Faith and finance collide for Muslim home buyers

When he bought his car two years ago, Javed Ahmed saved up enough money so he could pay for it with cash.

And every month, the senior analyst at Voyager Capital, a venture firm in Seattle, pays off his credit-card balance so he doesn't have to pay interest.

Now, at 29, Ahmed wants to buy his first home.

But as a Muslim, whose religion prohibits earning or paying interest on borrowed money, he faces a dilemma common to observant followers of the nation's fastest-growing religion: Can he buy a home without angering God?

"I'm not going to save up money to buy a house," Ahmed concedes. That's hardly practical — at least not in Seattle.

So "right now I'm on the fence," he said. "I'm not sure what the right thing is to do."

Avoiding interest, or riba as it's known in Islam, confounds the realities of Western society, where few people use cash to make purchases and Visa and MasterCard rule the day.

There's strong dissension among Muslims over how deep this ban on interest should reach: Are security investments allowed — stocks and bonds? What about retirement accounts or savings that yield a return?

The battle between finance and faith is not limited to Islam; the restriction on interest has roots in many religions, including Christianity and Judaism, to ensure that the wealthy don't take unfair advantage of the poor. Only Islam still adheres to this strict interpretation — at least in the United States.

It leaves Muslim followers who wish to pursue the American Dream with just a few options: Some, like Ahmed's parents, felt they had no choice but to take on a traditional mortgage when they bought their home in Portland, where he grew up.

ALAN BERNER / THE SEATTLE TIMES Javed Ahmed, 29, of Seattle, wants to buy his first home. But as a Muslim, he is wrestling with how to do so while still adhering to strict teachings of Islam about earning or paying interest on borrowed money.

And then there are those who believe it's better to perpetually rent than to incur the wrath of Allah in the hereafter.

"I occupy two very large homes and I don't own either of them," said Ali-Salaam Mahmoud, a Muslim and owner of American Mercy Services, which provides residential-care services for elderly East African Muslims. He and his partner run the business from the homes in South King County.

"My parents paid cash for our family home on the East Coast. If I get a big windfall, if Allah provides me a big contract, then maybe I'd buy property," he said.

Employed in the high-tech industry during its glory years, Mahmoud said he refused to accept or buy stocks because of his religious convictions. His family is debt-free, he said. His savings account earns no interest, while his wife annually donates the interest she earns from her account to the poor.

"No serious Muslim can justify investing in stocks, accepting interest," he said. "The Quran is very clear."

In recent years, another home-buying option has emerged for Muslims, one in which some lenders are designing alternative mortgages for interest-wary clients.

While they differ among institutions, they're typically variations of lease-to-own contracts and installment purchases. For the benefit of the buyer, what the lender charges for the loan is called something other than interest. In reality, the paperwork can be identical to that of a conventional mortgage.

In some case, the hybrids — because of their niche — cost more.

That bothers Ahmed.

"Everything I've seen dresses up a traditional mortgage as an Islamic mortgage and charges you a higher cost of capital," he said.

"For myself, I'd rather go to a traditional option — pay interest and get the market rate. The jury's out on what the right way is."

American Finance House Lariba of Pasadena, Calif., says its line of interest-free loans for homes, automobiles and businesses, offered across the United States, is a good fit for Muslims such as Ahmed.

Lariba uses a lease-to-own mortgage model, which allows buyers to build equity through monthly payments that combine principal with rent.

The rent, which is tax-deductible, is based on the going market rent agreed upon by both Lariba and the borrower. In the transaction, it is expressed as a percentage rate, allowing it to conform to traditional standards.

Nisar Sada, business-development manager at Lariba, said the lender is attracting not just Muslims but people of other faiths — Jews, Hindi and Buddhists. The maximum loaned is $359,600, Sada said.

"Riba is prohibited in almost all religions," he said. "Following Shariah [Islamic law] is the best way to buy a house and that's what we're trying to help people do."

Sada said that while many Lariba clients use the riba-free loans to refinance existing traditional mortgages, "A lot of our clients had been renting for 10, 15 years."

"Some have been saving for so long, they tell us, 'We try to reach our goal but the gap is so wide.' "

But whether riba-free mortgages truly are interest-free has given rise to fiery debate among Muslims whose interpretations of "riba" can differ drastically.

"They're selling pork and labeling it beef," said Jeff Siddiqui, a Muslim and real-estate agent with Western Associates Real Estate in Seattle.

Siddiqui, who purchased his own home with a conventional mortgage, said he invariably gets into philosophical discussions with clients who inquire about interest-free loans.

"I tell them what they'll pay in the no-interest model is greater than what they'd pay in the interest model," he said. "Call it what you like, but it's interest."

Talk turns to discussions about Islam and in the end, Siddiqui said, "More often than not, I've lost a client."

Much of what drives the prohibition on interest is buried in culture and tradition, Siddiqui said. "In the old country, it was cash on the barrel head," he said. "The only time you got a loan is if the government chipped in. If you bought a car or a house you produced a bag full of cash."

But Rosy Amman and her husband say that for Muslims who want to buy a home the Islamic way, interest-free loans are the best option available. The couples bought a home in Bothell through Lariba. "We are 20 percent owners and they [Lariba] own 80 percent. With each month's payment, our ownership goes up and theirs goes down."

For purposes of the paperwork, a 6.1 percent rate was assigned to the mortgage, Amman said. "People say to us, 'you're paying 6.1 percent — that's just like going through the bank,' " she said. But "in a spiritual way, it follows the rules of our religion. Our intentions are pure."

Mahmoud El-Gamal, professor of Islamic economics at Rice University in Houston, recognizes that many world scholars of Islam have declared these home-buying products a good compromise.

He says they're driven not so much by their own worth but by the refinancing craze brought on by lower interest rates. "There's a small segment of Muslims in America who would not participate in any type of mortgage financing unless they were convinced it was truly Islamic," El-Gamal said.

Lenders, he added, see a potential market in people such as Ahmed, educated professionals with financial means.

Nationwide, there are an estimated 1.5 million Muslim households in the U.S. and more than one-third have annual incomes exceeding $75,000, studies show. There are an estimated 20,000 to 30,000 Muslims in Washington.

"The bigger market, really, are those who use conventional methods but have a guilty conscience about it," El-Gamal said.

More focused on his religion than ever before, Ahmed said he just wants to do the right thing.

He used student loans to finance his education, including business and engineering degrees from the University of Pennsylvania. "Some people might say you shouldn't do that," he said. "A lot of people in the Islamic community are not open-minded.

"They latch onto this idea that interest is not allowed — period."

Ahmed doesn't believe Islamic laws are interpreted to prohibit student loans and security investments, but rather transactions such as payday loans and check cashing that charge exorbitant rates, mostly to poor people.

"It's not a constructive way to live in modern society," he said. "We live in this world. We need to figure out what fits and what doesn't fit."

Lornet Turnbull: 206-464-2420 or lturnbull@seattletimes.com