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. Last Updated: 07/27/2016

For Some Landlords, Banks Are Bad Tenants

SINGAPORE -- Most landlords would love to own a bit of Wall Street, with a blue-chip bank paying the rent. But not Islamic property investors.

For them, a conventional bank cannot be their tenant because it sins against Islam by charging interest on loans, which was banned as usury by the Prophet Mohammed about 1,400 years ago.

The grey areas of Islamic property investing are looming larger as international banks and fund managers look to meet a growing appetite for real estate from Muslim investors, many of them from Middle Eastern countries bulging with oil money.

"It does matter where the rent comes from," said Abdulkader Thomas, an expert on Shariah compliance in Islamic finance.

But there were practical limits to how far Muslim landlords would, and could, go in vetting their tenants, he added.

As a rule of thumb, Shariah scholars hired to advise Islamic property investors will consider how much of a building's rental income is derived from "bad income" such as liquor sales. If it's less than 5 percent, then it is deemed "incidental" income and qualifies as an Islamic investment. But that portion of the overall rent cannot go to the landlord. In the jargon of Islamic finance, it is cleansed.

"You give it to an acceptable charity," said Thomas, head of investments for Kuwait-based Alshaya Group International.

Such theological debates have gone beyond the level of individual Muslim investors weighing up a purchase. They are now heard in major international banks -- many of which, incidentally, would not qualify to be an Islamic investor's tenant.

There are few reliable figures on the size of the market for Islamic property, but it is growing quickly and can already account for a large part of an institutional Islamic investor's balance sheet, said Rakesh Patnaik, head of property investment funds for Kuwait-based investment bank Global Investment House.

"It's in its infancy," Patnaik said.

Shariah scholars have drawn some fine lines on what is considered un-Islamic property, he said, adding that even a conventional bank could be deemed an acceptable tenant as long as the bank didn't use the premises for making loans. A bank's back-office operations might qualify, for example.

"We look at the tenant profile very, very carefully," he said. "It's not the name of the tenant, but it's the specific activity carried out in the property," Patnaik said.

Privacy laws, particularly in the United States, mean Islamic investors in residential property cannot check up on what their tenants do in their own homes, however.

"There are tens of thousands of apartments in the United States that are owned by Islamic investors and it's become an issue because you can't lawfully know what your tenant is doing," said Alshaya Group's Thomas.

"You can't say these people shouldn't put pork in the fridge," he joked. "The reality is that the permissibility of leasing shelter [to someone] trumps what you don't know about them."