Mortgage options for interest-averse Muslims

Long Island Business News, Oct 24, 2003 by Ben Abelson

Islamic law, or Shariah, prohibits devout Muslims from paying or receiving any form of interest. As a result, many Muslims have previously been forced to either go against their own deeply-held beliefs or live as perpetual tenants.

In the last few years, however, several area banks have rolled out new interest-free home financing products specifically targeted to the Muslim community.

While HSBC's Murabaha Home Finance solution is similar to a conventional mortgage, it nonetheless allows practicing Muslim's to purchase interest free mortgages at a comparable cost to one purchased with a long-term fixed mortgage. The product was developed in conjunction with several prominent Islamic religious authorities, who ruled on the suitability of it and other Islamic-oriented products.

Tariq Al-Rifai, vice president of Islamic Banking for HSBC, said the product, which debuted in March 2002, addresses a market where there was "an unmet need."

A prospective homeowner can only apply for Murabaha financing after selecting a house and settling on a price. After making a 5 percent deposit to the bank and paying some assorted fees, HSBC buys the property at the agreed price - and then immediately sells it to the homeowner at a mark-up. The homeowner then simply pays a fixed monthly installment over a period of 10 years to 30 years.

The total amount paid is essentially the same as what a homeowner would pay on a long-term fixed-rate mortgage for an equally-priced house.

"They're paying for the house in a similar way, but our relationship with the customer has changed," Al-Rifai said. "Our relationship is not as a money lender, but as the entity that sold them the house. The distinction allows us to offer a profit-making product, rather than an interest-based product. In essence, we're simply charging a markup on the price of the house."

As might be expected, HSBC debuted its product in the Middle East. Five years later, the company also offers its Murabaha Home Financing in Indonesia and the United Kingdom. In the United States, however, the product is only available in New York.

About 25 percent of the $40 million in business that the product has already brought in across the state is from Muslims on Long Island. Valley Stream, Hicksville and Huntington are some of the more popular villages for the Murabaha product,

Al-Rifai said, noting that HSBC has completed about 150 Islamic mortgages in New York.

The product, however, does have its limitations. It cannot be used for the purchase of cooperatives, because the bank's Muslim advisors have ruled that a coop purchase is classified as buying a share in a company, not a main residence. The same religious advisors have said the product cannot be used for refinancings - although HSBC is currently developing a separate product to meet that need.

HSBC also offers several other Shariah-compliant banking solutions - including personal checking accounts, charge cards and small business accounts.

Only a few other banks have begun to offer Islamic home financing products in the United States, including Citgroup and the United Bank of Kuwait. Pasadena, Calif.-based American Finance House Lariba is one of the only financial institutions to solely offer Islamic- oriented financial products. The company, which first began operating in 1987, can offer Islamic mortgages in 35 states nationwide and is in the process of being approved to operate in New York.