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Purists' Reservations
Daoud Hawa, center, talks with Ahmad Ashkar, left, as Daoud Hawa hosts a dinner party to break Ramadan fast with some Muslim friends at his home in Herndon, Va. Daoud Hawa, a real estate agent, used an Islamic loan to buy a townhouse in Fairfax and then a conventional one to buy a single family home in Herndon. Now he's trying to refinance his Herndon house with an Islamic loan.
(Jahi Chikwendiu -- The Washington Post)
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Over time, riba has become synonymous with interest or the act of making money by renting money. That type of lending is prohibited because it exposes borrowers to undue risk, creating a societal imbalance that harms the have-nots.
Instead, Islam promotes financial transactions tied to goods -- that is, making profit off trade in real assets rather than by moving cash around.
"It is viewed as more responsible and just for the lender to share the risks so that the lender is not simply loaning money and getting money back regardless of whether that borrower's venture is a success," said Isam Salah, a partner at King and Spaulding in New York who heads that law firm's Middle Eastern Islamic Finance practice.
Meeting that criteria without violating state and federal regulations and tax laws is the challenge for firms trying to break into the Islamic mortgage business. Not all states allow these contracts.
In those states that do, there are a few different models. Some contracts are structured as installment plans, in which a firm buys a house and then sells it to an individual for the sale price plus an agreed-upon profit. Others are lease-to-purchase contracts that work much like a car-leasing arrangement but over a longer time.
For his part, Hawa is most comfortable with the co-ownership arrangement offered by Guidance Financial Group, a Reston-based financial services firm that says it has completed almost 4,000 transactions worth about $815 million since its creation more than four years ago.
If Hawa's refinancing goes through, he and Guidance would form a limited-liability corporation that buys the house. He has offered about 20 percent for the down payment, which means he would own 20 percent of the house, he said. Guidance would put down the rest and thus own the rest of the property.
Hawa would then pay each month to buy Guidance's share of the house at cost plus a fee to cover his use of the company's share of the property, which is how Guidance makes money. Hawa's share in the house keeps increasing until he owns it.
If a natural disaster destroys the house, and insurance does not cover the entire cost, Hawa receives the insurance money and any remaining loss is divided between Guidance and Hawa based on their respective shares of the house at that time. If there is a foreclosure and proceeds from the sale do not cover Guidance's share, the company takes a loss and does not seek to seize other assets.
No matter what the contract arrangement, the profit made or the rent collected under all these models is often tied to the prevailing mortgage rate.
"Yes, it looks like a loan even though it's not a loan," said Hawa, who is a real estate agent and music promoter. "I understand that and I'm okay with it."
Purists' Reservations
But others are not, including Majid Anwar, who moved to Herndon from North Carolina with his wife about a year ago and recently began house-hunting.
