Episode 701: A Bank Without Interest : Planet Money To serve Muslim customers, a bank in Michigan tried to comply with both U.S. regulations and Islamic law. One problem: Islamic law prohibits charging interest.
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Episode 701: A Bank Without Interest

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Episode 701: A Bank Without Interest

Episode 701: A Bank Without Interest

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Stephen Ranzini runs a community bank in Ann Arbor, Mich. It's called University Bank. It's in this old mansion. They turned the back porch into, like, a waiting area where people can sit and drink coffee. And Stephen clearly wants to be a good-guy banker.


When his bank won a big award a while back for investing in the local area and helping poor people get houses, he wasn't shy about telling the world. He even took out ads to brag about it.

GOLDSTEIN: But Stephen says not everybody was impressed.

STEPHEN RANZINI: A few months later, this gentleman walks into our bank and requests to meet the president 'cause he says he has a complaint.

HELM: Stephen is the president, so he says sure, send him in. And this middle-aged guy walks into Stephen's office.

RANZINI: So he's sitting in my office and he says, you know, if your bank is so outstanding for community service, how come you're not serving my community? And I was kind of taken aback by that, and I said, well, what community aren't we serving? I mean, who are you? Like, what is your community? He says, well, I'm Muslim.

GOLDSTEIN: Stephen's bank is in a part of the country that has a huge Muslim population. And he says, I mean, certainly we believe in serving the local Muslim community. What's the problem?

RANZINI: So he said, you don't have the products that we need. And I said, well, I just find that very hard to believe. I mean, we have every product here you could possibly imagine. We have every product that Citibank has. We have, you know, internet banking, debit cards. I mean, what - you know, what is this products that we don't have? I don't understand. He says, well, but all your products have interest. We're a bank. Of course they have interest. And he says, yeah, but I'm Muslim and we're not supposed to pay or receive interest. And I said - really? I mean, I've never heard of this.

HELM: Stephen says but I see Muslims in here all the time. And the guy says yeah, there are some Muslims who feel OK using a bank like this one. But I don't, and there are lots of people like me.

GOLDSTEIN: Stephen hears this and thinks - huh, could you even run a bank without interest? I mean, how could you do, you know, the most basic things? How could you lend somebody money for a house if you couldn't charge them interest? But that is what this guy was asking for.

RANZINI: So when somebody comes in and just challenges a core belief that all banking must include interest, it just (laughter), you know, blew my mind, but got my interest. And I'm like, wow, this is really interesting. I mean, I need to learn something more about this 'cause this is just so out there.

HELM: Stephen starts looking into it, and he decides he's going to do it - try to do what banks do but without charging interest.

GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.

HELM: And I'm Sally Helm. Today on the show - what happens when you do that. What happens when you try to build a bank without charging interest?


GOLDSTEIN: Stephen Ranzini, the banker, doesn't really know where to start with this. But he asks around and finds out that there is someone who has figured out a way to do some basic banking without charging interest.

HELM: Stephen says this man was, like, the Johnny Appleseed of Islamic finance in the United States. So we called him up.

GOLDSTEIN: So are you the Johnny Appleseed of Islamic finance in the U.S.?


GOLDSTEIN: (Laughter).

HELM: This is Abdulkader Thomas. He called us from his office in Kuwait.

GOLDSTEIN: He does have the perfect resume for the Johnny Appleseed job. He worked in finance. He did banking in New York. Also, he is a devout Muslim. And he'd already done some work with Islamic finance in the U.S. with some others banks.

HELM: Abdulkader says even if you live in a country where most people are Muslim, it's hard to avoid interest. Like, how do you have a savings account or a checking account?

THOMAS: When I was in one or two of the banks in my days in Bahrain, we had people who were then hundred millionaires who had all of their money sitting in a checking account with written instructions not to ever be paid a penny of interest.

GOLDSTEIN: So they had hundreds of millions of dollars and they said we order you, bank, to not pay me interest.

THOMAS: Absolutely.

HELM: Abdulkader says the prohibition on interest is right there in the Quran. It's in a part of the Quran called Surah Al-Baqarah, verse 275.

THOMAS: That's the - sort of the landmark, if you'd like, that many people turn to.

GOLDSTEIN: He says the key line is God has permitted trade and forbidden riba.

THOMAS: So riba would be translated from Arabic into English as interest. And it's something that grows of its own.

GOLDSTEIN: Grows of its own, as in if you don't pay your debt like, say, on a credit card you owe more and more. You know, there's interest, and then when you don't pay, you wind up paying interest on the interest. It compounds.

THOMAS: Interest disproportionately hurts the poor and the needy. If you have too much debt, the interest becomes a burden that you can't afford.

GOLDSTEIN: Just a hole that people can fall into.

THOMAS: And it digs itself deeper.

GOLDSTEIN: This kind of concern is not just in Islam. The Bible also has passages saying interest is bad. In fact, for hundreds of years, charging interest with prohibited in Christianity. And even today in the secular world, clearly, lots of people don't like interest - don't like banks.

HELM: And you can see why. When debt goes bad for a borrower, it can destroy their life. When debt goes bad for a lot of borrowers at the same time, it can destroy a whole economy.

GOLDSTEIN: Abdulkader talked with Stephen, the president of that bank in Michigan. And Stephen was, like, yeah, I get it. He says when he was a little kid, his dad got in some debt trouble.

RANZINI: Well, you know, my dad was a guy who was, you know, a very strong person. And I had never seen him cry in my life. But he picked me up after school one day when I was 8, and he was sobbing uncontrollably. I mean, we literally almost landed on the street by having our house foreclosed on.

HELM: But what's the alternative? How can you do what a bank does without interest? Like, one of the main things that Stephen's bank did was lend people money to buy houses - mortgages. How can you do a mortgage without interest?

GOLDSTEIN: Abdulkader says you can do it. In fact, he says some banks in the Middle East do it. The Arabic word for it is Ijara, and it's a little complicated, but we can explain. So normally, with a mortgage, regular mortgage in the U.S., the bank lends you money and you buy the house. You own the house, and you gradually pay off your debt to the bank.

HELM: With an Ijara - with this thing that Abdulkader has figured out, the house is owned by a legal entity called a trust. So the trust owns the house. You still get to live in the house, and every month you write a check. It's like you're paying rent. It's not a scam. With every passing month, you basically own a little bit more of the house. And then after 30 years or whatever, then you own the house entirely.

GOLDSTEIN: Now, you know, when I step back and look at this - as I - like, I kind of squint and look at it, it does look a lot like a regular 30-year mortgage. And Abdulkader says it is similar in a lot of ways, but there are some key differences. For one thing, with a normal mortgage, you own the house the whole time. Here, you don't. And he says this can keep some people from getting into trouble with, say, a home equity loan. That's when you basically use the value of your house to take out another loan after you get a mortgage. It's like a second loan. Abdulkader says with the Ijara, you can't do that.

HELM: He told us this story about this thing that happened again and again. He'd go into a new city. Some leader in the Muslim community would say oh, yeah, I want one of those Ijaras. Sign me up.

THOMAS: And two or three years later, he'd call up and say (sighing) Dr. So-and-so just got a new Mercedes. I don't have enough cash. Can I get a home equity on this thing? I say no. It's not your house. It's ours.

GOLDSTEIN: Abdulkader goes to Michigan to pitch this to Stephen Ranzini. And Stephen Ranzini says OK, let's try it.

HELM: It was not easy. Think about it - he's trying to build a bridge between this 1,000-year-old religious law and the modern banking system as it exists today.

GOLDSTEIN: One problem - those trusts that were supposed to actually own the houses.

RANZINI: Except under Michigan law, you can't operate a trust unless you have a trust license, so we didn't have a trust license. So we had to actually put them under Delaware law.



RANZINI: OK. So we had these trusts under Delaware law. But then some jurisdictions - some states don't allow you to have homes owned by trusts. So (laughter) - so then you got to work through a different structure with an LLC.

HELM: You get the idea. And the regulations weren't the only problem.

GOLDSTEIN: This is happening less than a year after the terrorist attacks of Sept. 11. Troops are going off to fight in Afghanistan, and not everybody is happy about what Stephen is doing here.

RANZINI: Well, first of all, we had several employees who left. They just...

GOLDSTEIN: Who quit. They quit.

RANZINI: Yeah. Yeah, they just objected, philosophically, to us helping Muslims.

GOLDSTEIN: But Stephen kept working on it. And eventually, his little bank in Michigan starts offering Islamic-compliant mortgages. I mean, they're not - I guess they're not quite mortgages. Maybe they're not technically mortgages. But let's just go with Islamic-compliant mortgages.

HELM: Right. One of Stephen's first customers to get one with these Islamic-compliant mortgages is this Iltefat Hamzavi. He's a local doctor there in Michigan. And when he heard that he could finally buy a house without breaking the rules of his religion, he felt relief. I mean, he had been dealing with this conflict his whole life. For example, when he was in med school, he had to take out a loan, which, of course, charged interest.

GOLDSTEIN: Did you feel conflicted at all?

ILTEFAT HAMZAVI: Oh, I did. I did. I felt very conflicted. I had very mixed feelings about it. You know, I shouldn't be doing this, but I have to do this. Is this the right thing? And then you also go back to your faith - like, why are you banning this? It seems so reasonable, and almost everybody on campus has a loan. So why can't I get a loan?

GOLDSTEIN: He was stuck. The words in the Quran were the words in the Quran. Banks were banks. Loans were loans.

HELM: Right. So when he heard about what Stephen Ranzini was trying to do, this Islamic way to finance your home, he was in. He was willing to be part of the experiment.

HAMZAVI: So my wife trusts me with all the finances of the - of our family, even though she's a brilliant woman and can probably run circles around me. So we were in the room signing, and she looked at me. And she was like - you're sure this is OK? I'm like yeah, honey, it's fine. Everything's great. And she's like - how many times have they done this? And I was like, including our time? She's like yeah. I was, like, twice.

GOLDSTEIN: (Laughter).

HAMZAVI: So she puts her pen down and is looking at me like - are you serious?

GOLDSTEIN: He was serious. And it worked out. They signed the papers. Iltefat and his wife got the house, moved in with their family and Stephen's bank helps lots of other Muslim families do the same.

HELM: And then Stephen Ranzini gets kind of stuck. His bank doesn't have enough money to keep making these Islamic-compliant mortgages.

GOLDSTEIN: Now, if these were traditional mortgages, there would be an obvious solution. Banks do it all the time. They take mortgages and sell them off to investors, usually through agencies like the Federal Housing Administration or Fannie Mae or Freddie Mac. Those agencies are in the business of buying mortgages, so, Stephen thinks, I'll get them to buy my mortgages that are not exactly mortgages.

RANZINI: Yeah, we call. We sent letters. I mean, we, you know, did everything we could think of.

HELM: But the fact that the mortgages he wanted to sell were not exactly mortgages, that was a sticking point.

RANZINI: The government is really good at saying no by just not responding to you.


RANZINI: Right. I mean - or they are very passive aggressive, right. They'll take your phone calls, say oh, OK. Thank you. Thank you. We'll study this issue.

GOLDSTEIN: He finally talks to this one guy at Freddie Mac who seems really to be listening, not just pretending to listen. And after some back-and-forth, the Freddie guy says yeah, I think we can work with you. But you're going to have to make some changes.

HELM: Stephen had to switch to another kind of Islamic-compliant mortgage. The details are different from the other one. But ultimately, it works in a similar way. It looks a lot like a regular mortgage, but the bank is not technically charging interest. And Freddie Mac looks at this one and says OK, we can do it.

GOLDSTEIN: Once that happened, the business really took off.

HELM: Stephen's bank has now made 850 million dollars' worth of these Islamic-compliant mortgages. They are operating in 16 states with plans to expand to seven more.

GOLDSTEIN: There's a tension at the heart of this story that goes back, more or less, forever. People don't like interest. Interest feels bad. But interest is really useful. You know, somebody, say, wants to buy a house. But they don't have enough money to pay cash. And then somebody else has this big pile of money just sitting there. And they say, I'll give you the money for the house. You just have to pay me back and give me a little something extra on top. Pay me a little interest.

HELM: We walked to Haider Ala Hamoudi about this tension. He is a professor at the University of Pittsburgh. He's a practicing Muslim, and he teaches a course on Islamic law.

HAIDER ALA HAMOUDI: Islamic law, just like Jewish law, was aware of this and in fact, opened its own little means of artifice. I mean, how can you sort of cheat and still take interest? And different schools of thought had different ways to do it.

HELM: One example he gave us - the original Islamic texts that prohibit charging interest, they explicitly say that you can't lend out gold or silver at interest. Those, of course, were the metals that were being used as money at the time. But the texts don't say anything about other kinds of metal.

HAMOUDI: The Malakis in North Africa were notorious with - well, it says gold and silver, you can't trade with (unintelligible). But you can trade copper. Copper's different.

HELM: Today, in Saudi Arabia, he told us that there are these credit cards that look like normal credit cards with interest. But behind the scenes, there's this warehouse full of platinum - actual platinum in an actual warehouse. And the ownership is going back and forth between the bank and the credit card customers.

GOLDSTEIN: So you told us about the copper and the credit cards. And we also asked him about what Stephen Ranzini is doing.

What do you think of these, you know, Islamic mortgages?

HAMOUDI: I don't take them particularly seriously. I think that they involve not only a series of legal acrobatics to avoid the formal taking of interest, but in addition to that, the problem that they have is that they end up breaking a rule or two.

GOLDSTEIN: He means a rule or two of Islam. And of course, there are other Islamic scholars who disagree with him on this.

HELM: But Haider says they're basically charging interest. He points out the U.S. government says you are allowed to treat this as interest. If you use these products, you still get the mortgage interest tax deduction on your taxes.

GOLDSTEIN: Haider says when he looks at this as a scholar, these Islamic-compliant mortgages boil down the loopholes.

HELM: When we talked to Iltefat Hamzavi, that doctor who got one of the first Islamic-compliant mortgages from Stephen Ranzini, we asked him what he thought.

GOLDSTEIN: I mean, in your experience of getting this Islamic-compliant mortgage, did it - did you feel at all like it was just kind of loopholes?

HAMZAVI: No, not at all.

GOLDSTEIN: For Iltefat, this isn't some scholarly, legalistic thing. It's about being a Muslim and an American, which, he says, can be hard. He feels like he's always being watched. He always has to be extra careful to do everything right.

HAMZAVI: We overpay our taxes. We always call the IRS to make sure everything's OK. We always call the state. You know, 'cause again, we're always on the radar, so it's better to work with the people who are watching you.

HELM: When Iltefat saw Stephen Ranzini offering these Islamic-compliant mortgages, he didn't think - oh, this is just some loophole. He thought - this is a big deal.

HAMZAVI: Oh, it really mattered to me. It really mattered to me because when you always feel that everybody hates you without even knowing you and then you see somebody's who's on different religion and says - yeah, I think this makes sense. I'd like to have that choice for you - there's a sense of acceptance. Now, I'm part of the U.S. bank system. I'm doing something that is religiously compliant. And I'm doing right by my family by giving them a house in a good neighborhood.

GOLDSTEIN: A few years after they got that Islamic-compliant mortgage, Iltefat and his family ended up moving. And this time, they got a conventional mortgage. He says he does feel a little bit bad about it. He would have preferred to do the Islamic version again. But logistically, he said, the regular mortgage was just a lot easier.


GOLDSTEIN: You can email us at planetmoney@npr.org or find us on Twitter or Facebook. Our show today was produced by Elizabeth Kulas with an assist from Jess Jiang.

HELM: Special thanks also to Ibrahim Warde and Elizabeth Eames (ph). Also, we are looking for PLANET MONEY's next intern. And as PLANET MONEY's most recent intern, I can say it is an awesome job.

GOLDSTEIN: Look. Here you are on the podcast.

HELM: Here I am on the podcast. If you want to apply, you should apply by May 22. You can get more information about it on our website npr.org/money.

GOLDSTEIN: And if you're looking for another show to listen to, try NPR's newest podcast. It's called Code Switch. It's hosted by Gene Demby and Shereen Marisol Meraji. It's about race and identity in music and food and sports - in everything, really. You can find Code Switch on npr.org/podcasts and on the NPR One app. I'm Jacob Goldstein.

HELM: And I'm Sally Helm. Thanks for listening.

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