Interest in Islamic finance is growing beyond the American-Muslim community because the recession has forced more people to question the nature of conventional debt and interest, said Hussam Qutub, a spokesman for Guidance Residential, an Islamic mortgage company based in Virginia, USA.
Guidance Residential, undertakes stringent checks of loan applicants’ finances, including income, savings and liabilities to make sure they can afford the mortgage. “Our conservatism has kept us out of the current financial mess,” says Hussam Qutub. By contrast, during the property boom years up until two years ago, other companies issued loans to low-income residents who relied on rising real estate values as collateral in what became the “sub-prime” crisis. Millions of US residents are now struggling with loans worth far more than their homes are worth, or are being foreclosed on after non-payment.
Guidance Residential has provided more than $1.5 billion in home financing to at least 6,000 customers in 23 states since it launched seven years ago. The company accounts for around half of the US market share of Islamic mortgages. Competitors include Lariba American Finance House in California and University Bank in Michigan.
Delinquencies, where borrowers fall behind on payments, accounted for less than half the national rate of 7.8 per cent at the end of last year. The company has only served about five foreclosure notices because the majority of its clients only took on liabilities that they could afford. By comparison, a record number of foreclosure actions started nationally in the first three months of this year, up 27 per cent from the same quarter last year, the Mortgage Bankers Association said last week.
“We have to give credit to the American Muslim community, who are conservative in the way they handle money and make sure to have savings for times of financial hardship,” Mr Qutub said. “We really take our hat off to the community.”
Under Islamic law, Muslims are prohibited from riba, often translated as interest, and are encouraged to make financial transactions tied to concrete goods or services rather than make money out of money. Guidance Residential’s mortgage model requires the company to take an ownership stake in the home along with the customer, who pays a rental fee as well as monthly payments to buy the company’s share in the home.
If a customer falls behind on payments, the company charges a $50 fee, rather than the compound interest usually imposed by traditional companies. If a home is foreclosed, losses are borne according to the ownership stakes of the customer and company, which does not then pursue the customer to regain its financial stake.
Some critics say a rental fee is akin to interest on a mortgage loan. But according to a customer, it was the joint ownership contract that made him feel religiously comfortable with the product, just as a legal contract distinguishes and defines marriage from other partnerships.
New York, Sharmila Devi Foreign Correspondent, The National, June 01. 2009
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