Halal Money Matters
Episode 5: Halal Mortgages
Halal Money Matters Podcast
Episode 05 – Halal Mortgages
CHRISTOPHER PATTON: Welcome to Halal Money Matters, presented by Saturna Capital. I’m Christopher Patton, here with me is Monem Salam.
MONEM SALAM: Hey, Chris. How are you?
CHRISTOPHER PATTON: I’m good!
MONEM SALAM: Welcome to the audience for joining us on this show. We have, I feel, a very special one. Hopefully we’ll get rid of a lot of myths that a lot of people have about Islamic mortgages.
CHRISTOPHER PATTON: Don’t know a lot about this topic.
MONEM SALAM: Yeah, you know, but I think as we get into more about what this actually is, you’ll find out there’s actually quite a benefit for just everybody. Similar to what we found with Islamic investing, right? Where, yeah, it does cater to a certain audience, but if you’re looking at it from a returns perspective or a risk perspective, anybody can use it. I think what we have today will be able to explain that a little bit more. Let’s see what happens.
CHRISTOPHER PATTON: Alright, cool. So, we do have a special guest.
MONEM SALAM: Yeah, we have our regional manager for Saturna Capital, Amjad Quadri. He was actually born and raised in Chicago, lives there currently as well. He’s had, what, 12 years of experience specifically in the Islamic mortgages space. So, I don’t think we could have asked for a better expert to be able to join us on this call.
CHRISTOPHER PATTON: Great.
MONEM SALAM: Amjad, well, welcome to the show. We’re really excited to have you on. Just give us a brief background about yourself, Amjad, before we get rolling.
AMJAD QUADRI: Absolutely. So, I got into Islamic finance 16 years ago, now. The whole reason I got into it is because I was sending some customers over to one of the financial institutions around Guidance and the regional manager reached out and said, “Hey, why don’t you come work for us?” And the way that whole thing happened is when I first wanted to buy my first condo in Chicago, I was very worried of buying something and being involved in any of the interest aspects of it. And I realized that hey, let’s see if there’s another solution. At the time, one of our good friends that we to a similar mosque that we did, that we grew up with, he was a CPA. And he approached one the other guys that we grew up with from our mosque that ended up becoming an Islamic scholar, and said, “Can we come up with a solution for the Islamic community?” His dad was a businessman, did a lot of banking with local Korean banks, so felt like hey maybe this will help. So, he approached the Korean bank and said, “Hey, I’m trying to see if we can do something to help Muslims buy homes.” So him, and this Islamic scholar came up with a contract with this Korean bank and they sent it over to who is now one of the leading, was probably then as well, one of the leading Islamic finance experts, Mufti Taqi Usmani, and then it came back from him with a fatwa in Urdu basically saying since there is no alternatives in America, as Muslims, you can use this. So, that’s how I bought my first condo in Chicago. Then, Guidance came around almost like two years later. And then, Mufti Taqi Usmani was one of the people that helped create the Guidance products, so I felt like his Urdu permission that he gave us no longer applied because now there’s a product from scratch. And you know, we heard about Guidance for almost a year and different times I would call them or ask the local representative, “When are you coming? When are you starting?” and when they finally started, I was their second customer. One of my cousins beat me by a day. And I refinanced. And at that point I felt obliged to tell other people, “Hey, there is a fully Islamically-compliant home financing option. You no longer need to be in this interest thing. And that’s kinda what led to me eventually going and working for them for a while.
CHRISTOPHER PATTON: So, that’s very recently, though. I mean, some of the instruments that we’ve talked about in prior shows date back quite a long time, but in this case, it seems like a fairly recent development?
MONEM SALAM: Yeah, it’s one of those things where they have to get approval from each of the different states, as far as the contract is concerned. I think now, a lot of the companies are not in all 50 states. Certain states, they don’t want to target because there’s not enough Muslims there. But a lot of it sometimes is the states are very difficult to work with when it comes to these Islamic mortgage contracts, so that’s why.
CHRISTOPHER PATTON: What would be the reason for a person of your faith to not want a traditional mortgage?
AMJAD QUADRI: I think the main reason for someone not to want a traditional mortgage that is of the Islamic faith is to stay away from what’s called Riba. And Riba, now would be translated to what’s happening in the American banking system simply as interest. And this is a money-on-money transaction where there’s no effort put into it or there’s no assets that actually are backing the financing. And the reason that people would want to stay away from it is because it’s clearly within the top, easily, five or ten sins within our religion. And also something that is very rare, where God says you know, anyone that is either accepting, like if they give someone a loan and they’re accepting more money in its place as interest or Riba, or if someone is paying it, you know, they’re essentially in war with God. And this just decreases your overall blessings in your financing. You know, it’s something you wanna stay away from.
CHRISTOPHER PATTON: And then, so the key shift that then happens in a Halal mortgage is a change in the risk-sharing and the kind of asset-based nature of it then?
AMJAD QUADRI: That is a very good way to look at it, yes.
MONEM SALAM: So, I guess for conventional, Chris when you’re given a mortgage, you own the house and the bank has a lean on the house, so they gave you money and you purchased the house. In this particular example of the Islamic finance contract, the financier, the lender, and you are actually co-owners of the house. There’s a real asset that’s being traded rather than just money being traded. Whenever you have money traded, that’s when the interest or the Riba part comes in. I think there’s a lot of misperception, misunderstanding about exactly what Islamic mortgages are, how they work, and those type of things. Why don’t you start off, if you don’t mind, and just kind of in a nutshell, talk about what it is? What am I getting into when I buy a house with an Islamic mortgage?
AMJAD QUADRI: When you’re doing an Islamic mortgage, I think the process of getting the financing, you’re going to find very, very similar to when you’re going for a conventional mortgage. And I think this, sometimes, confuses people and/or frustrates people because they feel like, you know, if I went to a large banking institution to do this, it would ask me for all of the same stuff. My credit score, my W-2, how much income, how much do I have saved. When I go to this Islamic institution, they’re asking me for the same things. But I thought Islamic finance should be different. And what I think people sometimes don’t think about is if they reversed the position and they were the person that had a lot of money. Let’s say, they had, you know, multi-billions of dollars and they said, “I wanna help people buy homes. Whether they’re Muslim or not Muslim.” Then, the question becomes okay what are you gonna ask them if you’re gonna get into this business of helping people buy homes? And I think everyone is gonna come back to the same place. The first thing I wanna know is their credit score. Why do I wanna know their credit score? Because I wanna know if the person that I’m potentially helping to buy a house is reputable. If they have a history of doing business in a reputable way with other people.
MONEM SALAM: I would want to know that history whether it was a debt contact or an equity one, right?
CHRISTOPHER PATTON: Right.
MONEM SALAM: I just wanna know that the person is good for whatever he is.
AMJAD QUADRI: Absolutely, and I think we clearly know within our religion that’s very important. I mean, we know the story of the Prophet when he was walking once, and he was going by some companions and he turned around and he said, “I’m walking with my wife.” And they said, “We wouldn’t have doubted you.” But his response was, “It’s important to guard your reputation. We shouldn’t leave things in doubt.”
MONEM SALAM: Yeah. Yeah.
AMJAD QUADRI: I think really, the nuts and bolts comes down to the contract itself. So, Monem you mentioned this earlier, that it takes a while to get into different states. And this is actually one of the things I tell people when they’re looking for an Islamic finance home institution to do business with, is if they’re doing business in all 50 states in the United States, it’s very likely that they’re not doing anything different. Because for the companies that are doing things correctly, you know Guidance and UIF specifically, each state they go into, they spend anywhere from $100,000 to about $500,000 on legal fees to make sure that their contracts, which are different than the conventional mortgages, apply and are aligned with the home buying safety guidelines that each state has. Home protections for the home buyers. Because homes are usually the largest investments that most people are gonna have in their life, and so there’s a lot of protections around them for the individuals. So, to make sure they’re protected, you need a barred attorney in that state to look over the contracts, look over all of the protection laws, make sure nothing is breaking the laws and then basically give a legal ruling saying yes. these contracts, even though they’re not a conventional mortgage, do comply with all of the state home protection laws and these guys can do business in this state. That’s why, currently, you see the two largest institutions have either, you know, 28 states or 24 states or something along those lines. Because they add states slowly, based on the Muslim population and return on investment.
MONEM SALAM: So, are you basically saying that if I wanted to start up a conventional mortgage-lending, I could easily just download a contract, take it to the state and start operating within a short amount of time? But because this is an Islamic contract that I had to get approved by Sharia scholars and those type of things, that they can’t easily get approved, so they need somebody like a lawyer to present this to the regulatory body of that state and then they’ll get approval?
AMJAD QUADRI: Yes.
MONEM SALAM: Alright, so the protections are exactly the same as they would be in a regular mortgage.
AMJAD QUADRI: Absolutely. And then the beauty of Islamic contracts comes into play… the beauty of it, and the actual crux of the matter comes into play with the contract itself and then the greater part is if you are ever in trouble. With the Islamic finance contracts, you know, there is no multiplying late fees. One of the things within Islam is that if someone is in trouble, you can’t add to their troubles by increasing the late fees, changing the interest, adding onto their principal balances, things along those lines. So, if someone is in trouble and they have an Islamic contract, then the late fee is capped, and it’s capped at an administrative cost and the only reason it’s even there is just so that they can get the administrative cost back. But, it’s not a multiple late fee like every month they get charged a big fee and it goes back into the balance. And the second benefit is that if you do get into trouble to the point where you cannot pay it back at all… then they have to force to sell your house, or you have to sell your house. And if you have to sell it for less than what your house is actually worth, or less than what your house is actually worth or less than what you still owed, then they won’t come after you for a difference because if you are in a Musharakah contract, which means you’re a co-ownership contract, basically your co-owner decided to take the loss with you and it’s not gonna go on your credit that you have an outstanding balance or things along those lines. Now, some states do protect you even in conventional financing, but not all states do and when we had our last crash, I know in the state of Florida that this was a big issue, where you know, people still had, after they walked away from their mortgages, they still had large balances that they owed to institutions whereas if they did finance with an Islamic finance institution that would not be the case.
MONEM SALAM: So, you’ve mentioned a lot of things, and I know you’re in the industry so it comes rapid fire to you, but I just want to kinda try to sum up, if I can, what you actually said. So, the first one is that if I have this Islamic contract and if for whatever reason, I can’t make a payment one month, then there is a late fee but it’s capped at the administrative fee level and I can’t keep compounding the late fees and the interest on top of that. Correct?
AMJAD QUADRI: That’s correct.
CHRISTOPHER PATTON: Are there trade-offs with some of these… I’m gonna say friendlier rules and guidelines here, like the late fees not compounding and kinda looking out for people if they’re in trouble. Are there trade-offs elsewhere that you find kinda make up for that? Or is it just, across-the-board, a different mindset.
AMJAD QUADRI: You know, that’s a great question and the short answer is there is no trade-off. There’s actually a misnomer in the community that doing Islamic financing versus going the conventional route will end up costing you more and that has actually been proven not to be correct either.
MONEM SALAM: We’re talking about the late fees. The second one that you mentioned was a benefit for the customer is that if they were, let’s supposing they were either under water on their house and they had to sell it, or it got destroyed in some kind of natural disaster, then the company that has financed you will be basically eating some of the loss with you? Is that correct?
AMJAD QUADRI: Absolutely, yes. In an Islamic co-ownership contract which is one of the allowed contracts for home financing, then your co-owner takes that loss because at that point, you are having to stop this contract out of hardship and not something that you’re doing just purposely just because you decided, hey, you didn’t like the house.
MONEM SALAM: You mentioned that there are different types of contracts. Do you wanna just briefly talk about what are the most popular ones? That most of our listeners would be facing whenever they do an Islamic contract?
AMJAD QUADRI: Sure. And now, to make it simple, now the two larger institutions have both kind of gotten to a point where they’re both using the co-ownership model, which Islamically is called Musharakah. Basically, what that means is that you know, let’s say someone moves to Indiana and they were wanting to buy a house. Let’s say they found a $100,000 and they had $50,000; they’re basically going to find another partner to help them do the other $50,000. And together, they buy the house and you know, if they’re buying it to rent it, then they would split the rental income, but in this case, one of the partners wants to live in it. So then, he’s paying the other partner, the 50% partner, off, while he’s living in it, and paying them almost a rental amount while he does that. Every month that you’re making payments, part of it will go toward you buying your shares back and then the rest of it will go towards them getting their income for renting the house back to you, even while they own half of it, or most of it.
MONEM SALAM: And it is complicated. Say, if you and I bought a house together and we were renting it out and it would rent for a thousand dollars a month, we’d take the thousand dollars in and split it halfway. But if you were living in the house, then you’re the renter and the owner, so you still have to pay me half the rent, and that’s kinda how that actually works.
CHRISTOPHER PATTON: Interesting.
MONEM SALAM: It’s a different model but like I said, a lot of times, when we talk about Islamic investing, it’s not only about the return, it’s about risk mitigation.
CHRISTOPHER PATTON: Sure.
MONEM SALAM: And so, I think in Islamic mortgage contracts, it’s the same thing. It’s not only about what you’re paying, but it’s also about, in cases of the downside, the risk part of it. There is a risk mitigation here. And that’s a large part about these contracts.
AMJAD QUADRI: That’s exactly how it’s done. I mean, it helps to mitigate risk. It helps people get into a house and you know, feel like they’re not in debt. That’s the other thing that, you know, obviously, debt is looked down upon in our religion, so a lot of people that might wanna go to Hajj or go to Umrah to the pilgrimage, they’re looking at this debt and saying, “Okay I’m in debt, so I don’t qualify to go,” but when you’re in a co-ownership, you’re not in debt. You’re actually in a business relationship with the person that you went into business with. It’s a business relationship. There’s an LLC. And I’m free to go to Hajj, I’m not in debt, I don’t feel like I’m in debt. And if and when I sell my house, you know, the benefit of this is the original contract is formed around the basis that you’re buying the house to stay in it and you’re paying it off over thirty years. If you wanted to sell it sooner then you still have the benefit of if the home went up in value as most homes do historically, you can still get the increase. We’re not gonna share in the profits because our original contract says that you’re just paying us off X amount, and so at the time of sale, you just buy us off as a partner and then you own it completely and you sell it for what you want. That way, you still get the benefit of the increase in property value without the downside of if something happened on the other side, you’re still protected.
MONEM SALAM: That’s a good explanation. There’s a lot of misperception and things out there. So Amjad, I wanna play a game of rapid fire with you. Number one: it’s expensive.
AMJAD QUADRI: I’d say Islamic home financing falls right in line with what’s in the market. It won’t be the most expensive and it won’t be the least expensive.
MONEM SALAM: Number two follows that up: it’s the same as a conventional mortgage. I’m paying the same amount. My 1099 says INT on there.
AMJAD QUADRI: Even though Freddie Mac has or Fannie Mae, has recognized this as a different contract than the states use a different contract, the IRS has not caught up yet. They have very limited scope of how they do things. But you know what I tell people is if we both see a yellow colored wall, just because the IRS comes by and says, “Hey, no, that’s blue,” it doesn’t change the yellow colored wall, which is the agreement between the two parties that are doing the contract.
MONEM SALAM: Okay, the source of money is coming from Freddie and Fannie, which are not halal.
AMJAD QUADRI: Freddie and Fannie are not banking institutions so when you say they are not halal, I don’t know that that’s true. They are mandated government institutions that are supposed to help Americans buy homes.
MONEM SALAM: I think one of the last ones would be… there have been fatwas in the past that said we can buy conventional mortgages. Why are we worried about Islamic ones?
AMJAD QUADRI: That is an awesome question. I love that question because the one fatwa that I know of, that I had a chance to see and that some scholars went over, was the Yusuf Qaradawi fatwa, early on before any Islamic finance institutions came around. But this was more a rukhṣa (permission/alleviation),
which means it was a stipulation given at a time of need and that it might not apply anymore. So, a few of the stipulations, the footnotes, the first one said that if Islamic financing is around, that this ruling no longer applies. That was the first one. The second one was this has to be a need. And then, the last one was don’t use this to go do business. So, if you take all three of those, then in the majority of the states we live in, that fatwa no longer applies.
MONEM SALAM: Okay. I don’t know of any other myths or misperceptions. Can you think of any that you’ve come across over the years of doing this? That people talk about.
AMJAD QUADRI: Yeah, I think one is that Islamic finance is harder than conventional financing. And I would say the answer to that is no. The truth is buying a home a hard process. And you know, if you did it conventionally then Islamically you’d be like, “Oh yeah, okay, it was about the same,” but if you haven’t, and if you’re buying either conventionally or buying it through an Islamic process, you’re just gonna be like, “Wow, this is hard! They are asking me for a lot.” And when you understand the amount of money that most of these financing institutions are giving you, or most of these banks are giving you, they are asking you for a lot and it should be hard because it’s not a small amount of money.
MONEM SALAM: Well that’s a good segue way, a little bit off the topic, but when is the right time to be able to look at… let’s suppose you have the credit history, you have the down payment, when is the right time to be able to start looking at Islamic mortgages and maybe closing on a house?
AMJAD QUADRI: I think when you know you’re going to be in a particular area for a significant amount of time and significant being probably you know, more than five years. And then the other thing that I would say is I know that they allow you to buy a house when you have 5% but I’ve always found that when people have 20% that that’s a better time to buy. Your payments are more in line with what you’d like it to be. You avoid private mortgage insurance, PMI, which ends up making your payments a little bit harder. You feel like, you know, you have more saved up and you’re in a better place.
MONEM SALAM: Chris, do you own your own house?
CHRISTOPHER PATTON: I do.
MONEM SALAM: How was the process for you?
CHRISTOPHER PATTON: I think it was exactly as he was describing when he says your first time through the process… it feels very demanding and very in-depth. And so happy and fortunate to be able to go through it. But it’s a very involved process, so I can easily see if you’d not been through either version of the process, the first time it would feel very difficult either way.
MONEM SALAM: That’s what I was thinking about, too. If you’ve never been through the process and your first exposure is Islamic finance… you’d think my God, this is complicated and stuff but you’re basically saying… no matter what happens…
CHRISTOPHER PATTON: It is complicated.
MONEM SALAM: It’s probably gonna be the number one asset for a lot of people, it’s their number one asset they’ll have in their life.
CHRISTOPHER PATTON: Do you feel like there’s an awareness that this is even possible?
MONEM SALAM: Yeah, I think it’s both a matter of awareness and especially in a mortgage contract, a lot of skepticism. For whatever reason, maybe Amjad you can talk about the history of it. Why is there so much skepticism in mortgages, Islamic mortgages? Rather than maybe some other type of product?
AMJAD QUADRI: Well, you know, I would say that what happened is when Islamic financing first started and even for myself, when I first went with this local Korean bank, the rate that I was paying was almost 2 percent higher than what a conventional bank could have gotten at the time. And when Guidance came to market, I was ending up saving almost 2 percent going with Guidance and to me, I was like, Hallelujah, this is awesome and it’s, you know, something that from start to finish was created by the Islamic scholars. But for most people, at that time, if they were looking at Islamic finance versus conventional financing, when it first started, Islamic finance was definitely a little bit more expensive. The reason for that is because they were new, they had more overhead. Now, what you see is that it’s completely in line and the issue is that those first people that started and that complained… that rumor never went away.
MONEM SALAM: Yeah bad news always spreads faster than good news.
CHRISTOPHER PATTON: Right.
MONEM SALAM: Rumors and those type of things.
AMJAD QUADRI: One thing I just wanted to add is the story of how one of the institutions first got started. Back in 2001, during the housing boom, they approached Freddie Mac, as I mentioned it’s a governmental institution. Their job is to help more Americans buy homes and the Muslim community being a part of the American community at large. They went to Freddie Mac and said, “Hey listen, we have this contract, where you know… you’re gonna have to take on more risk, but we want to see if this is something that you will accept in your guidelines to help the Islamic home financing institutions be able to be as liquid as you’re helping the banks to be liquid.” And the original answer by Freddie Mac was, “No. We have no interest in this.” We got very, very lucky in the fact that there happened to be a Muslim brother that worked there, and he was one of the attorneys that came to this meeting. And the next day he called Guidance back and he said, “I know this is something that is really going to help our community and even though the initial answer was no, let’s see if there’s something we can do to make this palatable so this is something that Freddie Mac will be willing to do…” And you know, many people in our community might have been like, “Oh you know, this guy works at an institution that just deals with something outside of our religion—this is not a good thing,” but this is where some scholars will say if your intention in going into something is to be able to find out how to do it so that it helps the greater community, then that is one of the reasons why you can do it. And this person has now opened it up for multiple hundreds of homes to be closed on a monthly basis through Islamic finance for a lot of people that probably would not buy a house. So, I think that story is very interesting in how it happened, how someone was at the right place. And the fact that now this person is getting the blessings of all of these people being able to avoid something that you know, within our religion is something that people don’t want to get anywhere near.
MONEM SALAM: That’s a beautiful story. I’d never heard that before, that that person was able to do that. On that note, well, I thank you very much Amjad for joining us on this show today.
CHRISTOPHER PATTON: Yeah, thank you.
MONEM SALAM: Every time I speak to you, I learn something new, so I’m glad we were able to have this conversation and hopefully our audience learned something as well.
AMJAD QUADRI: Thank you guys, it was nice being on.
MONEM SALAM: Thank you, take care.
DISCLOSURES (read by Christopher Patton):
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