Thursday, June 01, 2006

Captive market analogy

More evidence has surface to show that minorities are being charged higher mortgage interest rates than their white counterparts with similar credit ratings and incomes. This is the proper analogy -- in my opinion -- to Islamic finance, where Muslim customers who are forced t deal with "Islamic financial providers" are obliged to pay higher interest rates. Part of the premium is caused by genuine (albeit spurious) transcation costs due to additional trades, SPVs, legal fees, "scholar" fees, etc. The rest of the premium (which may or may not exist in the short term, while providers are seeking to build reputation and market share) is the rent-seeking incentive that brings most providers into that industry. If "Islamic finance" providers can extend credit to those minority borrowers at lower rates than they are currently charged, there may be a mixed blessing in the whole charade.


Blogger heraish said...


It would be interesting to know how much higher they pay. Then some quantitative analyses could be done to see if they would really benefit from "Islamic Finance" providers.

Part of the fees paid to the scholars should be considered a marketing expense when comparing against comparable Mortgage providers.

God Knows Best

6:52 PM  
Blogger heraish said...


Also a part of the fees given to the scholars can also be considered fees for product development and/or R & D.

God knows best

8:26 PM  
Blogger Islamic Law, Etc. said...

I would highly doubt if they would pay anything else, being muslim and minority would only double the costs, adding inslut to injury, esp. since the Islamic mortgage co.s use the same industry standards for determining thier interest rates as the conventional mortage companies do.

2:31 AM  
Blogger heraish said...


It is correct that "Islamic Mortgage" providers follow the same standards, however keep in mind that some mortgage brokers have more flexibility in tacking on some extra junk fees and have many more programs to choose from.

A minority non-English speaker or less educated person [I deal with them everyday] can easily be hoodwinked. The reason is that some of them do not clearly understand the disclosures and rely on the Loan Officer to tell them honestly what they are getting into.

If the Loan officer gets the feel that the customer does not know what is going on he can easily direct him to a program that is not the most suitable for the customer but is in fact more suitable to the brokerage.

In the conventional industry it is an ethics problem really.

I would like to applaud the Professor for bringing up an item that could possibly show an industry he has a distaste for in more positive light.

God knows best

4:26 AM  
Blogger heraish said...


More information on this here:


God knows best.

4:41 AM  

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