Islam & Economy

Whether Riba-free mortgages truly are interest-free has given rise to fiery debate among Muslims whose interpretations of Riba can differ drastically.


Javed Ahmed wants to buy a home, but is balancing that desire with his Muslim belief against paying interest on a loan. When he bought his car two years ago, Javed Ahmed saved up enough money so he could pay for it with cash.


And every month, the senior analyst at Voyager Capital, a venture firm in Seattle, pays off his credit-card balance so he doesn’t have to pay interest.


Now, at 29, Ahmed wants to buy his first home. But as a Muslim, whose religion prohibits earning or paying interest on borrowed money, he faces a dilemma common to observant followers of the nation’s fastest-growing religion: Can he buy a home without angering God? “I’m not going to save up money to buy a house,” Ahmed concedes. That’s hardly practical – at least not in Seattle. So “right now I’m on the fence,” he said. “I’m not sure what the right thing is to do.” There’s strong dissension among Muslims over how deep this ban on interest should reach: Are security investments allowed – stocks and bonds? What about retirement accounts or savings that yield a return?


The battle between finance and faith is not limited to Islam; the restriction on interest has roots in many religions, including Christianity and Judaism, to ensure that the wealthy don’t take unfair advantage of the poor. Only Islam still adheres to this strict interpretation.


It leaves Muslim followers who wish to pursue the American Dream with just a few options: Some, like Ahmed’s parents, felt they had no choice but to take on a traditional mortgage when they bought their home in Portland. Others save for years until they have enough cash to buy a home outright. And then there are those who believe it’s better to perpetually rent than to incur the wrath of Allah in the hereafter.


“I occupy two very large homes, and I don’t own either of them,” said Ali-Salaam Mahmoud, a Muslim and owner of American Mercy Services, which provides residential-care services for elderly East African Muslims. He and his partner run the business from the homes in South King County, Wash. “My parents paid cash for our family home on the East Coast. If I get a big windfall, if Allah provides me a big contract, then maybe I’d buy property,” he said. Employed in the high-tech industry during its glory years, Mahmoud said he refused to accept or buy stocks because of his religious convictions. His family is debt-free, he said. His savings account earns no interest, while his wife annually donates the interest she earns from her account to the poor. “No serious Muslim can justify investing in stocks, accepting interest,” he said. “The Quran is very clear.” In recent years, another home-buying option has emerged for Muslims, one in which some lenders are designing alternative mortgages for interest-wary clients.


While they differ among institutions, they are typically variations of lease-to-own contracts and installment purchases. For the benefit of the buyer, what the lender charges for the loan is called something other than interest. In reality, the paperwork can be identical to that of a conventional mortgage. “Everything I’ve seen dresses up a traditional mortgage as an Islamic mortgage and charges you a higher cost of capital,” said Ahmed.


“For myself, I’d rather go to a traditional option – pay interest and get the market rate. The jury’s out on what the right way is.”


American Finance House Lariba of Pasadena says its line of interest-free loans for homes, automobiles and businesses, offered across the United States, is a good fit for Muslims such as Ahmed. Lariba uses a lease-to-own mortgage model, which allows buyers to build equity through monthly payments that combine principal with rent.


The rent, which is tax-deductible, is based on the going market rent agreed upon by both Lariba and the borrower. In the transaction, it is expressed as a percentage rate, allowing it to conform to traditional standards. Nisar Sada, businessdevelopm-ent manager at Lariba, said the lender is attracting not just Muslims, but people of other faiths – Jews, Hindus and Buddhists. The maximum loaned is $3,59,600, Sada said.


“Riba is prohibited in almost all religions,” he said. “Following Shariah (Islamic law) is the best way to buy a house, and that’s what we’re trying to help people do.”


Sada said that while many Lariba clients use the riba-free loans to re-finance existing traditional mortgages, “a lot of our clients had been renting for 10 to 15 years. Some have been saving for so long, they tell us- we try to reach our goal, but the gap is so wide.”


But whether riba-free mortgages truly are interest-free has given rise to fiery debate among Muslims whose interpretations of riba can differ drastically.


“They’re selling pork and labelling it beef,” said Jeff Siddiqui, a Muslim and real-estate agent with Western Associates Real Estate in Seattle. Siddiqui, who purchased his own home with a conventional mortgage, said he invariably gets into philosophical discussions with clients who inquire about interest-free loans. Rosy Amman and her husband say that for Muslims who want to buy a home the Islamic way, interest-free loans are the best option available. The couples bought a home in Bothell through Lariba. “We are 20 percent owners, and they (Lariba) own 80 percent. With each month’s payment, our ownership goes up, and theirs goes down.”


For purposes of the paperwork, a 6.1 percent rate was assigned to the mortgage, Amman said. “People say to us, ‘You’re paying 6.1 percent – that’s just like going through the bank,’ “ she said. But “in a spiritual way, it follows the rules of our religion. Our intentions are pure.” Mahmoud El-Gamal, professor of Islamic Economics at Rice University in Houston, recognises that many world scholars of Islam have declared these home-buying products a good compromise. He says they’re driven not so much by their own worth but by the refinancing craze brought on by lower interest rates. “There’s a small segment of Muslims in America who would not participate in any type of mortgage financing unless they were convinced it was truly Islamic,” El-Gamal said.


Lenders, he added, see a potential market in people such as Ahmed, educated professionals with financial means. Nationwide, there are an estimated 1.5 million Muslim households in the United States, and more than one-third have annual incomes exceeding $75,000, studies show. “The bigger market, really, are those who use conventional methods but have a guilty conscience about it,” El-Gamal said.


More focused on his religion than ever before, Ahmed said he just wants to do the right thing. He used student loans to finance his education, including business and engineering degrees from the University of Pennsylvania. “Some people might say you shouldn’t do that,” he said. Ahmed doesn’t believe Islamic laws are interpreted to prohibit student loans and security investments, but rather transactions such as payday loans and cheque cashing that charge exorbitant rates, mostly to poor people. “It’s not a constructive way to live in modern society,” he said. “We live in this world. We need to figure out what fits and what doesn’t fit.”

(The Seattle Times)

According to the World Islamic Banking Competitiveness Report 2005 released recently, Islamic banks need to improve their service levels.


More than 500 participants from across the world, attended the 12th World Islamic Banking Conference (WIBC) in Bahrain on December 10, 2005. The WIBC McKinsey Compe-titiveness Report 2005-06 was released during the Executive Briefing on this report and was facilitated by McKinsey and Company. The WIBC McKinsey Competitiveness Report is a ground breaking research-based initiative designed to identify and raise the bar on financial performance and strategic excellence in the industry. The theme for this year’s research project was- ‘Tracking an Industry in Transition’, the scope of which included valuable and important features, including the perspectives of CEOs of leading financial institutions on industry trends and excellence in customer service in Islamic banks. David McLean, Executive Director, The World Islamic Banking Conference said: ‘The WIBC Competitiveness Report has rapidly established itself as an indispensable reference point for senior executives striving to raise the bar of strategic leadership and financial performance in the global industry.’ The objective of this report is to look at trends in Islamic Banking and chart ways to help the industry sustain its momentum. The key messages that emerged from the Report were:


• Growth is substantial, Islamic banks are introducing more and more products and more players are entering the industry.

• While there is much to be happy about, this report maintains the spirit of providing constructive challenge to Islamic Banks. Key questions often asked, include: how do we sustain our growth? Where do we need to improve?

• In 2004, Islamic Banks continued to grow much faster than their respective conventional counterparts. However, despite some improvements, the profitability of Islamic banks generally remained below that of their conventional peers. This gap will increasingly be high on the agenda of Islamic Bank CEOs: the current high valuation of Islamic banks indicates strong market expectations for future growth and profits.

• To meet these expectations, Islamic banks will have to continue their strong growth while bridging their profitability gap.

• Delivering on these expectations will depend on the ability of Islamic Banks to develop a more sophisticated offering and, specifically, to capture the Consumer Banking opportunity.

• If Islamic banks are to capture this opportunity, appealing to a broader consumer base will be key. So far, Islamic banks have managed to capture customers who have a strong preference for Shariah-compliant products. Going forward, they will have to broaden their appeal to customers who are interested in Shariah-compliant products, but are not ready to sacrifice returns, service or convenience.