The dilemma of getting a conventional or Islamic loan is a major financial hurdle for Muslims living in the West, particularly in the UK. A prospective homeowner often faces a difficult choice: choose a conventional loan, which is interest-based (Riba) but affordable, or an Islamic loan, which is Shari’ah-compliant but significantly more expensive in terms of repayment. This article addresses the economic realities behind this price disparity and the scholarly perspective on navigating it.
Why Are Islamic Loans More Expensive?
It is important to understand why Islamic financing products often carry a higher price tag than their conventional counterparts.
Prominent economists explain that Islamic financing is a relatively “new” product in the Western market. As such, it requires higher legal, administrative, and research expenses to structure contracts that comply with both religious law and local property regulations.
In contrast, conventional financing has been established for centuries; it is standardized, legally streamlined, and benefits from economies of scale. Consequently, its provision costs are much lower. In the current market, the additional costs of Islamic financing are often borne by both the producer and the consumer.
The Problem of Market Disparity
Ideally, Islamic financial institutions should aim to be competitive. However, in many instances, providers do not absorb these extra operational costs. Instead, some may exercise a degree of monopolistic power—knowing Muslims have limited choices—and charge higher prices. Additionally, some Islamic providers may not yet be as efficient as conventional banks, leading to higher costs passed down to the client.
When the Islamic Option is Too Expensive
What should a Muslim do when the “Halal” option is financially crippling?
Expert economists argue that Muslim customers should not be unjustly exploited. Ideally, they should not be charged significantly more than the prevailing market rates.
If an Islamic provider charges an exorbitant amount compared to the market standard, making the loan unaffordable, some scholars and economists suggest that the consumer may view this situation as if the Islamic provider “does not exist.”
In such a specific scenario—where the Islamic option is effectively inaccessible due to prohibitive cost—a person may revert to the rulings regarding necessity (darurah). If their circumstances and needs for housing qualify them under the scholarly exemptions (such as the Fatwas issued by the European Council for Fatwa and Research regarding purchasing a primary residence), they may be permitted to utilize a conventional mortgage. However, this is a specific exemption based on need and the lack of a viable alternative, not a general permission.
