Home Sweet (Halal) Home

The “American Dream”–a house, two cars, two children, a good job and good health–is pursued by many. Until perhaps ten years ago, a major portion of that dream–the house–was only attainable with a conventional mortgage, one that thrives in the interest-based system that sustains most of the United States economy. So what was a Muslim suppose to do? Either live in a rental situation, wait years to save enough cash to buy a home in full, or resign themselves to a riba–(or interest) based mortgage while believing any interest paid on a monetary loan is prohibited by the Qur’an.

    Those may have been the only options before. Now, as the nearly seven million US Muslims grow in wealth, population and influence, financial institutions are taking notice. They are realizing that perhaps faith has a place in financial products and are now offering another choice–financing compliant with Islamic guidelines for Muslims home buyers.

    Home ownership has reached an all-time high of 69 percent, according to “The State of the Nation’s Housing,” a report from the Joint Center for Housing Studies of Harvard University. The past decade has seen a real estate boom, yet the report says Muslim (sub-categorized under Asians) home ownership ranks behind most minorities, including Hispanics and African-Americans.

    However, Muslim-Americans have the resources to own , according to banker Adnan Mirza. “If you look at homeowner statistics, 67 percent of Muslims hold a bachelor’s degree or higher compared to 44 percent of other minorities. You look at the demographics and see that Muslims on the whole are more educated than the general population and have a greater income. So why don’t they take their part of the ‘American Dream?’” asks Mirza, a senior Islamic banker for the University Bank in Ann Arbor, Michigan. He answers his own question, “They don’t want to do something that goes against their belief.”

This reason led numerous financial institutions to delve into the complicated world of faith-based financial products that comply with Islamic and US government regulations. But the road to developing Shariah-compliant home financing products that adhere to strict US banking policies is a challenging one.

At the heart of the issue are two diametrically opposed mortgage products–one that thrives on interest and one that prohibits it. Groups like Lariba American Finance House, Guidance Financial Group, HSBC Amanah, Samad Group Incorporated, the University Bank and countless others have worked to create interest-free mortgage options for Muslims. But how do financiers help Muslims buy a home without charging interest and still make a profit while complying with government regulations? Are Islamic home financing products really halal?

The answers are found in technical terms, profit margins and the delicate difference between paying interest on borrowed money and paying out a profit on a tangible piece of property. Those selling the products point to the approval of their Shariah-boards (some who are involved in developing the products and some who sign off on it). And while many Muslims are skeptical, an increasing number are chucking conventional mortgages for something definitely more halal.

Where the Differences Lie

The Muslim-American population is not one homogenous subgroup, but a mix of national origins and economic status that color their opinions on Islamic home “mortgages.” Thus a number of independent companies as well as US banks with special branches have developed a variety of Islamic home financing products. While Islamic financiers all offer their unique twist on interest-free mortgages, the options basically boil down to three alternatives: an ijara, or “rent to own” transaction (preferred by Lariba); a murabaha, or “purchase and deferred payment resale” transaction (favored by HSBC Amanah) or a diminishing musharaka, in which the lender and buyer are partners and more and more ownership passes to the buyer as monthly payments are made (the mainstay of Guidance).

To understand the major difference between an Islamic home financing product and a conventional mortgage, consider this: A mortgage is a long-term loan of money lent by a bank or other institution that is usually backed by the equity of the home. Interest is paid on the mortgage, and the interest rate is determined by the buyer’s credit, the type of mortgage, whether it has a fixed rate of 15 or 30 years or a shorter period, and the market interest rate at the time, determined by the federal index.

 However, according to the Qu’ran, paying interest, or riba, on a money transaction is prohibited. And that, most Islamic finance specialists say, is where the big difference comes in. With an ijara, murabaha or diminishing musharaka transaction, the profit for the lender comes on the product–not from interest charged on the money loaned.