Lenders help Muslims avoid ban on interest

Words of the Koran rule out traditional mortgages for many

September 09, 2001|By Jennifer Hieger | By Jennifer Hieger,THE ORANGE COUNTY REGISTER

SANTA ANA, Calif. - Buying a house can be tough.

If you're an observant Muslim, it can seem all but impossible.

That's the predicament facing many Muslims who interpret the Koran to prohibit the payment or collection of interest, which means they cannot use traditional lenders to obtain a mortgage. Some have remained in apartments for years, even decades, trying to save enough to buy a home outright.

But increasingly, Muslims in Orange County, Calif., are finding ways to buy a home without compromising their religious beliefs. And businesses are slowly waking up to a potentially profitable niche market.

The U.S. banking system revolves around interest. Banks charge it - to customers who take out loans - and pay it - to customers with savings, money-market and other types of accounts. Their profits are based on the difference between the interest they pay and the interest they receive.

It is a system with little room for people who believe interest is immoral.

Islam teaches that profiting from an investment is a desirable thing, so long as the person making the money shoulders a fair amount of the risk and responsibility. But when a bank issues a loan and charges interest, it gets far more than it gives, said Virginia Morris, author of The Guide to Islamic Investing.

For that reason, Muslims consider interest strictly off-limits: "You can profit on the basis of risk you take, but not on someone else's back," Morris said.

Between 140,000 and 200,000 Muslims live in Orange County, according to the Council on American-Islamic Relations.

The population has grown steadily since the 1980s because of immigration - especially from Syria, Lebanon and Pakistan - as well as conversions and births, said Hussam Ayloush, executive director of the council's area chapter.

Muslims, he said, fall into three broad groups: those who adhere strictly to the tenets of Islam; those who care little; and those who are somewhere in between. For many in the middle, the question of whether and how to buy a home is a wrenching one.

A prominent Islamic scholar recently issued a fatwa, or religious verdict, saying that in the absence of other options, Muslims may obtain conventional mortgages. The verdict swayed some, but not others.

Ayloush has struggled with the prohibition.

"It's nice to have a big house. It's nice to have a back yard," said Ayloush, who has decided he agrees with the fatwa and is looking for a house. "But I also want a clear conscience."

Muslims who are opposed to paying interest have three options:

Save enough money to buy a house outright.

Continue to rent.

Or find an alternative form of financing.

American Finance House in Pasadena gives buyers a way to go the third route. As a state-licensed finance company, American Finance is not obligated to have interest-bearing reserves like a bank or to pay interest on its deposits.

American Finance and Muslim homebuyers purchase homes together, with the company as an 80 percent owner and the buyer as a 20 percent owner.

American Finance basically leases the home to the buyer in a lease-to-purchase arrangement. Over many years, the buyer repays the company's initial 80 percent investment, plus a portion of the home's fair market value as a rental.

The company also provides similar financing for Muslim-owned and other businesses' equipment purchases and franchise deals.

American Finance, founded in 1987, finances 20 to 30 home purchases a month, compared with two or three a few years ago.

"We see the demand growing, absolutely," said Mike Abdelaaty, president of American Finance.

Riaz Ahmed and his wife, who have three children, rented for four years before buying a home through American Finance.

As a renter, Ahmed felt he was wasting money. But the more he studied the Koran, the more strongly he felt that he could not take out a conventional mortgage.

The couple's inability to buy a home was sometimes difficult to explain to their children, who wanted separate bedrooms and a back yard.

But he believed he had no choice.

"The reason is pretty simple," he said. "This is a temporary life. We have to prepare ourselves for questions in the afterlife."

Until the couple heard about American Finance, they worried that they would spend a lifetime paying rent.

Being homeowners has given the family a sense of permanence.

"It's a different feeling altogether. This is something we own," Ahmed said.

This year, Freddie Mac, a federally chartered mortgage company, endorsed American Finance's approach, approving the company as one of its authorized lenders. Though American Finance does not charge interest like other lenders, it generates cash flow, which is what Freddie Mac is investing in.

American Finance's new status gives it greater access to capital and, therefore, the ability to finance more purchases. It is the first Muslim-oriented company to establish such a relationship with Freddie Mac.

American Finance, which operates in 23 states, has a handful of competitors, notably, MSI Financial Service Corp. in Houston.

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