Interest-Free Financing for U.S. Muslims

When the Siddiqui family, complete with toddler and 5-year-old, had outgrown their current home, they did what most Americans do — they took out a mortgage and bought a new one.

But, unlike most Americans, Rushdi and Asma Siddiqui won't be paying any interest on their loan.

That's because they are are taking advantage of an Islamic home-financing initiative launched this May by HSBC Bank in New York, and known by its Arabic name of murabaha.

A so-called murabaha sale is one in which there is no interest paid. Instead, the price of the object to be financed is known and the buyer agrees to pay a premium over that initial price. In such a contract, the financial institution must own the item at the time the customer buys it from the institution.

Explains Rushdi Siddiqui: "The bank bought the property from the seller and immediately sold it to us with a monthly commitment to pay."

No-Interest Charge Cards Also Available

Islamic financing is not necessarily a new phenomenon in the United States. Multinational institutions, such as Citigroup, and community-based companies, such as Lariba in California, have been offering Islamic programs for decades.

"In Islamic financial history, back in the '80s, programs were community-based, like Lariba, but most lacked financial capital," says Rushdi Siddiqui, whose day job is as director of the Islamic Group at the Dow Jones Indexes. "Now there are bigger institutions that opened Islamic windows."

Indeed, HSBC's initiative reflects not only a growing demand for Islamic products, but also the bank's willingness to translate international Islamic financing principals to the level of personal finance.

In fact, the murabaha mortgages are just one of three popular Islamic financial services recently launched by HSBC, according to Tariq Al-Rifai, its U.S.-based vice president of Islamic banking. The other two services are no-interest charge cards and interest-free checking accounts.

The Devil Is in the Details

In order to translate Islamic principles into personal finance, financiers and scholars had to reconstruct Western financing for mortgages and credit cards to make them comply with Islamic law.

That law, or shari'ah, has two main prohibitions: one against the use of ribaa or ribit, also known as usury; and the other against gharar, the unbundled sale of risk, such as gambling, insurance or derivatives.

The very notion of interest is widely condemned by the Muslim world, but the devil is in the details, says Mahmoud El-Gamal, chair professor of Islamic economics at Rice University in Houston.

"I will be among the first to admit that the terms 'Islamic banking' or 'Islamic finance' can be quite misleading, given the many similarities between Islamic and conventional financial contracts," says El-Gamal.

The key is what are the intentions behind the contract, as well as the type of contract. Scholars agree that interest is expressly forbidden on loans. But the idea of interest itself is not forbidden in Islam, because shari'ah recognizes the time value of money, says El-Gamal. He points out that many Islamic financiers even use the going interest rate as a benchmark to set their profit margin — a point of contention yet to be resolved by scholars.

Sharing the Burden of Risk

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