Participatory Finance: Mourabaha Credit More Expensive than Classic Real Estate Loans?

Rabat – It is amid a public confusion that Islamic finance has made its first steps into the Moroccan banking system. The novelty of the young participative market in Morocco and the structural ambiguity of its interbank circuit have often led experts and clients alike to believe that participatory financing would be more expensive than conventional bank loans.

In its latest number, the economic newspaper La Vie Eco tested these assumptions on the ground, after the launching of participatory banks.

Participatory banks are appearing everywhere out of nowhere, like overnight grown mushrooms. It’s difficult to stroll down the streets without noticing the big billboards promising “halal” loans, or the shiny banking agencies adorned with Arabic calligraphy offering a Sharia-compliant experience.

Presenting almost identical “everyday banking” products, the competition between the participatory subsidiaries of some Moroccan banking giants is fierce. In this segment, these products’ costs are rather similar to those offered by conventional banks, even with some competitive advantages for participatory banks. They offer according to La Vie Eco no account maintenance fees for some services and complete deletion of value dates in others.

However, when it comes to real estate financing, the economic newspaper observed a blatant difference in “land” conditions.

The Mourabaha real estate loan aims to facilitates the customer acquisition of the desired property without going through an interest loan. The participatory bank is responsible for the purchase of the asset, acting as an intermediary between the buyer and the seller, and then selling the asset back to the customer by specifying a profit margin, which it can not negotiate after the contract has been established. This lump-sum margin covers the risk assumed by the bank acting as an intermediary.

While participatory banks have mostly been anticipated for their financing offers, especially for real estate, the Mourabaha, adapted to this type of financing, seems to be more expensive than the classic credit, according to La Vie Eco. The latter explains that for a loan of MAD 761,500 over 20 years, the interest rate would be 3.3 percent more expensive than a traditional real estate credit.

To obtain this result, the weekly newspaper compared the two formulas for a property worth MAD 1,568,000 with a personal contribution of MAD 806,500 over a period of 20 years. The monthly payment is estimated at MAD 5,599 with a Mourabaha credit, compared to MAD 5,414 for a classical one.

The newspaper also pointed out the MAD 1,500 costs for transferring ownership as part of the Mourabaha credit. In the end, the overall cost of the operation settled at MAD 1,345,260, compared with MAD 1,299,292 as part of the conventional financing.

This simulation was carried out excluding insurance costs and with an interest rate of 5.3 percent in the conventional bank credit.