Khalid Aqbal's new condo sits in one corner of a quiet leafy square in a northern Virginia suburb. He's 62, and it's the first home he's bought in the U.S. since moving here from Canada. Some of his neighbors' homes are in foreclosure, but Aqbal isn't worried because he didn't take out a high-risk loan.
"I've always bought everything — all the big things — on Islamic finance," he says. "My wife makes sure I pay all my bills on time so there's no interest."
Islamic finance firms help Muslim customers buy homes without compromising their religious principles. This conservative approach to finance keeps the firms clear of the subprime drama and customers like Aqbal in their homes.
Islam forbids charging interest in the belief that it exploits people, but it allows making money off actual goods. Aqbal worked with an Islamic finance company to buy his $300,000 condo. He put in $30,000 and the finance company put in the rest, so they essentially bought it together. Instead of paying a mortgage, Aqbal will pay rent until he eventually buys the company out of its share. The company charges a fee for Aqbal's exclusive use of the house, but considers that profit, not interest. It'll end up costing practically the same as a mortgage; the methodology is what's different.
"You have essentially the same type of product," says Hussam Qutub of Guidance Financial, an Islamic finance firm. He uses the analogy of a potato chip fried in pig fat — pork is forbidden to Muslims — and a potato chip fried in something more acceptable, like vegetable oil.
"It's a potato chip," he says. "The difference is the way they produce the product. The cost could potentially be the same at the grocery store."
Some Islamic financial groups like Guidance Financial have been operating in the United States for almost a decade. Qutub says his company initially focused on the most devout Muslims. Now, his group closes on average 100 contracts a month. But it is very careful about who it does business with. Potential buyers need to pay more money upfront and have a good credit score and savings.
"If that customer cannot qualify for the home, then that person should wait, and we do turn away a number of folks," Qutub says. "Because of that, we've always been very conservative in our criteria for qualification."
Qutub says business is up 13 percent for the first half of this year. The Islamic finance industry itself is rather small — bringing in between $2 billion to $3 billion a year. That's a drop in the bucket, says mortgage finance expert Guy Cecala. But, he says, the market for alternative lenders is growing.
"The traditional mortgage market as we know it is on its knees," Cecala says. "So a lot of individuals who want to buy houses now are going to have to look to some of these more locally based lending sources."
Peace Of Mind
Back at Aqbal's condo, his 2-year-old granddaughter, Asia, is ready for a nap. And Aqbal says he sleeps easily, too, knowing he hasn't violated the principles of his faith to buy his home.
"As far as I'm concerned, I'm very happy that I took this step and the way I did it," he says.