Islamic financiers sell Koran-compliant American dream
Wed Apr 26, 2006 8:00 AM ET
By Jui Chakravorty
DEARBORN, Mich., April 26 (Reuters) - For 30 years, Khalil Madun has been packing pastries at his bakery in Michigan, waiting for the day he could buy a home without committing sin.
"I'm so happy I can have my own place now and still be on the right side of God," 54-year-old Madun said, smiling widely as he shuttled trays of Middle Eastern confections from the kitchen of his bakery in Dearborn, a suburb of Detroit.
Madun is one of an estimated 7 million Muslims living in the United States, many of whom observe a Koranic law that forbids paying or receiving interest, or "riba."
That has left many observant Muslims in the United States shut out of the American dream of home ownership and facing a difficult choice: Either save hundreds of thousands of dollars, borrow from family or resort to a conventional mortgage that contravenes their faith.
But Madun, like thousands of others, recently turned to a mortgage compliant with Koranic law, a fast-growing niche for entrepreneurial bankers in which American financial engineering is reshaping a centuries-old Islamic tradition. These banks have developed ways of avoiding traditional interest-carrying mortgages, for example by buying the home then having the buyer pay the bank for it over time.
"The banking market is becoming saturated and firms have to figure ways to grow," said analyst Alois Pirker of consulting firm Celent, who has tracked the growth of Islamic finance. "The Islamic community is growing and if a bank can capture that community, there is big potential there."
HOME TO KEBABS AND 'MURABAHA'
Almost half a million Arab residents live in Dearborn and the surrounding area, one of the largest and fastest-growing Arab populations outside the Middle East. Streets in the middle-class neighborhood are peppered with Arabic store signs and restaurants redolent with the smell of kebabs and hummus.
But homeownership for the state's Arab residents remain 7 percent lower than average, even though Arab households tend to have higher income, census figures show.
Seeing a growing opportunity, several U.S. banks have developed "interest-free" financial structures -- such as mortgages -- compliant with Islamic law, or Shariah.
The trend is part of a global boom in Islamic finance, estimated to represent between $200 billion and $560 billion in assets with growth of over 15 percent per year.
In the United States, a few banks are readying plans for a range of financial products compliant with Islamic law, including checking accounts and mutual funds.
The Dow Jones Islamic Market Index, which tracks investments compliant with Islamic law, gained more than 5 percent in 2005, compared to a 3-percent rise in the S&P 500.
In Michigan, University Bancorp has rolled out a financing model called "murabaha" -- in which the bank buys the house and gradually sells it to the home buyer, after tacking on an additional margin.
The model has been a hit: The bank recorded a $1 million gain in 2005 after forming an Islamic finance unit. Freddie Mac , the second-largest U.S. mortgage buyer, bought $100 million of the alternative loans, a step toward creating a secondary market to free up capital for more potential buyers.
The success has sparked talks with "one of the top four U.S. banks" for a possible partnership, said the bank's president Stephen Ranzini. "We're hoping to get to a model in which we develop the product and manage it for clients," he said.
Borrowers do not have to be Muslim or religious to qualify for the loans, but banks market them almost exclusively to Islamic communities, printing Arabic brochures and distributing fliers outside mosques after Friday afternoon prayers.
The Shariah-compliant loans are required to be blessed by three internationally acknowledged imams, Ranzini said.
MUCH INTEREST IN 'NO INTEREST'
California-based lender Lariba -- which means "no-interest" in Arabic -- issues a differently structured Islamic mortgage.
Lariba's model creates a shared-equity partnership between bank and buyer to acquire the house. It then gradually transfers shares of its ownership, but also has the tenant paying a market-based rent split between the two owners.
"As we expand our business, I think you'll see our growth in the coming years will be quite impressive," said Yahia Abdul-Rahman, chairman of Lariba.
Rashid Abrar, a 40-year-old immigrant from Pakistan, bought a home through Lariba in 2002.
"We rented a place for 15 years, because we didn't want to pay interest," said Abrar, who now owns a home in Canton, Michigan. "But when they started offering riba-free financing, we were so excited. We would not have to wait another 15 years to buy a home."
© Reuters 2006