A borrower can obtain a mortgage from a bank, credit union, or other lender. Most lenders require the borrower to have a certain amount of money to use as a down payment toward the purchase of the house. For example, if an individual wants to buy a home priced at $100,000 and the lender requires a down payment of $5000, the individual will apply for a loan of $95,000 to pay for the difference.

A lender requires detailed information about borrowers to assess their ability and willingness to repay a loan. For example, a borrower will be asked about income, employment history, and credit history. The lender will also inquire about any debts, such as a car loan or credit card balances.

Before the lender agrees to a loan, an appraisal of the property by a qualified third party is required. The appraisal provides an estimate of the property’s value. The lender wants to be certain that the property is worth at least as much as the loan in case of foreclosure.

If all requirements are met, the lender agrees to the loan. The loan agreement specifies the current interest rate and the loan’s repayment terms. The terms of repayment specify how much the regular payments will be, how frequently they will be made, and over how many years. The interest rate and the duration, or life, of the mortgage determine the amount of the payment. Payments are usually made monthly. The life of the mortgage can be 15, 20, 30, or even 40 years.

To accept the loan the borrowers must sign a promissory note that obligates them to repay the mortgage debt. The borrower also promises to keep the property insured against fire and other hazards, and to pay any property taxes that may be owed. If the borrower fails to keep any of these obligations, the loan is considered to be in default, and subject to foreclosure.

The actual transfer of funds and property takes place at the closing. At the closing the lender transfers money to the borrower for buying the house and the borrower signs the mortgage documents. The borrower also pays the lender any fees associated with borrowing the money. These might include origination costs for creating and processing the loan, fees for obtaining reports on credit history, and fees for obtaining an appraisal.

Microsoft ® Encarta ® 2008. © 1993-2007 Microsoft Corporation. All rights reserved.


June 8, 2008 at 9:51 am 1 comment

Estate Tax

Estate Tax, in law, federal and state taxes imposed upon the property (called the estate) of persons after their death. Estate taxes are usually imposed on the net estate of a decedent. The net estate represents the value of the property at the time of death, less allowable deductions as provided by law. In United States law and in the laws of some states, the value of the decedent’s insurance policies is not deductible and is included in the estate. Gifts of real or personal property, made by a testator in contemplation of death, are considered under federal and most state estate tax laws as part of the decedent’s estate.

Beginning in 1982, changes in the U.S. federal tax law allowed an unlimited marital deduction—that is, an estate of any size can be left tax free to a spouse. In computing the federal tax on a decedent’s estate after taking the marital deduction into account, the Economic Growth and Tax Relief Reconciliation Act of 2001 gradually raised the amount that could be exempted from federal estate taxes and completely eliminated the estate tax in the year 2010. However, the law was due to be repealed after December 31, 2010. Federal estate taxes would then revert back to the way estate tax law existed in 2001 unless Congress agreed to extend the Tax Relief Reconciliation Act. In 2001, $675,000 could be exempted from estate taxes. Under the new tax law that exemption was raised to $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million from 2006 through 2008, $3.5 million in 2009, and no estate tax at all in the year 2010. In addition, the top estate tax rate on amounts exceeding the exemption was to decline from 50 percent in 2002 to 45 percent in 2009. Many observers believed that if federal budget deficits continued to grow, Congress was likely to repeal these estate tax provisions, which benefited only about 2 percent of the wealthiest Americans.

Microsoft ® Encarta ® 2008. © 1993-2007 Microsoft Corporation. All rights reserved.

June 8, 2008 at 9:00 am 2 comments


Insurance, legal contract that protects people from the financial costs that result from loss of life, loss of health, lawsuits, or property damage. Insurance provides a means for individuals and societies to cope with some of the risks faced in everyday life. People purchase contracts of insurance, called policies, from a variety of insurance organizations.

Almost everyone living in modern, industrialized countries buys insurance. For instance, laws in most states require people who own a car to buy insurance before driving it on public roads. Lenders require anyone who finances the purchase of a home or car with borrowed money to insure that property. Business partners take out life insurance on each other to make sure the business will succeed even if one of the partners dies.

Insurance makes up part of the broader financial services industry (see Finance). In the United States in the late-1990s, more than 5500 insurance companies offered a wide range of policies and services. Some large companies sell virtually every type of insurance available in the marketplace. Smaller companies may specialize in a specific geographic region or type of insurance. In 1997 more than 300 Canadian companies sold some form of insurance.

Reason for Insurance

In life, losses are sometimes unavoidable. People may become ill and lose income or savings to pay off medical bills. Individuals or their relatives may die of illness or accidents. People’s homes or other property may suffer damage or theft. People also may accidentally cause injury to others or damage to the property of others.

No one knows in advance when a loss will occur or how serious that loss will be. The uncertainty surrounding potential losses is known as risk. Insurance offers a way for people to replace risk with known costs—the costs of buying and maintaining insurance policies.

Assume a person buys a new car for $25,000. Its owner faces the possibility that, at some point, the car will suffer damage in an accident. But how could the owner budget in advance for a loss of unknown cost? The cost to repair or replace the car in the event of an accident could range from the price of a bottle of touch-up paint to as much as $25,000. If the accident injures someone, the costs of medical care could be much higher. Through the mechanism of insurance, however, the car owner can share the risk of an accident with others who face the same risk.

Insurance pools (combines) risks shared by many people, thereby reducing the risks faced by a group. People pay to buy insurance coverage (protection from risk). In exchange, all policyholders (people who own insurance policies) receive a promise that the group of policyholders—as represented by the insurance organization—will pay when any policyholder experiences a covered loss.

The reduction in risk brought by insurance relies on a mathematical concept called the law of large numbers. That law states that the ability to predict losses improves with larger groups. Using calculations based on statistics, experts known as actuaries can accurately predict the losses of a large population, even without knowing when or how any one individual will experience loss.

Insurers distinguish between two types of risk: speculative risk and pure risk. Speculative risk offers both the potential for gain and the potential for loss. People who invest in the stock of companies, for example, take speculative risk. An increase in stock prices produces a gain, while a decline in stock prices produces a loss. Pure risk, by contrast, creates the potential only for loss. Although pure risks do not necessarily result in losses, they never result in gains.

Historically, insurance dealt only with pure risks, and most people still buy insurance to cover pure risks. No one, for instance, experiences a gain when they go a full year without an auto accident. However, some insurance companies now help businesses finance large losses including those incurred on speculative risks, such as the international exchange of currency. Also, in the 1990s financial markets and some professions outside insurance, such as the field of environmental impact and damage assessment, began to expand into risk management for the first time.

Microsoft ® Encarta ® 2008. © 1993-2007 Microsoft Corporation. All rights reserved.

June 8, 2008 at 8:48 am Leave a comment

Case study: Islamic mortgages

Islamic mortgages


Market research suggests there is a potentially huge market for Islamic mortgages in the UK – but how do they benefit Muslims trying to buy a home?

Waseem and Saima Taj want to buy their own home but it is proving difficult: They can’t get a mortgage which complies with their faith.

The young couple married in March this year and are embarking on their careers. They live in west London with Mr Taj’s parents.

The monthly payments will be more but that’s not the issue … We will have the satisfaction of knowing the mortgage is halal

Waseem Taj

Their hopes of getting their own place are being delayed by the high price of London property and, more importantly, the lack of mortgages in the UK which comply with Islamic law.

“We’re living with my parents at the moment because we’re trying to save enough money for a house,” says Mr Taj.

“Ideally we want a two-bedroom house near to where we live. We have thought about moving out of London but don’t really want to because all our family are here.”

Mr Taj, who works in the IT industry, began looking into buying a home during his studies.

“When I learned how mortgages work and that you have to pay interest, I spoke to Islamic scholars for advice.

“I decided mortgages based on interest would not be acceptable to me because they would compromise Muslim principles.”

Mortgages from British financial institutions are interest-based, something which does not comply with Islamic Sharia law.

Islam has no objection to wealth creation, but says it must be based on partnerships and fairness where risks and rewards are shared.

In the eyes of Islamic scholars, interest is an excess payment from one party to another which is unrelated to the value of the goods traded.

Mortgage interest is therefore unacceptable because one party gains at the other’s expense without any regard to the price paid for the home.

This means many Muslims in Britain find themselves in a difficult situation, trying to balance the core principles of Islamic equality with the realities of the British mortgage market.

In many cases Muslims conclude they have no choice but to reluctantly take out an interest mortgage – something Mr Taj’s own parents did.

But Mr and Mrs Taj are among a growing number of young couples who want to turn to the two lenders in the UK offering Sharia compliant mortgages – the United Bank of Kuwait and the West Bromwich Building Society.

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June 8, 2008 at 7:45 am 1 comment

Islamic Banking makes headway in global finance—IMF

Since the inception of Islamic banking about three decades ago, the number and reach of Islamic financial institutions worldwide has risen from one institution in one country in 1975, to more than 300 institutions operating in more than 75 countries.

The entire banking systems of Sudan and Iran are based on Islamic finance principles. Although Islamic banks are concentrated in the Middle East and Southeast Asia, they are also niche players in Europe and the United States. According to McKinsey & Co., Islamic banking assets and assets under management reached $750 billion in 2006, and the Islamic finance sector is expected to reach $1 trillion by 2010.

June 8, 2008 at 7:38 am 4 comments

the largest number of Islamic financial institutions in the world

Whilst they are still strides away from the volume of Islamic investment seen in neighbouring Malaysia, Indonesia still has the largest number of Islamic financial institutions in the world. Despite being home to ten percent of the world’s Muslim population, Indonesia has so far held back, but Indonesia’s government is hoping new Islamic finance laws will entice foreign investment in the growing sector and secure a share of the $US700 billion global Islamic finance market.

“We do have three fully fledged Islamic banks, and about 25 Islamic divisions of conventional banks, and we have around 106, or 110 Islamic rural banks,” Dr Muhammad Syafii Antonio, from the Central Bank of Indonesia, recently declared. “So in terms of players, Indonesia is bigger, and in terms of market Indonesia is promising, so Indonesia is too big to be ignored.”

The Indonesian government is hoping that new laws will attract investment from the Middle East, and Dr Antonio says with the new changes in legislation, the share of Islamic investment on Indonesia’s national bond market could increase to 5 percent within the next two years.

source :

June 8, 2008 at 7:28 am Leave a comment

“Ethical finance”

The modern notion of “Islamic finance” is only about four decades old but the concerns it speaks to are far older. Most Islamic scholars agree that their religion prohibits charging interest, gambling and taking excessive risk. This means that some Muslims have religious objections to conventional financial institutions and products. Some also want to ensure their savings or pensions are not invested in industries that go against their religion, from alcohol production to gambling – not dissimilar to the wider idea of “ethical finance”. In the absence of alternatives, some will simply use conventional banks, but others feel excluded from the financial system.

As a result, starting in the Middle East, Malaysia and Pakistan, banks have tried to develop “sharia-compliant” services that do not break Islamic rules. These may be as simple as an investment fund that blacklists certain industries.

Or it could be a savings account that does not pay interest but which gives the depositor a share of the bank’s profits at the end of the year. Instead of giving a loan to a small business, an Islamic bank might buy some of the machinery the company needs and then rent it to them at a profit. Alternatively the bank could invest in the firm in return for a share of its profits, rather than a fixed interest payment.

Islamic mortgages and finances

In the past few years Islamic scholars, often working with Western banks and law firms, have sought to devise a vast range of more complicated solutions. They have even looking at controversial areas like hedge funds and futures markets, which many Muslims are sceptical about. In the last five years, the UK government has been encouraging the development of financial services deemed to comply with Sharia law, from mortgages to child trust funds.

Tax laws have been changed to help this niche market

For instance the 2003 budget ended the problem of Islamic mortgages incurring stamp duty twice over. This occurred because in a typical ijara mortgage, the bank buys the house from the seller, and the buyer eventually buys it from the bank.

London leads the way

The finance business is centred in London, home to a large Muslim population. The Islamic Bank of Britain says three-quarters of its business is done in London. But the City of London has its eye on the much more lucrative market of serving large business clients, many based in the Middle East.

Of the UK’s six fully Islamic financial institutions – “the only stand-alone Islamic providers in Europe” – according to Treasury Secretary Kitty Ussher, most focus on the corporate market, with only one actually providing consumers with current accounts. Islamic financial services for UK consumers have been growing fast, but the market remains small. The Islamic mortgage market is worth about £0.5bn, according to the Treasury. This is a tiny fraction of the billions of pounds worth of mortgages issued by UK banks every month. It is also less than a tenth of the value of the Islamic sukuk – securities that loosely equate to bonds – currently listed on the London Stock Exchange (LSE)…

Source: Jane Kinninmont, The Politics Show London, BBC One

June 8, 2008 at 7:16 am 1 comment

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