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." (MORE)