- The Washington Times - Friday, July 20, 2001

As if qualifying for a loan isn't difficult enough, how would you like it if your faith forbade you from buying a

home using a loan that charges interest? For every devout Muslim, this is the quandary in which they find themselves if they want to buy a house in today's real estate environment.

The Koran forbids usury in financial transactions on both sides of the transaction, whether buying or selling. Because of this, many Muslims were barred from owning a home, unless they were able to purchase the property with cash or received the house as an inheritance.

In 1975, a group of Muslims in Canada floated the concept of halal financing, which enables a buyer to purchase a house with one or more other investors (shareholders) and then buy back the property over several years through a lease-to-purchase agreement with those shareholders, known in Arabic as ijaara wa iqtina.

The buyer leases the property at or above the fair market value. A portion of the lease goes to the other shareholders the "seller" for rent, and the remainder is used to purchase back shares of the house.

This way, the buyer-occupant (vs. the owner-investors) is able to purchase by paying rent instead of interest, which is how a property is financed in a traditional setting.

According to information from MSI Financial Services Corp., one of the largest halal financing groups in North America, the first such transaction in Canada used documents much like any other mortgage. The document spelled out all details related to the expenses, where it was assumed that the investors were buying a property and renting it out for profit. Thus, the property taxes, insurance and maintenance were considered qualified expenses while such incidentals as lawn care, snow removal or utilities were expenses to be paid by the tenant-purchaser.

As you can see, with halal financing the lender must participate in the profit or loss in the property. The difference here from a regular mortgage is that the extra money is not interest in this agreement, but rather rental income.

In essence, this form of financing is much like a shared-equity arrangement where an investor fronts money for a purchaser, who then makes payments back to the lender/investor. When the house is sold, the investor shares in the equity (or loss).

Financially, here's how it works. The buyer puts down 20 percent ($20,000> for a $100,000 purchase) and the investor puts up the remaining 80 percent ($80,000). The buyer now pays an agreed upon amount of money to the investor to lease/purchase the house back from the investor, based on fair-market rent. This loan is amortized over several years. As each year passes, the investor and buyer review the fair market rent, then the buyer pays that amount for the next year. Also, as each year passes, the tenant-purchaser is increasing his share in the property until eventually he owns it 100 percent.

Halal financing is used to purchase items other than homes or property. The interest-free plan can be used to finance a car, business or convert an interest-based mortgage. There's plenty more to how this alternative financing works for Muslim buyers and here are some Web sites for research. The sites have English text, as well as definitions of Islamic financial services and terms.

• www.mtg-res.com/shariah.htm. Site for Mortgage Resources in San Jose, Calif., which offers halal financing.

• www.lariba.com. Site for the American Finance House. Acronym stands for Los Angeles Reliable Investment Bankers Associates. The term "riba" is the equivalent of the English "interest," and "lariba" is the equivalent of "interest free."

• www.isnacanada.com. Site for Islamic Society of North America, a clearinghouse, with a link to Islamic Cooperative Housing Corp. Ltd. of Canada.

• www.islamiqmoney.com. Site for IslamiQMoney.com, a financial services provider geared toward Islamic patrons, with offices in London, New York City and Kuwait, Malaysia and Grand Cayman Island.

• www.altawfeek.com. Site of Al-Tawfeek Co. for Investment Funds Ltd.

• www.msifinancial.com. Site for MSI Financial Services Corp., a North American Islamic alternative financial services company.

• www.kfh.com. Site for Kuwait Finance House, Kuwait's first Islamic bank.

• www.tii.com. Site for the International Investor, a Kuwaiti shareholding company.

M. Anthony Carr has written about real estate issues for more than 12 years. Send questions and comments to ([email protected]).

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