News / Economy

Sharia Financing Helps US Muslims Achieve Home Ownership Dream

Mana Rabiee
Khadijah Sahak, 59, sits in the family room of her neatly-kept townhouse in Sterling, Virginia. The Afghan news program broadcasting from her wall-mounted flat-screen television is discussing the Taliban.

This leafy Washington suburb is a long way from the refugee camp in Pakistan where Khadijah’s family says they lived after leaving Kabul in 2002.

“We like the house very much,” she says in Dari, adjusting the white headscarf draped loosely around her face. “We are very comfortable here. We are at peace.”

It is a peace Khadijah thought she could never enjoy in the United States.
 
When her grown son, Nabi, offered to help his parents buy a home, Khadijah and her husband refused to live in a house bought with a traditional mortgage.

As practicing Muslims, they believe demanding or paying interest on money - like the kind paid on a home loan - is prohibited by strict Islamic practice.

“Everyone in my family was, in one way or another, against the idea of conventional mortgages,” says Nabi.  

A piece of the American Dream

Then he heard about the Michigan-based Ijara Loans, one of a handful of Islamic financing companies in the United States. They've tapped into a niche market of devout Muslim-American homebuyers by offering “Sharia compliant” home purchasing contracts which do not include actual interest.

“That day they got really excited, when they learned that they were able to still buy a house and not compromise their religious values,” Nabi says of his parents.

When the Sahak family bought the Sterling townhouse in 2010, they joined about 10,000 other Muslim-Americans who've purchased homes in the past 10 years using Sharia-compliant financial transactions.

Guidance Residential, based in Reston, Virginia, is the largest company in the United States which offers Sharia financing. At its spacious headquarters, phone operators manage calls from customers mostly in a mix of English and Arabic.

Spokesman Hussam Qutub says the company has processed $2.3 billion in Islamic home financing transactions since it launched in 2002.

“Relief that it does exist is definitely the feeling among the majority of the people who contact us,” Qutub says. “We are in a sense impacting the ownership rates of Muslim-Americans in a positive way.”

'Sharia' financing

Instead of charging interests on a monetary loan, Islamic finance companies generally offer homebuyers a sale, rent or partnership contract on the home.

In the sale model, the Islamic bank purchases the home, immediately sells it to its customer at a mark-up and the customer pays the bank in installments, according to Georgetown University law professor Babback Sabahi, who lectures widely on Islamic financing.

In the rent model, the Islamic bank purchases the home and rents it to the customer in a rent-to-own type agreement.

In the partnership model, says Sabahi, both the Islamic bank and customer purchase the home together. The customer gradually purchases the bank’s share of the home while also paying a fee for occupying the house.

“In order to be done right,” says Sabahi, “the bank needs to truly purchase the asset, own it and then transfer this ownership to its customers. And a trade - as opposed to lending in the conventional sense of the word - is what Sharia signs off on and approves.”

The arrangement works for devout Muslim-American homebuyers because Islam does allow making profit on a trade transaction or the sale of a commodity - in this case the house. The buyers never feel they are paying interest on money.  

“We feel we’ve only scratched the service here…with this niche market.” says Qutub of Guidance Residential. “There [are] still plenty of consumers out there of the Muslim faith that don’t even know this option is available.”

Keeping the faith

Sharia financing in the U.S. has accounted for less than $3 billion in home sales over the past 10 years - a small fraction of the total U.S housing market. But Islamic finance companies are making the American dream of home ownership come true for more and more practicing Muslims, like the Sahaks.

“If I can live in America and feel that I own a home that is completely in line with my Islamic system,” says Nabi, “then I guess the pleasure of living in that house would be tenfold.”

“We were very happy that we found an Islamic bank,” Khadijah chimes in. “We didn’t like the other banks. If we want to buy another house it will be from an Islamic bank and I tell my friends that, too. We are more comfortable like this.”

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Comments
     
by: Matthew from: Michigan
June 29, 2012 4:59 PM
Although well intentioned, I doubt that anyone posting here is actually qualified to discuss the rather detailed jurisprudential issues pertinent to Islamic finance. Unless you have advanced degrees in the subject and are fluent in classical Arabic you are out of your league. Why not just leave it to the people that actually know about these matters?

by: anon from: Chicago
June 27, 2012 10:04 AM
The comments that have been posted here indicate a misunderstanding of what interest is. Islam permits profit with shared risk, but it forbids usury. In one of the models permitted under sharia law, the lender shares in the appreciation or depreciation of the property. In other words, the borrower and lender are partners in the purchase. If the buyer sells prior to paying off the loan, the lender shares in any profit, or loss, based on his ownership share at the time of the sale.

Think about this - how many people have lost their homes due to foreclosure in the recent housing crash and how many would have lost their home if they had a sharia compliant loan?

Also, how many of you know that usury was also forbidden in the Bible? Not that any Christians or Jews are complying, but devout Muslims do follow the commandments and divine laws.

by: RockyBullWkl from: everywhere
June 26, 2012 5:22 AM
Oh, I see. Lets not call it interest, just call it a markup. Islam is so just and righteous.
In Response

by: Victor from: Omaha
June 26, 2012 6:05 PM
The difference is that you actually own the share of the home you are purchasing. It's like a business. For example, if you were to buy a home with a partner, you would take a percentage of the rent from a tenant according the percentage of the home you own. With shariah based financing, you are part owner and renter and percentage of rent you pay is used to buy more shares.

In the event you can no longer make payments, you will still own the percentage of the home you paid for. If the other owner, Guidance Residential, resells the home because you could no longer make payments, they return a percentage of the profits to you. You can learn more about it here: http://guidanceresidential.com/learning-center/our-videos

This is in fact more fair than traditional mortgage financiers, who would foreclose your home even if you were one payment away from ownership. Imagine, after thirty years of payments, you hit hard times, and the bank takes your home without ever compensating you for the money you put in.

by: Anonymous
June 26, 2012 1:08 AM
The article points an interesting point. Quote: "The buyers never feel they are paying interest on money." Key word is "feel."
There is still "interest" being paid. No matter how you try and slice and dice it, the "borrower" is still paying a fee. You can use euphemisms if it makes you "feel" better, but at the end of the day, you are only changing the transaction in an 'emotional' way as it makes you feel better, while the essence remains the same. This is simply because the company assisting the buyer must still make a profit to even exist. Therefore, they need to charge more than what they paid for it. Capitalism trumps everything else in a free market society. And at the forefront of this model is profit, where both the "seller" and the "buyer" have something to gain. You get your house, they make a profit. And to make a profit, someone has to pay more than the other person. Call it what you want. Call it a 'surcharge' if it makes you feel better, but it's still a form of interest.
In Response

by: Victor from: Omaha
June 26, 2012 6:07 PM
The difference is you actually own a share of the home, unlike a traditional mortgage where, you don't truly own the home, until your mortgage is paid in full.

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