MUSLIM HATE FOR INTEREST
For Devout Muslims, Interest Is Forbidden
By ALEX FRANGOS
Staff Reporter of The Wall Street Journal
For immigrants who settle in the U.S., a home purchase is a meaningful step toward showing they're here to stay.
But for devout Muslims, many of whom are recent arrivals from places like the Middle East and South East Asia, buying a home isn't as simple as taking out a mortgage. Islamic law -- known as Shariah -- forbids the primary element of most every loan: interest.
To get around this restriction, a few lenders offer financing plans that don't charge interest. Of course, that doesn't mean banks are lending money free of charge. The lenders make loans "halal," or permitted in Arabic, by charging a fee or "rent," which is their profit in the transaction.
In these deals, the fees are almost identical and often are pegged to actual interest rates. But because of the way the deals are structured, the fees don't violate Islamic law.
Shariah scholars say there is no prohibition against using an interest rate, or another pricing scheme, as a benchmark in pricing halal goods and services. For example, a halal butcher may price his meat to be competitive with nonhalal butchers.
Homeowners Gain
In these types of arrangements, the home buyers aren't renters -- they really own the property. Any appreciation in the value when sold goes to the homeowner, just as with a regular mortgage.
These programs are open to home buyers of any faith. Banks offering the loans report having customers from other religions that also frown on interest, including certain sects of Hinduism, Judaism and Christianity.
In a sign of the importance of serving this growing market, Freddie Mac and Fannie Mae -- government-chartered corporations that help finance the home-loan market -- committed $110 million last year to Islamic home mortgages. International bank HSBC Holdings (phone 877-344-4722; Web site www.amanahfinance.hsbc.com) last year launched an Islamic home-finance program and now holds over $20 million in loans in New York, the only state where it offers Islamic mortgages, and expects to lend an additional $20 million in the coming year.
The largest Islamic mortgage lender, American Finance House Lariba, (888-527-4221, lariba.com) founded in 1987 and based in Pasadena, Calif., offers home, auto and small-business loans in 32 states. Instead of an interest rate, the borrower pays Lariba an amount based on what the property would fetch on the rental market. In effect, the home buyer and Lariba buy the property together, and the borrower pays Lariba a share of the "rent" plus the loan's principal over the term of the loan.
Here's an example: A family has its eye on a $200,000 house and goes to Lariba for financing. Lariba does standard underwriting checks on the family's ability to pay, such as determining credit score, income and outstanding debts. The next step is to figure what the property's rent will be. To do that, Lariba and the family each go to three local real-estate brokers who have expertise is estimating what a property would rent for. Those estimates are averaged to determine the property's rental price.
In a typical scenario, a $200,000 house would rent for $1,000 a month. The family makes a down payment, of 20%, or $40,000. Because it has that 20% of equity in the house, the actual rental payment to Lariba is 80% of the full rental price, in this case $800 -- the idea being that Lariba fronted 80% of the home's purchase price and is thus due 80% of the rent.
The family also pays Lariba a principal payment, which is a monthly share of the amount borrowed, in this case $160,000 divided by the number of months in the loan's term (240 months for a 20-year loan), which comes to $667.
In theory, as the family pays off the principal and increases its equity, the rent goes down. When it owns 50% of the house, the rent falls to $500.
In practice it's a bit different. Lariba amortizes, or spreads out the entire cost of both the principal and the rent over the term of the loan. In this example, the monthly payment is $1,146.
Comparable Deal
In the end, are Islamic mortgages more expensive than regular ones? "The consumer is getting a very comparable deal," says Saber Salam, vice president at Freddie Mac, who overseas that company's Islamic mortgage-investment program.
Lariba ensures that its loans are competitive with standard loans by seeing that the rent, or in essence, its profit, is close to what banks earn from current interest rates.
With HSBC's program, the bank buys the property outright from the seller, then turns around and sells it to the borrower at a profit consistent with what it makes on traditional loans. "We buy the property and sell it to the customer at a markup," says Tariq Al-Rifai, HSBC vice president for Islamic banking. The profit is pegged to what the bank earns on typical fixed-rate mortgages, which in today's market would be around 6%. "Once we sell you the property at closing, it's yours," says Mr. Al-Rifai. "You just owe us the money. Any appreciation or depreciation is yours."
Sharia compliant
mortgages
By Zoe Coleman
It was an unusual sight - hundreds of businessmen listening attentively while a small group of top-notch Islamic scholars instructed them on the intricacies of Muslim ethics. These were bankers, and what they wanted to know was how they could do better business with Muslims.
The Islamic Real Estate Finance conference in London was the culmination of a year-and-a-half of change in UK Islamic finance. This came after The Bank of England's request,early in 2002, for high street banks to create financial solutions for Muslims.
Practical changes are now on the way. But while these changes could mean great things for the Muslim community, changing their long held attitudes to banking will take longer.
Islam,
ethics and finance
Until recently, mortgages were a religious obstacle to any Muslim who wanted to buy a home. Muslims must be sure that the mortgage complies with Sharia (Islamic) law. The biggest problem for a British Muslim who wants to buy a house is that either paying or charging of interest is prohibited.
Most UK mortgages involve the house-buyer borrowing the money and paying it back with some interest charged on top. No good for Muslims. To avoid the issue of paying interest, Muslim mortgages usually involve the bank buying the property and then the buyer purchasing it from them and renting it over a length of time at a slightly increased price.
Muslim mortgages also involve making other aspects of the mortgage Sharia compliant, for instance making sure that the money the banks use to buy the property comes from permissible sources.
Why now?
Until July 2002 only one financial institution in the UK has directly offered Islamic mortgages (The United Bank of Kuwait). The shortage of Muslim mortgages was due to a combination of technical and cultural problems.
Stamp duty was one of the biggest problems. Stamp duty is a one-off tax that is charged on every property sold. But stamp duty was being charged twice on Islamic mortgages because in a Muslim mortgage the property is in theory bought twice (once by the bank and once by the buyer).
Banking institutions also lacked knowledge not only of Sharia, but also of the Muslim community itself, and this probably held up the development of Sharia compliant products. All financial products for Muslims must be checked by a panel of Muslim scholars, and bankers were not used to working with religious experts and were unfamiliar with the language of the Qur'an.
But change is happening fast. The law on stamp duty has now been altered - double stamp duty was abolished on Islamic mortgages in April 2003 - and the government has been urging banks to work with Muslims. One of the first results came on the 12th of July 2003 when the HSBC, one of the biggest banks in the UK, brought out a range of Sharia compliant mortgages.
What's the difference?
This new interest in Islamic finance may seem like a dream come true for Muslims, but some remain cynical about the mortgages on offer. UK banks need to work on gaining the trust of the Muslim community. They have ignored the needs of Muslims for a long time so it is not surprising that many Muslims are concerned that the banks are not really taking Muslims' ethical concerns seriously.
A big concern for Muslims is that they have to find more money in the beginning than borrowers going for a traditional mortgage. Sharia mortgages usually involve paying a large deposit, often around thirty percent of the total cost.
Arshad Majid who helped to set up Sharia-compliant mortgages in the US says that this is not necessarily a bad thing. "You could argue that the larger down-payment is actually decreasing your costs over time. It's giving you a greater percentage of equity in the property at a faster rate." Arshad also stresses that following Sharia law is about doing what is right, not saving money. "No one says that Islam is an easy religion to follow, but we believe that the rewards of being a Muslim are great as well halal food costs more money than regular food, yet nobody thinks twice about buying halal meat. Why would you think twice about doing Islamic banking?"
Some Muslims are not convinced that banks will test their products rigorously enough. But Nizam Yaquby, a highly respected Sharia scholar who advises banks, has been impressed by the way HSBC has approached Muslim finance. Scholars were called in to advise on the Sharia-compliance of the new mortgages and he says he is satisfied with their efforts.
Others are concerned that the banks may be using money in non-permissible activities (like financing breweries or non-halal meat companies). Many scholars concede that laws regulating money in the UK cannot be as strict as they would be in Muslim countries while still making sure the products on offer conform to Sharia.
It may take some time and some changes within the Muslim community before Muslims are happy with the mortgages on offer but home ownership is an important step forward for Muslims that should lead to greater financial stability and greater social inclusion.