NCPA - National Center for Policy Analysis


August 12, 2005

Koranic law forbids paying or receiving interest, or "riba," so Muslims who want to buy a home have to save hundreds of thousands of dollars, get loans from family, or swallow their faith and take out a conventional mortgage, says the New York Times.

Recently, several Islamic-friendly lending programs, that offer joint-owner partnerships and charge lease fees instead of interest, were deemed "halal," or clean, and are becoming a popular route for Muslim homebuyers, especially in Michigan where the Arab-American population is booming but homeownership is 7 percent below the national average.

Banks have noticed and are now entering the Islamic market, says the Times.

  • Ann Arbor's University Bank has lent $11 million in Islamic mortgages.
  • The California-based lender Lariba, which issues about 100 Muslim mortgages each month, expanded into Michigan in 2002 and Virginia-based lender Guidance Financial Group recently opened a satellite office in wealthy Oakland County.
  • Devon Bank of Chicago, with underwriter Freddie Mac, offers Muslim mortgages in nine states, including Michigan.

There are three types of Islamic loans that are used to refinance a conventional mortgage or avoid old interest-bearing loans:

  • The Murabaha allows a bank to buy a house and gradually sell it to a buyer, with an additional profit rate attached.
  • With an Ijara loan, the bank buys a house and leases it to a buyer, who pays off the home and market-based rent for living there.
  • The Musharaka creates a shared-equity partnership between bank and buyer to purchase the house and gradually transfer ownership.

These loans often come with high fees, additional closing costs and make getting homeowners insurance difficult; but overall, the mortgages offer a peace of mind that overshadows all other concerns, says the Times.

Source: Patrick O'Gilfoil Healy, "For Muslims, Loans For the Conscience," New York Times, August 7, 2005.

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