With the US Muslim population expected to hit eight million by 2050, the demand for Shariah compliant financing for mortgages as well as business loans is expected to rise. While the dream of owning one’s own home may have — only a few decades ago — seemed far-fetched for many Muslims seeking to maintain a Halal lifestyle, scholars, visionaries and financiers have since then come together to help create viable alternatives to the conventional Riba (interest)-based financing.
Previously, Muslims had to choose between either renting or — unless they had enough money to purchase a home outright — using conventional financing. While conventional methods do provide ease of access, they are rooted in interest and debt, thereby failing the test of Shariah compliance.
Nowadays, US Muslims have options when it comes to Islamic financing, and a few different methods have been developed to address the issue, including the Musharakah, Ijarah and Murabahah models.
The Musharakah model refers to a joint enterprise where partners share in profits based on a predetermined ratio, while losses are shared based on capital investment. This model has made its way into the US Muslim space as the most popular option for home financing over the last 20 years, with Guidance Residential (which operates under this model) helping over 20,000 families and surpassing US$5 billion in funding. Musharakah is also the model being used by Star Finance — a new social impact start-up — in its venture to address housing challenges for minorities in Minnesota.
Ijarah, on the other hand, is basically a leasing agreement. It refers to a model whereby an investor is able to earn profits by charging rent. LaRiba, another Islamic company, utilizes both the Musharakah and Ijarah models as home financing options.
The last form of financing available is termed Murabahah, which utilizes a cost-plus system. This means that money is made through the purchase and resale of an asset — such as a house — at a profit. UIF Corporation and Devon Bank both provide residential and commercial real estate financing through both Murabahah and Ijarah programs.
According to Thomson Reuters’s State of the Global Islamic Economy Report 2018/19, assets in Halal financing were estimated at US$2.4 trillion in 2017 and are expected to surge to US$3.8 trillion by 2023. Yet there remains work to be done, with Islamic financing methods and companies being critiqued for the higher costs and bigger risks involved, as well as for a lack of cooperation with conventional systems. These issues will need to be addressed if the Halal financing sector hopes to continue expanding its growth within the US.
Aliredha Walji is the vice-president of ShariaPortfolio. He can be contacted at [email protected].