Interest: Companies are helping Muslims
conform to their religion, which forbids
conventional credit practices.
By Marla Dickerson Los Angeles Times
When the creators of IslamiCity decided to upgrade their Islamic information Web site, they knew they would need a top-notch server and other computer equipment costing $10,000.
They also needed an equipment loan, but there was one major hitch. Islamic teaching forbids Muslims from dabbling in conventional credit, the interest-based fuel that powers international finance and stokes the United States' consumer economy.
A bank loan "simply wasn't an option," says Mohammed Abdul Aleem, president of Hadi Inc., a Culver City, Calif.-based Islamic charitable organization that developed the IslamiCity Web site (www.islam.org). "It would have been hypocritical to use a loan for a project like this."
Instead, the organization purchased the equipment through a lease-to-own arrangement with American Finance House, a Pasadena, Calif.-based finance company specializing in transactions conforming to Islamic religious law. In the process, Aleem joined a global legion of Muslim entrepreneurs, consumers, investors and even a few non-Muslims who are reviving the ancient tradition of interest-free Islamic banking.
With assets estimated to be nearing $150 billion in Muslim countries, the religious-based system now is gaining a toehold in the United States, where a few institutions like American Finance House are catering to the fast-growing Muslim population.
"Muslims want cars and homes and businesses like everyone else," says Abdullah Tug, chief financial officer and general manager of American Finance House. "But they want to do it in keeping with their religious beliefs. Islamic finance is providing that alternative."
Derived from the teachings of the Islamic holy book, the Koran, and its companion Sunna, Islamic religious law prohibits Muslims from paying or receiving interest. Religious scholars say the ban was a response to the age-old practice of loan-sharking. But in a modern society, it prevents observant Muslims from taking out mortgages, carrying balances on credit cards or investing in bonds, Treasury bills or any other instrument that smacks of a guaranteed return.
Which isn't to say that Islam frowns on making money, or demands that Muslims revert to an all-cash or barter economy. What's essential, according to Samuel Hayes, a Harvard Business School professor and expert on Islamic finance, is that all parties to a financial transaction share in the actual profits or losses of a venture, and that no one gets predetermined compensation -- interest.
In effect, the system functions much like Western equity financing while protecting borrowers from leveraging themselves into the poorhouse.
"In the Koran and the teachings of the prophet Muhammad, it has always been understood that [investors and lenders] have the right to a decent rate of return," says Hayes, co-author of "Islamic Law and Finance: Religion, Risk and Return." "It's just the certainty of that return that's an issue. You can't put yourself in a superior position to everyone else. So Muslims developed their own unique debt contracts."
Thus, "depositors" in Islamic banks are really shareholders who earn dividends when the bank turns a profit, or lose a portion of their savings if it posts a loss.
Paying rent for the use of a real asset is perfectly acceptable under Islamic law. So business owners can lease equipment through contracts called "ijara," while would-be homeowners can acquire houses through rent-to-own transactions.
"Mudaraba" agreements look a lot like Western-style limited partnerships, with one party contributing capital, the other running the business, and profits split based on percentage ownership. Even investments in common stocks are permissible, as long as the funds aren't channeled into enterprises whose activities conflict with Islamic taboos against liquor, gambling, pork consumption or pornography.
A touchstone of Muslim life for 14 centuries, Islamic finance withered under colonial rule as Muslim countries bowed to Western laws and business practices. But the system has made a rapid comeback in the past 20 years, fueled by independence, revolution, oil wealth and Islam's emergence as the world's fastest-growing religion, with more than 1 billion followers worldwide.
"It's going nowhere but up," says Mustafa Kamal, executive vice president of MSI Financial Services, a Houston-based Islamic finance company. "This market is too important to ignore."
With few Islamic institutions to serve them, some American Muslims have formed informal, no-interest loan pools in their communities to help members buy houses, purchase cars or start businesses. Others simply do without these essentials until they can save up enough money to pay cash for them.
But a good number have turned to traditional banks and finance companies, religious leaders admit, because there simply aren't enough viable alternatives. Some prominent scholars have defended this practice for Western-residing believers, citing a tenet of Islam that permits Muslims to break some religious laws out of necessity. But many American Muslims are uncomfortable with this compromise, including Yahia Khairy Abdul-Rahman, an adviser to American Finance House.
An imam at Masjid Omar Ibn Al-Khattab mosque in Los Angeles, Abdul-Rahman helped found the Islamic finance company in 1987. Started with $200,000 in seed capital from local Muslim investors, American Finance House now offers home and commercial real-estate loans, auto financing, equipment leases and trade financing.
The walls of the small but comfortable Pasadena office are adorned with verses of the Koran, the delicate Arabic script a firm reminder that "Allah permitteth trading and forbiddeth `riba,' " or usury. With a $5 million portfolio, the firm is still a virtual unknown outside local Muslim circles. But company officials say they won't compromise standards to place more loans or deliver higher returns to investors.
For Suvanee Ibranan, that meant she had to stop serving liquor at her Los Angeles restaurant before American Finance House would finance the purchase of her building. Ibranan admitted the alcohol ban has crimped her profit margins. But she said she's salvaged something more valuable from the experience.
"I was away from my religion for too long," says Ibranan, owner of Suvanee's Siam Cafe. "Business isn't as good but I feel better inside."
Islamic banking isn't without its critics, most of whom are Muslims wary of financial institutions using religion as a marketing tool. Some view the "fees," "markups" and "profit-sharing" of Islamic transactions as a thinly veiled subterfuge for interest.
"The Muslim market is a hard nut to crack," says Bashir G. Ahmed, president and chief executive of Samad Group Inc., a Dayton, Ohio-based Islamic investment company. "They want to see a track record. The industry also has to keep developing new products and instruments if it's going to grow."
Originally published on Jun 7 1999
