It would make financial sense for Sajeed Jaweed and his wife to buy a house, but for the past five years they've been renting a two-bedroom apartment in Burtonsville instead.
After seven years of making mortgage payments, Maha Badir and her husband withdrew all of their retirement savings to pay off the loan on their Rockville home.
Badir and Jaweed, like many among the local Muslim community, made those choices because, under Islamic law, paying or charging interest is considered riba, or usury--and a high sin. And conventional banking offers no alternatives to the interest-bearing loan.
But as the Islamic community in the Washington region grows, companies are preparing to introduce financial service options that adhere to Muslim ethical and religious laws governing personal business dealings, especially those barring interest payments.
Next fall, two companies--Enterprise Bancorp Inc. in Largo and Al-Manzil Islamic Financial Services in New York--are set to begin tapping the huge market here for Islamic financial services. They will offer leasing options on homes and eventually other financial services that will give the Muslim community a way to avoid the interest payments around which the American financial system is built.
The Washington region is home to about 300,000 Muslims, a growing community that some say is paying more attention to Islamic spirituality. The more devout, such as Hadiera Muslim, have stood on the sidelines as most Americans in this credit-driven economy use their credit cards, take out student loans, borrow money for a new car or put money in their interest-bearing savings accounts.
Muslim, 36, is single and avoids paying a mortgage by sharing a house with her sister in Laurel. To live a truly interest-free life, she can't even pay for furniture or insurance in monthly installments that carry finance charges. "That has tremendous impact because conventional banking paralyzes you financially, unless you have a large disposable fund" to pay everything up front, she said. And she doesn't.
Washington's is the seventh-largest Muslim community in the United States. The median income of Muslims nationally is about $40,000, according to the Center for American Muslim Research and Information in New York, enough to qualify many families for home loans. Community leaders here say most families in the larger Muslim communities in College Park, Laurel, Columbia, Lanham, Arlington and Falls Church are educated and affluent but choose simply to rent instead.
Interest-free financing is a hot topic in Ibrahim Shafir's circle, which includes young Muslim families for whom living in America means trying to balance their faith and their financial aspirations.
"The reality is that a lot of Muslims do take loans or have a mortgage, [and] they come up with justifications to do it," said Shafir, who is treasurer for the Dar-Us-Salaam mosque in College Park. "The biggest justification I hear is 'If I don't take a loan, I can't own a home in America,' " said Shafir, 26, who rents a town house in Silver Spring with his wife and two children.
The main feature of Islamic-oriented banking services is what is known as a halal arrangement, a type of lease-to-own agreement that on the face of it looks and feels a lot like a regular loan. In a halal arrangement--one that conforms with the Koran--customers make a deposit that acts as a down payment, and the financial institution buys the property. Thereafter, the buyers make monthly payments that include payments toward equity in the property, as well as rent on the portion of the property they do not own. To the Internal Revenue Service, this distinction between rent and interest is immaterial: The institutions pay taxes on the amount as if it were interest income, and homeowners usually claim the mortgage interest deduction.
But these "lenders" differ in that they hold the title to the home, car or business until the loan is paid off, effectively acting as equity investors. So if the price of the house plummets, that loss is shared by both client and investor, and in a foreclosure, the investor recovers the property but has no further legal recourse against the client. The same arrangement can be used for any asset-backed business or personal loan.
In spiritual terms, the difference is paramount: "When the asset goes away, we have no claims against each other," and with the dissolution of the contract comes "an absolute termination of bad things," said Abdulkader Steven Thomas, a Muslim and the chief executive of Al-Manzil, a business unit of the United Bank of Kuwait PLC. Samuel L. Hayes III, a Harvard professor who has written books on Islamic finance, says the structure of these loans may strike the lay person as mere semantics, but "the devil is in the details, and the difference is that God knows the difference."
Regulation of Islamic financial service companies depends on who is offering them. Al-Manzil, as a subsidiary of an international bank, is overseen primarily by federal and state bank regulators--though it doesn't offer federally insured deposits. Enterprise Bancorp, because it is a thrift holding company, is regulated by the Office of Thrift Supervision. Both companies are subject to federal fair-lending and housing laws, as is every other mortgage company.
Ironically, the absence of such services is "a force of empowerment" for the community, says Haifa Bint-Kadi, director of funding development for Dar-Us-Salaam. The community has to pull together to find alternatives, and some Muslim communities pool their cash to buy homes up front and lease them to families, she said. The benefit of that structure is that investors have a vested interest in making sure the family can make their payments, hold down jobs, and take care of the safety and well-being of the neighborhood, she said.
"You have to convince investors that you're not just getting a return on your money, you're getting a stable environment for your children," said Bint-Kadi, a divorced mother of two who rents an apartment in Beltsville. "It's actually one of the oldest investment models that exist."
The ethics of interest has a long history. The Roman Empire banned it, Plato wrote about its adverse effects on society, and the Old Testament laid out many prohibitions on charging another human being interest. The argument against interest is essentially the same everywhere: It runs counter to concepts of mercy and charity, and it benefits the rich at the expense of the poor. But religion ran into the reality of life, and modern times created market-determined interest rate levels that many considered reasonable, and therefore not usurious.
"Western culture has not observed" Judeo-Christian prohibitions on interest, said John P. Kelly, the former president and chief executive of Enterprise Bancorp, who was involved in formulating the firm's initial plans for Islamic financial services. "We're called to the same standard to some degree, although we don't adhere to it," he said.
The demand in the United States for these services is increasing primarily among younger, second-generation Muslim immigrants who are more spiritually focused than their assimilationist parents who first came to this country more for political or economic reasons, Thomas said. Shafir, whose parents emigrated from Pakistan 35 years ago, said he has observed a religious revival among young adults like himself, and that has translated into efforts to find alternative financing and start halal credit unions.
"They didn't have time to think about [religious] issues, because they were too busy establishing their lives," Jaweed said of his parents, who emigrated from India.
Badir, who teaches Arabic and the Koran at the Islamic Al-Huda School in College Park, said it's only recently that the Muslim community reached a critical mass necessary to put together viable community alternatives. Her family pooled their resources to pay off the rest of their home loan when they found out that mortgage payments were considered riba. "It takes lots of patience, because it's a lot of work to get where the other [conventional] institutions have gotten," she said.
In response to growing demand from the religiously adherent who are also financially savvy, Dow Jones & Co. unveiled its Islamic market index in February, a collection of about 600 stocks that do not invest in tobacco, alcohol, restaurants or hotels that serve pork, or conventional banks. The three indexes the company started initially have outperformed the Nasdaq composite index, the Standard & Poor's 500-stock index and the Morgan Stanley world index, said Rushdi Siddiqui, director of the Islamic Index Group. Owing to its success with Muslims and non-Muslim investors alike, Dow Jones started three Islamic indexes last month and has two more in the pipeline.
Washington-area Muslims are a particularly diverse group, with strong representation from India, Pakistan, Egypt, Somalia and along the entire Arabian Peninsula. Islam, with about 1 billion followers around the world, is the fastest-growing religious sector in the United States, with an estimated 2.5 percent growth rate, according to the Center for Muslim Research and Information. This year alone, as many as 10,000 Muslims from Kosovo moved to the United States, according to Abdu Alamoudi, president of the American Muslim Foundation in Alexandria.
Of course, not all Muslims are interested in alternative investment forms. Al-Manzil's Thomas estimates about a third of the Muslim population is interested in Islamic loans, which he says is about a $100 billion market. The biggest obstacle for Al-Manzil, which has already opened for business in California and Connecticut, is educating the Muslim community about the spiritual underpinings of the halal system and how it works, he said.
But word of mouth in the community makes for a very steep growth curve. A mere six months after Al-Manzil secured its first few home acquisitions in California last year, the increase in business in that area has been exponential, Thomas said. Enterprise Bancorp's Batties said focus group studies the bank has conducted since 1995 indicate that support for the program in this area is substantial.
Khalid Obeid's family of four moved from Santa Clara, Calif., three months ago into a two-bedroom rental property in Silver Spring. After Al-Manzil started offering financial services in Santa Clara earlier this year, "many, many people took advantage of it," said Obeid, who is principal of the Al-Huda School, with a population of 340 students from kindergarten to seventh grade. The school purchased the building with the help of Al-Manzil this spring.
Hadiera Muslim believes many in the local community here will embrace the new alternatives. "From my point of view, it's a test of your conviction of your faith; you can't be completely responsible on a spiritual level" living with interest, she said. "You just have to make choices to live differently."
CAPTION: Haifa Bint-Kadi, director of funding development at the Dar-Us-Salaam mosque, explains the new programs.
CAPTION: Women pray at College Park's Dar-Us-Salaam mosque. The Washington region is home to about 300,000 Muslims.
CAPTION: "Many, many people took advantage of" a new program, says Khalid Obeid, principal of Al-Huda School.