In a significant step Iran’s Grand Ayatollahs, Makarem Shirazi, Safi Golpaygani and Nouri Hamedani, as well as Grand Ayatollah Sistani, issued a Fatwa announcing that selling and buying mortgage loans are not against Islamic code. The significance of this step rests in the fact that according to Islamic law one could not collect excessive interests from a loan. Some use these codes to forbid receiving any interest at all. Iran does not have an official bond market, although its stock exchange market is the largest in the Middle East.
For decades thousands of Iranian consumers have relied on mortgage loans to purchase their residences. These loans on average have a much lower interest rate than market interest rate. Given the high appreciation rate for the properties in Iran these low rates loans guarantee a much higher real rate of return on property investments. Thus there is a high demand for such loans in the market.
Qualifying for a mortgage loan is usually a complicated process. Some receive these loans through their employers, some by offering several guarantors who would guarantee the payment of the loan and some receive such loans through connections and networking. When they receive their loans, finding a house or a condo that meet bank’s requirement’s is another odyssey. But those who recieve these loans have a low interest rate loan that guarantees a high yield.
Given the demand for housing and property investments in Iran it is only natural to see a mortgage exchange market being formed. Legalizing this market and considering its activities Islamic is a milestone in developing a bond market in Iran.
Should mortgage exchange market become official, then market can reach an equilibrium that signals the real interest rate. Given the growing housing markets in Iran and its neighboring countries one also could hope that this step helps the creation of a regional mortgage exchange market in the region.