Interest-Free Financing for U.S. Muslims
July 1, 2002 -- 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
Risk is inherent is any loan, such as the risk of default, but under shari'ah the lender cannot be guaranteed a return while the borrower is making no return or is suffering on investments for reasons beyond his control, notes Samuel L. Hayes III, Islamic finance expert at the Harvard Business School.
"There is no guarantee on return, but with a conventional Western loan, you are required to pay on a certain day a certain amount of money. It doesn't matter if the investor has done well or poorly," he says. "The risk using Islamic finance is less because [the lender] can't put that into a contract."
Thus, the burden of the loan is placed on both parties' shoulders. "This does provide relief for a borrower in distress, which is not seen in the U.S.," says Hayes. "It's a more humane standard of arrangements for the borrower."
The bankers at HSBC were able to create shari'ah-compliant charge cards, for insance, by replacing the interest rate with a flat fixed late payment fee of $25 for balances not paid in full at the end of the month. The card, affiliated with Mastercard, comes with an annual fee of $55.
Members of HSBC have worked with a board of Islamic scholars to set up a system so that accounts remain interest-free. "We ensure that funds are not mixed with other funds," says Al-Rifai. "The bank is not getting interest."
Minority of U.S. Muslims Use Islamic-Based Services
Exactly how big the market is for HSBC's and other Islamic financing programs is really a function of who you speak to, says Rusdhi Siddiqui. "If you speak to people who are 'gung-ho,' there is a lot of money in the market. However, if you speak to secular Muslims, they don't have a great demand for Islamic products."
There are about 7 million Muslims in the United States, with 800,000 in New York alone. An HSBC survey found the median household income for Muslims in the United States is the relatively well-off $51,830. And about 32 percent of American Muslim households make more than $75,000 per year, says Al-Rifai.
Yet fewer than one in 10 U.S. Muslims use Islamic-based services, while more than three-quarters have interest-based banking, found the study. And just 4 percent have shari'ah-compliant mortgages, compared to 64 percent who do not.
In explaining the discrepancy, Rushdi Siddiqui says, "Maybe it's an issue of time lag. Muslims came aboard [in the United States] in the '60s and '70s. I think it's a function of demographics. People used what was available because of necessity."
Ultimately, though, the murabaha loan designed by HSBC incorporated the procedures of a conventional mortgage, including the credit check, without relaying any additional charges to the buyer.
"It feels great, we're very happy," adds Asma Sidduqui. "Not because we were the first, but to say we did it the Islamic way."