The pair offered mortgages with downpayments as small as 5 per cent while allowing debt-service ratios of up to 50 per cent, which is where a mortgage accounts for half of the borrower's salary. Amlak and Tamweel declined to comment. Access to cheap lending on attractive initial terms may also have encouraged the practice of flipping, or buying property for speculative purposes, analysts say. "Islamic home finance products, the way they are structured, have facilitated flipping in the market as buyers didn't have to pay until the asset was delivered," said Khalid Howladar, the senior credit officer at Moody's Investors Service.
"Many 'pure' speculators would not have opted to take Islamic mortgages if they had to make payments from day one." Flipping became popular at the height of Dubai's property boom as queues formed outside the offices of big developers such as Emaar and Nakheel, and people were able to make overnight profits as developments sold out within days and sometimes hours. Some of them, such as the thousands of apartments and villas for Dubai's Palm Jebel Ali development, have yet to be built.
The speculation sent prices rising more than 40 per cent during one three-month period in 2008, helping Dubai become the world's best-performing property market before prices fell back later that year. The use of staged payment plans from developers without verifying the ability or intention of the buyer to pay the residual balance also encouraged speculation. While both conventional and Islamic lenders have been blamed for encouraging speculation and excessive borrowing, Sharia explicitly forbids many of the practices that contributed to the strife faced by the Gulf's banking sector.
This includes, for example, Islamic lenders demanding security cheques, which is not in line with Sharia principles, scholars say. "Sharia does not need any type of collateral because the financing company is supposed to be the owner," said Hussain Hamed Hassan, a well-known Islamic scholar who sits on the boards of Dubai Islamic Bank, Dubai Financial Market and many others. "These abuses are not an issue of Sharia compliance of the products but of banks' credit policy."
Another example is selling on Ijara-financed mortgages without the consent of the contractor or developer. An Ijara is a Sharia-compliant leasing arrangement where a bank or finance company buys a home or other asset on behalf of a customer and then leases it back to them at a profit. A portion of every monthly instalment goes towards ownership until at the end of the financing period the home is fully owned by the customer.
"It is not the instrument itself that allowed the abuses, it is the culture or the regime of allowing first-time buyers to profit and sell their rights into a contract to a third party," said Jawad Ali, a partner at King and Spalding, an international law firm. "Strictly speaking, once the Ijara is issued the property can only be utilised by the lessee. Under strict Sharia rules, if the owner leases you something, that cannot be assigned to another person without his consent."
Islamic scholars stress the abuses were the misguided application of Sharia principles. "Our job is to structure these products; how they are offered to the market is up to the lender," said Mr Hassan. He defended the integrity of Sharia-compliant products, but said the bankers selling them were often from a conventional banking background: "We just don't have the right manpower to do it." "The Islamic Finance industry is still young as it is setting its principles, policies and guidelines. The problem is that those who implement and execute often think in conventional (finance) ways," said Mr Hassan.