Mortgages that comply with Islam

Interest-free program has bank buy home, sell to customer at a markup

February 20, 2005|By Dennis Rodkin | Dennis Rodkin,SPECIAL TO THE CHICAGO TRIBUNE

O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; so that you may be successful. - 3-130 Surah Al-Imran Verses

Taj Khan had resigned himself to renting a home for his family of three for a very long time. Devout in his practice of Islam, the 28-year-old computer network administrator is particularly concerned about avoiding any business transactions that entail charging or paying interest.

"Interest is one of the biggest things we are specifically told to avoid," Khan said, "so I wasn't going to be able to buy a house. I wanted to buy, but my religious belief was stopping me."

He was trying to save toward an all-cash purchase, but the pressures of supporting a young family kept him from putting much away. So Khan figured he and his wife, Seemab, would go on renting part of his father's house indefinitely.

"If I couldn't find a way to buy in a religiously good way," he said, "I would just keep on renting."

Then last year Khan heard through friends about a new interest-free Islamic home-buying program. Instead of taking out a conventional mortgage to pay for it, under this program the buyer picks a house, but Chicago's Devon Bank buys it and immediately sells it to the buyer at a sizable markup.

Devon took a big step forward last month when it announced that national mortgage investor Freddie Mac would buy its Islamic home deals, giving the bank the leverage to offer its Islamic products in other states. By mid-January, Devon Bank had begun offering the products in 10 states outside Illinois, with more states to be lined up soon, according to the bank's corporate counsel, David Loundy.

A Devon spokeswoman said the bank expects to get approval soon to do business in Maryland.

The deputy commissioner of financial regulations for Maryland said he is unaware of any other banks offering such loans in the state.

Devon calculates its markup based on prevailing interest rates. Thus, because the total price with markup is the same as what the buyer would have paid on a 30-year loan with interest, the buyer is agreeing to pay just as much as a homeowner with a standard mortgage would pay. The difference is that it's a credit sale for a set total price, not an interest-bearing transaction.

But that's only true of the transaction between the homebuyer and the bank. When Devon Bank later sells the loan to Freddie Mac, as many mortgage lenders do, what it sells is a standard interest-bearing loan, with the same profit structure for both sides. Essentially, the bank has wrapped a standard mortgage in nonstandard terminology that satisfies Islamic teachings.

Although it might sound like a paperwork trick, it finesses a fine point in Islamic law, or Shariah, that makes all the difference to Khan and other U.S. Muslims who want to own homes but decline to get into any financial transactions that charge interest.

Khan bought a four-bedroom house in a Chicago suburb last summer, confident that the purchase was in compliance with his faith because of the structure of the deal. He picked a house whose price was $295,000. Devon Bank bought it, and accepted a $60,000 down payment from Khan. His agreement with the bank calls for 360 monthly payments of $1,338. In the end, with all payments and the down payment, he will have spent a more than $540,000 for the house.

Had he bought with a standard, interest-bearing mortgage, his 30-year total would have been approximately the same.

"From a financial standpoint there may not be much difference, but what matters is the way you conduct the transaction," said Salman Ibrahim, a member of the Shariah Supervisory Board of America, a panel of 10 Islamic scholars that monitors financial products directed to Muslims and gave its approval to Devon Bank's program. "The taste of a chicken does not change whether it is zabiah [slaughtered according to Islamic practices] or non-zabiah; what changes is the way you slaughter it," Ibrahim said.

Devon Bank and Broadway Bank, both small North Side Chicago institutions in neighborhoods where large numbers of Muslims live, started Shariah-sanctioned home-buying programs in 2004. Neither bank's officials will say how many Islamic home transactions they have conducted, though both say the programs have been received well by their customers.

"For us, it's a service issue," said Demetris Giannoulias, chief financial officer of Broadway Bank. "There is a demand for this kind of thing in the community we serve, and if it requires us to do a little extra amount of service to make home-buying more palatable to the customer, we'll do that."

A measure of the pent-up desire for this method for Muslims to buy houses: "When he heard about it, a guy from Connecticut started calling us three or four times a day until we got approval there and could say yes to him," said Nazir Gurukambal, Devon Bank's vice president in charge of the Islamic home-buying program.

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