Faith, finance
Two city banks offer devout Muslims a way to buy homes
without violating usury beliefs
By Dennis Rodkin
Special to the Tribune
Published February 6, 2005
http://www.chicagotribune.com/classified/realestate/realestate/chi-0502060481feb06,1,7422831.story
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 says, "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
Hanover Park house indefinitely.
"If I couldn't find a way to buy in a religiously good
way," he says, "I would just keep on renting."
Then last year Khan heard through friends about an
interest-free Islamic home-buying program that was
launching at Chicago's Devon Bank. Instead of buying a
house and taking a mortgage from a bank to pay for it,
under this program the buyer picks a house, but the
bank buys it and immediately sells it to the buyer at
a sizable markup.
The bank 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
home buyer 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 non-standard terminology that satisfies Islamic
teachings.
Although it might sound like a paperwork trick, it
finesses a fine point in Islamic law, or shari'ah,
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 Bartlett 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
total of $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," says Salman Ibrahim, a member of the
Shari'ah Supervisory Board of America, a West Rogers
Park panel of 10 Islamic scholars that monitors
financial products targeting 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."
Two Chicago banks -- Devon Bank and Broadway Bank,
both small North Side institutions in neighborhoods
where large numbers of Muslims live -- both started
shari'ah-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," says 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."
In January the larger of the two banks, Devon Bank,
took a big step forward when it announced that
national mortgage investor Freddie Mac will 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 measure of the pent-up desire for this religiously
appropriate 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," says Nazir
Gurukambal, Devon Bank's vice president in charge of
the Islamic home-buying program. (The bank is awaiting
final regulatory approval to offer its program in
Connecticut.)
Mohammed Monawer, an engineer with Wisconsin's Public
Service Commission, says he called Devon Bank as soon
its product became available to him last fall, as he
had been renting with his family of four for more than
15 years.
"An Islamic option was never available before, so I
kept renting," Monawer says. When a group of Islamic
scholars in his city determined that "the way Devon
Bank is doing it is in compliance with the Islamic
way, I got on the bandwagon."
Monawer uses credit cards because he's found there's
no other way to secure hotel reservations and conduct
some other business, but he diligently pays the
balance each month, eliminating interest charges.
He had rented a two-bedroom apartment in Madison for
his family of four long past the age when a
professional typically can buy a house, but he had no
other choice that would fit his religious needs.
Monawer and his wife, Safia, had been saving to buy
for years, but they only had about 20 percent of what
a suitable home would cost.
In November, they bought a three-bedroom house on a
half-acre lot in Fitchburg, a suburb south of Madison.
"It's a nice neighborhood, and quiet," he says. "Our
condition is improved, but we are happiest because we
didn't have to compromise our beliefs to get this."
Notwithstanding the exuberance of individual home
buyers, there's no sure measure of how big a demand
there is for Islamic-friendly financing. A study by
HSBC, a New York bank that offers similar Islamic
products, indicated that fewer than one in 10 U.S.
Muslims use Islamic-based financial services, and that
64 percent of the nation's Muslims have bought homes
using standard interest-bearing mortgages. That could
be simply because shari'ah-compliant loans weren't
available in the past, as new homeowner Khan notes.
"Eleven years ago, when we came to this country, my
father needed to buy a house and couldn't afford to
look at it from an Islamic perspective," Khan says.
"There wasn't anything; he didn't have a choice."
In fact, while the Islamic stricture against borrowing
with interest goes back centuries (Judaism and
Christianity had similar prohibitions), the desire
among Muslims to avoid interest is relatively modern,
says Mahmoud al-Gamal, professor of Islamic Economics
at Rice University in Houston.
"In the early 20th Century, most Islamic countries
were basically trying to emulate the West in their
rules and institutions," he says. "But since the
revolutions and the religious resurgence of the 1970s,
you have this premise that Western-style finance is
not acceptable anymore."
But al-Gamal notes that these programs have to have
one foot in each of two canoes: They have to satisfy a
Muslim's religious practices at the same time that
they fulfill U.S. banking regulations and practices.
"The job of the lawyers is to make sure that while the
language in the contracts makes the customers
convinced there is a difference from a mortgage, in
fact the difference is negligible or nonexistent, so
the buyer of the loan, the Freddie Mac, is happy that
this is a Freddie Mac note like any other Freddie Mac
note," al-Gamal says.
While it's pretty easy to calculate how much an
interest-bearing loan will cost in 30 years and
translate that into a markup (it's about the same as
the figure shown at the bottom of a standard
borrower's Truth in Lending form at closing), keeping
the Islamic purchase "clean" creates three dilemmas
for the buyer and the bank. They have been resolved
with differing levels of clarity.
The first and simplest is the extra cost of what Devon
Bank's Loundy calls "the COBM: the cost of being
Muslim." If getting a home in a way that adheres to
one's religious principles means shelling out a
prohibitive additional sum, customers will feel that
the cost is too high and keep renting. Loundy says his
bank has tried to ensure that this fee is minimal,
just enough to cover the cost of processing two deeds
(one for the sale to the bank, the second for the sale
to the buyer) instead of just one. He estimates the
extra cost to be about $100. In Madison, Monawer says
his additional costs came to about $750, not enough to
scare him off.
The second dilemma is vastly more complicated. Few
people buy a house with a 15- or 30-year loan and
stick around for that whole term. With an
interest-bearing loan, that's no problem. Sell the
house, settle the debt still owed to the bank, and
walk away with what's left. But because a buyer using
an Islamic purchase plan isn't paying interest, how
much debt is left if he or she sells before the term
is up?
It's further complicated by the fact that most homes
will be worth more on their next sale than the
purchase price.
Pure Islamic finance instructs that risk should be
shared by both parties, al-Gamal says; that would mean
the bank and the home buyer would share any increase
in home value, and that if the value drops, the buyer
would owe less. These ideas are counter to the way
American home financing is devised.
Loundy and al-Gamal both say this is a very thorny
issue. It would be disrespectful to even offer a
payoff schedule, because that blurs the line between
paying interest and paying the Islamic way. The whole
idea is that these buyers intend to pay the cost of
the house in full over time. That's why most buyers in
the program agree to accept the uncertainty and go in
with no promise of how it will be resolved if they
sell early, Loundy says.
"There's no other way to work it out but to leave it
undecided," he says.
The third problem is similarly left unresolved, but it
tests the home buyer's dedication to religious
principle. Every year at tax time, millions of
American homeowners cash in on their most lucrative
tax break, the deduction for mortgage interest they
have paid. Because it amounts to thousands of dollars
for most people, it's a major factor in what makes a
home affordable.
Here's the problem for buyers in Islamic programs: To
comply with mortgage regulations, the bank has to
report the amount buyers paid that would have been
interest in a standard loan. Should the buyer take
advantage of that deduction, then, or stand on
principle and refuse the deduction because it is
premised on paying interest?
Loundy and al-Gamal say the IRS has not yet determined
what it will require, which means Islamic buyers have
to decide for themselves.
Ibrahim, of the shari'ah board, says the concept got a
lot of debate, and ultimately the board said that "we
would prefer to have some sort of preferred
shari'ah-compliant deduction [that reflected the
markup] and not the interest, but because there is
nothing of that type at this point and because it
would be brutal to these Muslim consumers to have to
go without the deduction, the board would go ahead and
allow taking the deduction."
Without taking that deduction, most Islamic buyers
would find that their "cost of being Muslim" was way
too steep.
Copyright © 2005, Chicago Tribune
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