Dr. Ala-ud-Din, a dentist in San Jose, Calif., had two
choices: save for years to buy a house with cash, or take out a
mortgage and violate the law of the Koran.
That was until a third choice emerged. A small Islamic
financing company bought the house and leased it back to Din in a
15-year deal that made him a homeowner without violating the
religious law that bans Muslims from paying or earning interest.
While still on the far edge of American finance, Islamic
banking is making inroads as several groups of bankers and Muslim
scholars work to create an interest-free banking system that
relies on lease agreements, mutual funds and other methods.
And a new emphasis by lenders on improving service to
minorities, including black, Arab and Asian Muslims, may be the
key to their success.
"I wouldn't say that this is a major part of American finance,
but it's definitely growing," said Nicholas Kaiser, president of
Saturna Capital Corp. of Bellingham, Wash., which manages two
mutual funds that follow Islamic law.
At least six Islamic financial organizations companies, in
areas with large Muslim populations like Los Angeles, Detroit and
New York, are offering mortgages and investment opportunities
that comply with Islamic law.
Muslims are not allowed to pay or receive interest because the
body of law of the Koran, called sharia, prohibits them from
making a guaranteed profit on capital.
Investors can get around the ban by making investments that
involve risk, like stocks, or by carrying out lease deals rather
than loans for homes and cars.
"Most of the Muslims who practice Islam would not buy houses
with interest-based mortgages," said Din, who is from Pakistan.
The good news for the country's Muslims, who number 3 million
to 4 million, is happening on several fronts. One group of Muslim
experts is trying to put together a mortgage that complies with
Others are refining lease agreements to bring them into
compliance with Islam while making the agreements more palatable
for lenders. And, coincidentally, car companies have embraced
leasing, allowing Muslims to avoid the ethical dilemma of car
But as Islamic banking becomes more common, some specialists
warn that there is a risk that small investors will be duped by
hustlers claiming to offer Islamic financial services.
"You cannot invest money on faith alone; that's a very bad
investment," said Vincent J. Cornell, a professor of religion at
Duke University who studied Islamic banking in Malaysia.
Experts in Islamic finance say that what they propose varies
only slightly from conventional banking.
"The irony is that it doesn't take a lot of work, it takes
creativity to convert a conventional home mortgage to a deferred
payment sale" that complies with Islamic law, said Steven Thomas,
the publisher of The American Journal of Islamic Finance.
Thomas, who works for a bank, has tried to use the newsletter
to educate Muslims on the requirements of Islamic banking and
show that it can be done in the United States. "Islamic finance
is just another form of asset-based investment banking," he
In its most basic form, Islamic banking covers both savings
and credit. Instead of being paid interest, depositors are
considered shareholders and receive dividends when the bank turns
a profit and lose money when it has a loss.
The Amana mutual funds, which Kaiser runs, work this way.
Amana's income fund began in June 1986 and has between 1,200 and
1,300 shareholders and total assets of $11 million.
Amana has relied on word of mouth among Muslim Americans _ to
attract new investors. Its income fund has kept pace with the
Standard Poor's 500 stock index, Kaiser said.
But managing the income fund is not simple. The prohibition on
interest prevents investing in bonds, as well as stocks in
companies like banks that make money on interest. …