financial risk involved in it, in comparison to taking huge loans from the bank and paying the interest over it.

As Islamic banking prohibits interest charging therefore the property buyer charges only the fixed rent while the borrower purchases the shares in the property gradually and over time. hence Buiter says that this system can be extended far beyond Islam to be used in any country in order to make housing affordable for the people.

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