Vikki Frank

Under Sharia'a Law, Muslims are unable to open an interest-earning savings account with a mainstream financial institution. There are seven million American Muslims, or 2% of the U.S. population. About 30% want to adhere to Islamic principles when dealing with their finances. Muslims want cars, homes, and businesses just like everyone else, but they want them in keeping with their religious beliefs.

Islamic banking and finance is a modern movement that began in the 1960s to embrace Islamic principles (Sharia'a), which prohibit paying or charging interest and prevent investment in "unethical" sectors and industries such as pornography, alcoholic beverages, gambling and others. With respect to interest, or Riba, Islamic Financing requests that all parties to a financial transaction share in the profit or loss of a venture and that no one gets predetermined compensation. Therefore, it is not adequate to describe Islamic Financing simply as "interest-free." It is better described as socially responsible financing of a tangible asset. The concept is much like Western equity financing with protections for the investors from leveraging themselves too highly.

1. Facilitating IDA Savings: No Interest for Depositor or Bank
   Several IDA agencies have successfully addressed this by helping Muslims open interest-free savings or checking accounts. In some cases, IDA agencies have encouraged Muslims to donate earned interest to a local Mosque or to the IDA project itself. In actuality, this only resolves half the issue. Since deposits in banks are invested by the bank, the bank earns interest on deposits, invests deposits to purchase stocks or bonds, and/or to fund loans. When Muslim deposits earn interest for the bank or when deposits are invested in "unethically acceptable" stocks, this infringes upon Sharia'a. Several financial institutions around the U.S. are now offering Islamic bank accounts, which regulate how Muslim deposits are invested.
2. Creating Asset Purchase Opportunities
   According to Sharia'a, it is perfectly acceptable to pay rent for the use of a real asset, just not for money itself. "Borrowers" may pay fees or rent on an asset owned by another. Financial transactions including lease-to-own and rent-to-own financial products allow a Muslim to purchase an asset while a "lender" makes a profit. These are referred to as Murabaha contracts, literally "profitable sale", and are essentially installment sales contracts for real property. However, most IDA projects are unsupportive of lease-to-own financing. In the U.S., lease-to-own options are usually associated with predatory lending practices, much higher "interest" rates, and lender ownership of title until the last purchase payment. Within an IDA, we want the participant to own the assets. Most Islamic financing options do transfer title of the asset (or at least provide co-ownership) at the beginning of the agreement.

For More Information on This Topic

• To read the full text of this article, see Institute on Social and Economic Development (ISED) or call 202-223-3288
  http://www.ised.org/research&evaluation/documents/Islamic_Financing_and_IDA.pdf
• American Finance House offers Islamic products to finance homes, autos, small business, home renovation, etc. in the following states Alabama, Alaska, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, Oklahoma, Ohio, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington State, Wisconsin and Wyoming.
  www.lariba.com
• Neighborhood Development Center, Inc. (NDC), of Minneapolis and St. Paul works with Reba Free, LLC to put together alternative financial packages based on Islamic principles that will be acceptable to Muslims.
  www.rebafree.com
• Harvard Islamic Finance Program:
  www.hifip.harvard.edu
• Islamic Banking and Finance in the Global Economy:
  www.islamicbanking-finance.com
• The Islamic Banking Network:
  www.islamicbankingnetwork.com
• American Journal of Islamic Finance:
  www.ajif.org