Muslim Investment Group Sidesteps Financial Crisis
MICHEL MARTIN, Host:
Now, it's time for Faith Matters. That's the part of the program where we talk about matters of faith and spirituality. Today, though, we want to talk about faith and money. Specifically, a group of investors who say they have managed to sidestep the current woes of the U.S. economy by handling their finances according to Sharia law.
That's a set of rules set up by the Quran that instructs devout Muslims on how to conduct themselves in everyday life. One of the rules prohibits the charging or acceptance of money earned through interest. Islamic financiers claim that the law helped them avoid the subprime mortgage scandal and avoid many of the problems caused by the collapse of financial institutions in the U.S.
We wanted to find out more so we called Monem Salam. He's the vice president of Islamic investing, director at Saturna Capital Corporation and co-author of the book "A Muslim's Guide to Investing and Personal Finance." Also joining us is one of Monem's clients Aslam Sherule. In addition to investing with Monem, Aslam bought his house through an Islamic mortgage lender. He joins us from Dallas, Texas. Thank you both for joining us.
MONEM SALAM: Thank you very much for having us.
ASLAM SHERULE: Thank you very much for having me here.
MARTIN: So distrust of borrowing and lending is not unknown in many parts of the world. For example, there's that famous line from "Hamlet," neither a borrower nor a lender be. But if you could just explain the prohibition on charging or accepting interest under Islamic law, can you explain that?
SALAM: Yeah. Basically, the idea has been there in history for a long time and it is that, you know, debt traditionally has always been a bad thing. It's never been something that you do for concession purposes, but more of a last minute resort. And that being said, when somebody is in a desperate situation and then having to borrow money from somebody, to charge them interest or to receive interest from that is something that's loathed.
In Islam itself, debt is not something that's not allowed. It is allowed. However, trying to minimize its good and definitely if you are going to do it, there's no paying or receiving of interest at the time.
MARTIN: Well, how do most people buy houses then in countries where that is the norm? I mean, obviously there are some parts of the world where it's pay as you go, you know. You buy your bricks, you put up your house. Until you can afford those bricks, you don't get a house. But in some parts of the world like this one that, you know, a 30-year mortgage, 15-year mortgage, that's the norm, how do people do it?
SALAM: So for a long time that was a question that, you know, Muslims had for a long time living here in the U.S. and they didn't have avenues to do that. However, over the recent decade maybe about 15 years or so, there have been companies that, you know, that have come about, some of them local oriented, some national oriented. And what they do is they've come up with different models to help Muslims or even actually everybody just buy houses outside of interest.
And the way they do that - there's a couple of different models that are out there. The first one is on an equity-sharing basis. So, a company will buy a house along with you as an equity owner of the house. And because you're living there and they still own about, let's say, 80 percent of the house, you're going have to pay them 80 percent of the rent for living in the house until you've paid it off. That's one way.
The other way is to do basically something we're all familiar with which is a lease-to-own model where you basically lease the house for, I don't know, 15 years, 20 years, 30 years and at the end of that period, you're basically paying, you know, $1 and you assume title and ownership of the house.
MARTIN: Aslam, how about you? When you were thinking about buying a house - I don't know if this is your first house, by the way, is it?
SHERULE: Yes, it is.
SHERULE: Thank you.
MARTIN: Well, when you were thinking about buying a house what was going through your mind? Did you know that these models existed or were you thinking oh, that you wouldn't be able to do it?
SHERULE: No, I was familiar with the Islamic financing and also the mortgage companies existing in the United States, so I wasn't worried on that front.
MARTIN: How did you go about doing it?
SHERULE: From a customer's perspective, there's absolutely no difference between Islamic mortgaging and conventional mortgaging. The customer doesn't see any difference. They go to the bank, Islamic bank or Islamic financing company and tell them I want to purchase this house in such and such place, give them my address and then he or she gives the personal details and the company investigates his credit background. And then from there, it goes the same way as the conventional mortgage.
MARTIN: Do you mind if I ask, and forgive me for being personal, but how do you have a credit history if you don't take out loans.
SHERULE: It is not that we don't have a credit history, for example, we use credit cards, right? So that builds up our credit history.
MARTIN: But you pay them off?
SHERULE: Yes, we pay them off every month. So, we don't carry over to the next month. Unless in exceptionally very dire circumstances, yeah, in that case, we are forced to carry the balance to a future month and that way we are forced to pay interest, that because we don't have a choice.
MARTIN: Like in an emergency, for example.
SHERULE: Exactly, exactly.
MARTIN: Can I ask you if you're ever tempted?
SHERULE: No, I'm not much of a shopaholic.
(SOUNDBITE OF LAUGHTER)
MARTIN: If you're just joining us, I'm Michel Martin and this is TELL ME MORE from NPR News. We're talking about Islamic finance in the U.S. Joining us are Monem Salam. He's an investment banker with Saturna Capital Corporation and Aslam Sherule. He went through an Islamic bank in the U.S. to buy his house in Dallas, Texas.
So Monem, do you have to follow Sharia law in order to get a mortgage or invest in a mutual fund from an Islamic bank.
SALAM: No, not at all. In fact, if you look at our situation in the mutual funds, majority of our investors that we have are non-Muslim. And so, we don't regulate anything and anybody can walk in the door. And if they like our product, they like the way that we do our business, they are more than welcome to actually participate.
MARTIN: And how are the returns compared to those in other...
SALAM: Yeah, the returns are really good. Actually, we are in the growth fund, we have two funds, the growth fund and income fund, and just recently we launched a developing world fund. The growth fund (unintelligible) are the number one performing funds within that category, especially during this downturn in the market when the financial services were hurting quite a bit, we didn't participate at all. And so, we had a significant out-performance from, you know, on the downside.
MARTIN: Aslam, how in arranging financing for your house, if I were pursuing it the traditional way, I would compare interest rates.
MARTIN: So how did you do it?
SHERULE: In the traditional conventional mortgage, the customer compares what is the interest rate I'm paying for this loan. In the Islamic investing, the same nomenclature can be used, even though the underlying mechanism, it may be a profit percentage, rather than interest.
Now, to understand that, one has to go a little deeper into the underlying nature of Islamic financing itself.
MARTIN: See, that's what I don't understand. Why isn't that interest, if you're going to make a profit from lending me the money or letting me use it, why isn't that interest?
SALAM: Yeah, and they actually do sound really similar except for when you look at it more on the down side of, you know, the transaction. And that is, for example, if I'm an equity holder with you on a house and, you know, there happens to be some type of a hurricane that comes through like there was in New Orleans, and the house gets blown away. In a loan transaction, I still owe you the money because it was a loan - whereas in an equity partnership, if the house gets blown away, there is no house, we both lose money.
MARTIN: How do you make a profit?
SALAM: Well, when we make a profit, I mean, if you're talking about for the Islamic banking side.
MARTIN: Yes, for the Islamic banking side. How do you make a profit?
SALAM: We actually become equity participants in the house, and just like if I was going out there and had a partnership with another, a business where, you know, there was a grocery store, and there was two partners, and one partner said, you know what? I'm going to buy you out within three years.
I would say okay, give me the profit until the three years are done, and every time you don't give me the rental portion of it, you can buy me out from the principal. That's the same concept. We're making money off of the rental income that's coming from the house that we're renting to the actual owner.
MARTIN: And so do you earn most of your profit at the end of the contract? At some point, does the contract terminate? Is that when you really reap the profit, or is it continual?
SALAM: In that sense, it's not really a profit. It's only an income that we're generating. The profit actually stays with the owner of the house because they're living there.
MARTIN: So at the end of the day, though, is this a service that you're providing to believers, or is this a business just like any other business?
SALAM: Yeah, I think at the end of the day, we are providing a business for individuals that are wanting to do their business transactions according to Islamic law.
MARTIN: How big of a business is this in the United States, do you think?
SALAM: As of right now, the approximation is roughly about 500,000 or a half-a-million families in the U.S. So the potential market is just going to be those 500,000 families. However, what we do think is in the long term, you know, people will understand the benefits of doing this way, which is actually going into an equity partnership rather than doing a loan, and then the whole market is available for is.
MARTIN: Monem, the mainstream financial system in the U.S. has caused huge problems for the economy. Would more use of Islamic financing by the Western banking sectors help the economy on the whole, in your opinion?
SALAM: One thing you want to keep in mind, regarding this economic system is that when you have paper, which is the loan transaction - and they did this last year and the year before, they credit credit-default obligations and all these different types of instruments because all they were dealing with was a simple piece of paper, which was a loan that said I owe you something.
When you have a house, there's only certain ways you can divide up a house. And so the equity partnerships, you can sell off, but you can't slice and dice them and make derivatives out of them and all of those different things. And so I think the complication that happened which led to the turmoil that did, probably would have never happened if there was more of these Islamic transactions floating around.
MARTIN: Monem Salam is the vice president of Islamic investing, director at Saturna Capital Corporation. He's co-author of the new book, "A Muslim's Guide to Investing and Personal Finance." He joined us from Bellingham, Washington. He was also joined by one of his clients, Aslam Sherule. He just bout a house in Dallas, Texas. Congratulations once again.
SHERULE: Thank you.
MARTIN: And thank you both so much for being here.
SALAM: Thank you very much.