Some U.S. lenders design financing options for Muslims since Islam

New Orleans CityBusiness, Jul 14, 2003 by Michael Giusti

A handful of U.S. lenders are working to reconcile the American Dream with the Islamic prohibition against paying interest.

According to Islamic law, it's forbidden to pay and receive riba, or interest. In the past, devout Muslims who wanted to buy a home had to choose between violating a tenet of their religion or permanently remaining a tenant.

Now, through programs backed by the Federal Home Mortgage Corp., known as Freddie Mac, and the Federal National Mortgage Association, known as Fannie Mae, several companies have designed special "Shariah compliant" financing options to allow devout homebuyers to have the best of both worlds.

Freddie Mac and Fannie Mae, the federally chartered, shareholder- owned companies that buy bundled mortgages on the secondary market, purchased more than $110 million in "halal," which means "permitted" in Arabic, mortgages.

"We got involved a few years ago with American Finance House Lariba in Pasadena Calif.," said Brad German, spokesman for McLean, Va.-based Freddie Mac. "They developed a financing contract to help observant Muslims who can't pay interest to finance a home."

No credit unions, thrifts or banks in New Orleans offer this financing but a few out-of-state lenders, including American Finance House, help Louisiana Muslims buy homes.

Rather than collecting interest, lenders worked out other ways to profitably structure the deal because even halal loans are not free.

A typical deal consists of the lender charging a profit equivalent to what it would have made from interest on the front end of the deal. The lenders finance the whole package, less a 5% down payment, interest-free for 30 years.

Another prominent method is for the lender to buy the house, less a 5% down payment, and charge the homebuyers a fair market "rent" for its portion of the house until the buyer pays off the interest-free loan over 30 years.

In the rental model, homebuyers are not renters in the traditional sense. They own their homes, have clear title to it after the loan is repaid and enjoy all the tax advantages of ownership.

AFH's rent model fits the criteria Freddie Mac uses to purchase bundles of mortgages, which allows the lenders to have a constant flow of funds to finance homes, German said.

In halal loans, the lenders' profit is comparable to what would have come from actual interest rates but, because of the structure, the fees don't violate Islamic law.

Most lenders have a panel of internationally recognized Islamic clerics and scholars signing off on the procedure. Those scholars say there is no prohibition against profitably pricing halal goods and services, just as a halal butcher may price meat competitively with the market.

The Islamic prohibition of interest is not unique among Western religions, said Michael Homan, assistant professor of theology at Xavier University

"Several ancient societies forbid collecting interest, as during hard times families often were forced to sell themselves into slavery in order to get enough food to survive," he said. "In the Hebrew Bible, passages such as Exodus 22:25 and Deuteronomy 23:19-20 forbid interest. In fact, the latter passage is the inspiration behind Habitat for Humanity, which does not charge interest to its homeowners."

Habitat for Humanity has built more then 130 homes for poor families in the New Orleans metropolitan area, said Duane Bates, spokesman for Habitat International in Americus, Ga.

Unlike for-profit banks and finance companies offering Muslim financing, the non-profit Habitat for Humanity uses its home- financing program as a Christian ministry and does not build costs into the loan.

"When the house is completed, the family purchases it by paying off a no-profit, zero-interest mortgage," he said. "Mortgage payments go into a revolving 'Fund for Humanity,' which is used to build additional Habitat houses."

The program is available to everyone regardless of religious belief, Bates said.

While Habitat for Humanity offers buyers a subsidized loan, Muslim financing deals are underwritten with similar profit guidelines as those used for conventional mortgages.

"The costs work out similarly in the end," German said. "All told, it's comparable to traditional financing but since it is structured differently it works in accordance with their beliefs."

Halal programs are not restricted to Muslims -- lenders say homebuyers of any faith with an aversion to interest are free to participate.

Lenders also offer halal products for auto loans and day-to-day banking like checking and charge card accounts. Since interest is not involved, such charge cards must be paid in full at the end of each month.