Financing homes under Islam
Though the Bible says, “Neither a borrower nor a lender be,” for Americans that has long been taken as an admonition rather than a command. Not so for many Muslims, who find the Koran’s strictures against not just usury but also borrowing forced them to choose between their faith and their home, as this insightful New York Times article reveals:
Emaan and Ifrah Abrar with their father, Rashid Abrar, who has a loan satisfying the Islamic rule that forbids paying interest.
Koranic law forbids paying or receiving interest, or riba.
Renunciation of debt carries a heavy cost:
Muslims who wanted to buy a home had to:
· Save hundreds of thousands of dollars
· Get loans from family, or
· Swallow their faith and take out a conventional mortgage.
None of these choices is appetizing. Moreover, in a country where homeownership is the dominant path to wealth-building (and embracing the American Dream), with an increasing divide between the owns and own-nots, this impairment has hindered Muslims’ ability to join the rest of
But census figures show that the homeownership rate for these Arab residents, many of them Muslims, remains 7 percent lower than the overall percentage of homeowners statewide.
“There are people making $90,000 to $100,000 a year and living in apartments,” said Mushir Khwaja, an Islamic banker with University Bank, a
“But there are others, out of necessity, who say, ‘O.K., I’m going to do what I need to for my family.’ There isn’t any alternative available.”
Scrollwork at the
Such families are common:
Every time Subhan Khan paid his mortgage, stepped into a mosque or talked about real estate with friends, he felt the shadow of shame creeping over him.
To buy his first home, Mr. Khan had quietly but deliberately violated Islamic laws that bar Muslims from paying or receiving interest on loans. He had financed a home in
Never again, Mr. Khan told himself. When he sold the house and moved to
In suburban
“I always felt bad about purchasing a home on a mortgage,” said Mr. Khan, 35, who recently bought a home in
The mezquita, interior,
Enter the marketplace: first with financial innovations:
The [Chicago Federal Reserve] identified three types of Islamic loans.
· In a Murabaha loan, the bank buys the house and gradually sells it to the home buyer, with an additional profit rate tacked on.
· In an Ijara loan, one of the most common, the bank buys the house and leases it to the buyer, who pays off the home, plus market-based rent for living there.
· The third form, called Musharaka, creates a shared-equity partnership between bank and buyer to purchase the house and gradually transfer shares of its ownership.
The difference may seem largely semantic, but the loans are deemed halal, or clean, by Islamic scholars. And they are becoming a popular route for Muslims who want to buy homes, bankers said.
Actually, the differences aren’t semantic at all, because none of these is a perfect economic mirror of straight homeownership. Each creates a hybrid tenure in between rental and ownership. The first is essentially a staged transfer of ownership; the second is lease-purchase or similar to a land contract; and the third is a more classical shared-equity loan (of the type quite common for affordable housing in the
Where did these innovations come from? From entrepreneurial financiers:
University Bank, a small public company based in
The California-based lender Lariba, which issues about 100 Muslim mortgages each month, expanded into
A Virginia-based lender, the Guidance Financial Group, recently opened a satellite office in
And in January, Devon Bank of
As you might expect, if you wave money, they will come:
“At the time I bought my house, I weighed my needs over religious needs, which was wrong,” Mr. Khan said. “As you grow, your priorities change. I don’t want to teach my kids that I’m living under an un-Islamic loan.”
One of his cousins had languished for 15 years in rental apartments before buying a house.
We know that homeownership changes behavior, not just financially but also in household formation. So retarding the homeownership aspirations of a population segment retards their economic and demographic prospects as well.
Mr. Khan, determined not to wait that long saving money, found a loan through Lariba that would finance his newly built, 2,500-square-foot home.
After appraising the house and checking Mr. Khan’s credit, Lariba bought the home and began leasing it to the family. [Ijara finance. -- Ed.] The Khans will live there and pay rent as they gradually buy the house. Mr. Khan said he will ultimately pay a quarter percentage point more than he would under a conventional mortgage.
If true, that is a very efficient market, only 25 basis points to remove a fundamental blockage. It’s a niche product:
A May letter from the Federal Reserve’s Chicago office called Islamic home loans a tiny corner of the $1 trillion mortgage industry, but could not say how tiny.
Tiny doesn’t matter, especially when religion is involved. Diversifying the ecosystem does, because diverse products will grow as their customer base grows.
