Pursuing an American Dream While Following the Quran
SUSAN SACHS investigates halal finance for Muslims in the United States

fter moving his growing young family into rental apartments, his in-laws' house and then again into a rented condominium, Sal Spiteri scraped together the money for a down payment last year and bought his first home. It is a milestone that brings joy to most people, but it pained Mr. Spiteri, and he said that it tormented him still.

The problem is the mortgage he had to take on his new house in North Babylon, N.Y. As observant Muslims, the Spiteris try to follow the Islamic prohibition on paying or receiving interest. They pay their credit card bills in full each month. They keep checking but not savings accounts. And when they were ready to buy a home, they sought help from an Islamic cooperative in Houston, the MSI Financial Services Corporation, one of only a handful of such specialists in the country.

That was five years ago. The couple — Mr. Spiteri became a Muslim and his wife, Hoda, is from Egypt — are still on an MSI waiting list for financing.

"It's frustrating when you know there is a right way and a wrong way, and you're being driven toward the wrong," said Mr. Spiteri, a program manager with Symbol Technologies Inc. in Holtsville, N.Y. "A lot of people say, `We're in America and we can't change the rules.' I think the important thing is realizing it's wrong and trying to change it."

Faith has never been much of a factor in the mortgage business and fashioning products to accommodate religious requirements is a novel, even mystifying, idea for regulated institutions like banks. But, mindful of the country's changing demographics, some financial services companies now see the estimated five million to seven million Muslims in America as an untapped market that is growing enough in numbers, wealth and sophistication to justify specialized products.

At least one major lender, HSBC Bank USA, is already positioning itself to mine the Muslim home financing market in the New York City area. Bank officials say they plan to offer a plan tailored to Islamic precepts as early as September to potential home buyers in Brooklyn, Queens and elsewhere on Long Island, where 90 of its 437 American branches are situated. The bank is the American unit of HSBC Holdings , the British parent of the Hongkong and Shanghai Bank.

"Our target market is the second and third generation, educated, middle- class Muslims — the American who believes in his religious values but at the same time is proud to be an American and wants the American dream of owning a car and a home," said Iqbal Khan, head of global Islamic finance for HSBC.

While the biggest demand by far is for home financing, he said, HSBC also is promoting its checking accounts and debit cards as products sensitive to Muslim needs.

The Muslim market, however, is not a typical immigrant or ethnic market that can be reached simply by educating people about American-style credit or translating mortgage documents.

They may be, as Muslim leaders argue, the fastest-growing subgroup in the national mix. But American Muslims are also a diverse lot of varied national origins, economic status and views toward Western-style credit. While some form of lease-purchase or partnership contract is the standard model for Islamic finance, the details of how it should be structured are a matter of much debate.

So is the more basic issue of whether a conventional bank, with its other interest-based revenues, is a permissible partner for a Muslim. And since Islam requires that the parties to any contract share equally in the risk, there is disagreement over whether it is proper to participate in a regulated transaction that gives a bank the right to foreclose in the case of a default.

Even Islamic scholars have yet to reach a consensus. Ordinary Muslims, then, tend to take more conservative or skeptical views.

"Because the whole world is based on interest, you sometimes get interpretations that say if you are buying a house and living in it, it's O.K. to have a mortgage, or it's O.K. if you don't get a big house," said Farrukh Siddiqui, a Pakistani-born Web site developer in Levittown, Pa. who rents an apartment for his family of four. "But a lot of us living in this country now have come to realize this whole interest thing is something we really have to avoid."

HSBC is not alone in entering the Islamic finance business. Recently, a number of smaller mortgage banks and finance houses also announced their interest in the market, following in the steps of the mortgage financing company Freddie Mac , which has promised to provide much-needed liquidity to the Islamic finance business.

In late March, Freddie Mac, which is shareholder-owned and government-chartered, announced it would invest in Islamic financing contracts that conform to its eligibility requirements, starting with the purchase of an estimated $1 million in contracts from the American Finance House- Lariba, a small Islamic lender in Pasadena, Calif., that has financed several dozen home purchases through a lease-to-own contract marketed to American Muslims.

Saber Salam, vice president for customer strategies and offerings at Freddie Mac, said he has been contacted by many major banks, mortgage brokers and other institutions that are developing financing options for Muslims.

Based on their interest and on the agency's estimate of the potential Muslim market, he added, Freddie Mac expects to participate in $3 billion to $5 billion in such contracts the next few years.

If the volume reaches that level, it would represent just a tiny fraction, about 1 percent, of all the home loans that Freddie Mac and its older cousin Fannie Mae participate in each year. But it would be a huge advance for the Islamic home finance market, long limited mainly to homegrown cooperatives like MSI and Lariba that were handicapped by a lack of capital.

The market includes Muslims who have already bought houses using conventional mortgages but, like the Spiteris, want to refinance, as well as those who held back from buying homes because of a lack of Islamic alternatives.

To make the program work, Freddie Mac also plans to raise money by selling a bond based on those contracts, an investment that it can promote to Islamic investors overseas as religiously correct.

The rather sudden interest on the part of financial institutions in the United States is partly a response to the heightened visibility of American Muslims as they have become more politically active and concentrated in big cities. A substantial number have college educations and household incomes above $50,000 a year. About 40 percent are African-Americans, Muslim organizations say, and the rest are a mix of people of Southeast Asian, East Asian and Arab descent.

At the same time, banks are responding to the growing confidence of many younger Muslims who now demand accommodation from the society around them.

"My parents came here from Pakistan with a very strong impulse to compromise for the opportunities available," said Naveed M. Siddiqui, vice president for North American marketing at IslamiQ (pronounced Islam I.Q.), a two-year-old Muslim- run company that advises financial institutions and investors on developing Islamic financing and investment products.

"They figured that they were going to a country where there are few mosques, no real Muslim institutions and as much as they could they would stick to their way of living," he added. "The idea was to buy the right house, even if it meant getting a mortgage, and live in the right neighborhood and be all-American."

Mr. Siddiqui at IslamiQ, 31, grew up as an American, in Roslyn, N.Y., and said he and others of his generation feel more of a sense of entitlement. "That's why the demand for Islamic finance is increasing," he said. "A lot of people are growing up in the West and adapting to Western products. And they're saying, `Let's make demands on the market.' "

Until recently, American Muslims looking for an alternative to a conventional mortgage could turn to self-help groups that pooled money from investors and placed it in a revolving fund that bought homes and leased them to Muslim families.

Abid Shaikh, a vice president at a Merrill Lynch office in Plainsboro, N.J., took a slightly different route. He used his own money to buy homes in partnership with Muslim couples who purchase his stake over time through a lease based on the fair market rent of the house. He has just started a car-leasing business on the same principle.

Although some of his colleagues might think that he has sacrificed his own comforts for his faith, Mr. Shaikh, a 40-year-old who was born in India, said he is not concerned.

"I live in a town house which I bought with all cash," he said. "My peers, including those who are not vice presidents like me, are living in houses three times as big as mine. Since I have belief in me, those things are not bothering me."

The biggest American experiment in Islamic home-buying contracts was run by the United Bank of Kuwait, which ceased operations in the United States after its merger with the Al-Ahli Commercial Bank of Bahrain last year to form the Alhi United Bank in Bahrain. During the two years before it closed in New York, the United Bank of Kuwait bought and leased back 60 homes for American Muslims.

Its experience provided some valuable lessons. Former employees of that bank said they found that women are often the driving force in a family to find an Islamic alternative to financing; that prospective customers will tolerate somewhat higher monthly payments than a conventional fixed-rate mortgage but not a great deal higher; and that sellers and real estate agents tend to view an unfamiliar financing contract with skepticism.

Abdulkader Thomas, the former general manager of United Bank of Kuwait in New York, has now formed an Islamic mortgage bank, in partnership with Capital Guidance a real estate investment company in Washington, and a marketing firm, MEF Money, based in McLean, Va. He said he hopes to have the bank licensed in 15 to 20 states by September and then to begin offering home financing contracts that would be based on a partnership contract between the bank and the home buyer.

Within a year, American Muslims will have a wide range of financing choices, predicted Abdul-Hakim Dyer, another veteran of the United Bank of Kuwait program.

"There is going to be a mix: small organizations, conventional brokers, big banks," he said. "I wasn't talking this way a year ago. But I've been amazed at how many people were watching what we did" at United Bank of Kuwait.

Mr. Dyer, an independent consultant based in Stamford, Conn., said that he, too, plans to start an Islamic services business.

"The Muslim community is increasingly sophisticated, regardless of generation," he said. "You may drive a taxi, but you know how to finance a medallion."

"What they're really looking for," Mr. Dyer added, "is an opportunity to get it right, to fit in, to enjoy what everyone else enjoys and take it to the next level."