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Muslims and Mortgages: American Home Ownership Through Flexible Financing

Affordable Housing Institute

November 19, 2008

Helping local business owners reach a new market by allowing Muslim communities to become home owners - without compromising their religious values

After moving his young family into rental apartments, his in-laws house and then again into a rented condominium, Saiyad saved enough money for a down payment last year and bought his first house in the northwest side of Chicago.

It was a milestone. But what made both Saiyad and his wife Fatima particularly happy is that they were able to purchase the three bedroom split level without compromising their deeply held religious views.

Saiyad and his wife are both observant Muslims and try to follow the Islamic prohibition on paying or receiving interest. They pay their credit card bills in full each month. They have a checking but not a savings account. And when they were ready to buy a home, they sought help from an Islamic cooperative.

Home ownership has long been linked to helping ethnic and immigrant groups feel more invested in their community. Until recently, Muslims who wanted to buy a home had to save hundreds of thousands of dollars to purchase it outright, get loans from family and friends or put aside their religious beliefs and take out a conventional mortgage.

Faith has traditionally never been a strong factor in the mortgage business. However, aware of the country’s changing demographics, some financial services now see the estimated 5-7 million Muslims[1] in the United States as an untapped market with enough in numbers, wealth and sophistication to justify the creation of specialized products.

“There are people making $90,000 to $100,000 a year and living in rental apartments,” said Mushir Khwaja, an Islamic banker with University Bank, a Michigan lender. Census figures show that home ownership rates for Arab residents, most of whom are Muslims remain 7% lower than the overall percentage of homeowners.

With home ownership the dominant path to wealth building, thousands of other observant Muslims trying to move from renting to owning a home face the quandary of how to balance their faith and their finances.

“I always felt bad about purchasing a home on a mortgage,” said Mr. Kindi, 45, who recently bought a home in Chicago. “To a Muslim, it’s haram – it’s not religiously acceptable. It’s the wrong thing to do.”

Prior to 1997, no bank or bank branch in the United States offered formal Islamic financing that was both publicly approved by a U.S. regulatory agency and sanctioned by a board of Islamic scholars, known as a Sharia Board. Instead, American Muslims looking for an alternative to a conventional mortgage could try and turn to self-help groups that pooled money from investors and placed it in a revolving fund that bought homes and leased them to Muslim families.

Over the last few years, several Islam-friendly lending programs have been created by the Chicago Federal Reserve to help solve these problems. Mainstream financial institutions are starting to use financial instruments to offer creative loans that comply with the laws against riba (receiving interest) by creating joint-owner partnerships or charging lease fees in place of interest.

Background…
The Chicago Federal Reserve has identified three types of Islamic loans:

  1. In a Murabaha loan the bank buys the house then gradually sells it to the home buyer with an additional profit rate tacked on
  2. In an Ijara loan (which is one of the most common) the bank buys the house and leases it to the buyer, who pays off the home, plus market-based rent for living there
  3. The third form is called Musharaka and it created a shared equity partnership between bank and buyer to purchase the house and gradually transfer shares of its ownership

Although the differences may seem largely semantic, the loans have the blessing of Islamic scholars and are becoming a popular route for Muslims who want to buy homes. Each of the above options creates a hybrid tenure between rental and ownership. The first option is essentially a staged transfer of ownership, the second is a lease-purchase or something similar to land contract and the third is a more classical shared equity loan (of the type common for affordable housing in the UK).

Borrowers don’t have to be Muslim or religious to qualify for the loan, but banks market these options almost exclusively to Islamic communities, printing Arabic brochures and distributing fliers outside mosques after Friday afternoon prayers.

HSBC Bank of America is positioning itself to really cater to the Muslim home financing market. “Our target market is the second and third generation, educated, middle class Muslims – the Americans who believes in his religious values but at the same time is proud to be an American and wants the American dream of owning a car and a home.” Adds Iqbal Khan, head of global Islamic finance for HSBC.

For related library resources on this Good Idea, see sidebar at right.


The Council on American-Islamic Relations, US Mosque Study Project 2000.

Making it Work for You:

  • Developing innovative services in response to new markets is a hallmark of successful businesses. Has your business assessed the size of the immigrant market with regards to your services? Perhaps you should.
  • Successful strategies and programs in financial services that target the immigrant community provide accessible, useful, cost-effective and flexible lending services sensitive to client needs.
  • What do new bank customers need most from a financial institution? What special tools and programs should banks put in place to serve them? How best can banks market their lending services to new immigrants?
  • The greatest innovation and the most successful strategies result from enterprise-wide, comprehensive immigrant-focused initiatives led by senior management.

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