September 2, 2003 BY TAMMY CHASE Business Reporter http://www.suntimes.com/output/business/cst-fin-muslim02.html Salim Shelia, who rents a two-bedroom apartment in Rogers Parkfor himself, his wife and three of his children, wanted to own a bigger place to live. Yet his religion forbids him from taking advantage of recent record low interest rates, because the Koran prohibits Muslims from paying or collecting interest. But Shelia, 47, an Indian, recently closed on the purchase of two condominiums in the same building in which he rents, and he plans to convert them into a five-bedroom duplex. He financed the purchase through a new form of lending developed by Devon Bank, which allows devout Islamic people to finance home purchases without paying a penny in interest, while still allowing the bank to earn a profit on the loan. At a time where Muslim and Jewish relations are deeply strained around the world, the Rogers Park bank, owned by the Loundy family, a Jewish family prominent on the North Side, has found a way to help the orthodox Islamic population buy homes. Devon Bank officers have long worked with what they call "casual" Muslims, who use western, traditional forms of financing for businesses and homes. But Muslims who strictly adhere to Islamic doctrine would either have to save enough cash to buy a home or borrow from relatives and friends. Devon Bank, 6445 N. Western Ave., began offering the financing this summer. It is one of a handful of institutions across the country catering to Muslims, and one of the few--and maybe only--Chicago-based banks to do so. Banks foresee growing demand for such financing products, given an estimated Muslim population of as much as 7 million in the United States. "Banks are starting to pick up on it," said Tracy Mills, a spokeswoman for the American Bankers Association. She said California-based Wells Fargo Bank and a few out-of-state finance companies, such as American Finance House-Lariba, are among the few financial institutions offering the special financing. Devon Bank has quietly catered to minority groups through its 58-year history, employing tellers and bankers who speak 30 languages. In the last several months, Nazir Gurukambal, an assistant vice president, had been getting calls from people asking the bank to make financing a possibility for devout Muslims. Collecting extra money is not religiously acceptable, Gurukambal said. "Somebody making money, lending, taking advantage of somebody's need--it's not acceptable." Bank officials met with Islamic community leaders and tapped their own lenders and lawyers, including David Loundy, the bank's attorney and son of bank chairman Richard Loundy. They had to make sure the loans would be sound and pass the scrutiny of bank regulators, a tough crowd. They developed two types of financing: Murabaha, an Arab word for installment, and Ijara, which is Arabic for lease. *Murabaha: In this type of transaction, the buyer finds the home he wants and the bank agrees to buy it. The bank then sells the home to the buyer for a fixed price that includes the price of the property plus a profit. Instead of paying principal and interest, as most homeowners do, the buyer pays principal that has the profit already built into it. *Ijara, pronounced E-jar-ah: Ijara is similar to a rent-to-own transaction. The bank buys the house that its customer wants, and the resident makes monthly payments to the bank until he owns the home. Devon is also working on a third type of transaction, though it's not yet offering it: Musharakah. The bank and the customer jointly buy a price of property, and the customer over time buys out the bank's stake. The percentage of ownership changes with each payment. Sometimes, transactions like murabaha can be more expensive than a traditional loan, said Dan Thompson, senior business manager of community lending for Fannie Mae. He explains: If a person buys a $100,000 house and puts down $20,000, he needs a loan for $80,000. Under the murabaha technique, the bank figures out the interest charge over the life of the loan, and builds that into the loan amount. So, the person needing $80,000 would actually borrow $170,000 at zero percent interest, which could lead to higher recording fees and transfer tax, Thompson said. Devon for now is keeping its Islamic mortgages on its books, though it has been in talks to sell them to Fannie Mae, a standard banking practice. Under current federal tax laws, Muslims who use murabaha and ijara financing can still deduct the equivalent of what they would have paid in interest from their federal income taxes, he said. Devon Bank recently began to offer similar styles of financing for businesses and equipment purchasing, and it has fielded out-of-state inquiries about Koran-compatible mortgage financing programs. Devon Bank's David Loundy says the bank is now working on financing for car purchases. Shelia, who makes sweets at his brother Mohammed Shelia's Rogers Park bakery, Tahoora, has found a way to purchase newer vehicles on his own without violating his beliefs. "Zero-percent financing" from dealers, he says, with a grin. |