Truly Interest Free in the United States
By Liaquat Ali
The purpose of this article is to explore various financing
opportunities which individual Muslims in the US and Shariah finance
houses around the world could tap into to expand the riba-free
transaction space in the country by providing stable and predictable
investment options to investors and flexible and cost-effective
funding options to real estate buyers.
Muslims’ understanding of riba, and their attitude toward it, varies
greatly. Some believe that it refers to any kind of profit which is
made on top of money and it is disallowed regardless of how you
interpret it. Some believe that only excessive interest constitutes
riba, and yet others believe that simple profit taking is allowed but
compound interest is not allowed.
Then you have the Islamic finance arenas where theological and
historical understandings meet conventional financial market
instruments. The discussion gets even more nuanced in terms of the
existence and interpretations of maysir (generally understood as
gambling or speculation), gharar (generally understood as situations
where consequences of transactions are hidden or worse
misrepresented), and of course risk.
Due to the stern denouncement of riba in the Qur’an, the demand for
riba-free transactions exists all around the world. In recent years
various real estate financing products have hit the US market which
claim to provide Islamic financing. Specific details about those
products are beyond the scope of this article. However, it is
important to note that the liquidity of those products is primarily
provided by Freddie Mac (Federal Home Loan Mortgage Corporation) in
the residential space, and by Wall Street “credit lines” in the
The underwriting criteria of those Islamic finance outfits are
therefore dictated by their respective money sources. Due to such
criteria, a large segment of the Muslim population in the US is left
without riba-free transaction options even if they wanted to conduct
business with those outfits.
The only way to service this demand is to work with sources of money
that, due to reasons of their own, are as eager to create riba-free
transactions as those who demand them. These sources of money don’t
necessarily need to be of Muslim origin as long as their investment
needs are satisfied while creating end-to-end and transparent
This author‘s area of expertise is real estate investments and
“private money” which he has used for his real estate transactions
during the past six years. To him riba-free transactions are simply a
special case application of the private money space. The author
defines private money as the source of funds where the owner invests
directly. Intermediaries if any have low or no influence on the
transactions. The second requirement for the private money is that the
terms are flexible, individually negotiated among principals and are
not dictated by institutional indexes or underwriting criteria.
The first large source of “money” is equity in real estate. According
to the National Association of REALTORS (NAR), as of February 2009,
the size of “owner occupied” residential real estate was $20 trillion,
and the size of commercial real estate was $5 trillion. According to
Census 2000, 33% of all owner-occupied residential real estate in the
US was owned “free and clear.” That is, there were no mortgages on
Due to the real estate boom and bust in the past eight years, the very
houses which were “free and clear” may have been financed, and the
houses which had mortgages on them may now be “free and clear” due to
mortgage pay off or foreclosure. So until Census 2010 is released, we
can safely assume that up to $6.6 trillion worth of owner-occupied
residential real estate is available “free and clear.”
According to the Federal Reserve, at the end of the third quarter of
2008, the mortgage debt on commercial/multifamily properties was $3.4
trillion. This means that the owner equity in commercial properties is
around 32% which is almost the same as the “free and clear” number for
owner-occupied residential properties.
Additional drill down into a property’s title data, in terms of age of
the owner and the length of ownership could reveal potential
candidates for “free and clear” residential and commercial properties.
It is safe to assume that older owners would have more equity in their
properties, and may entertain alternative financing proposals.
Younger owners who may have mortgages may not be able to make
independent decision. According to Census 2000, 33.4% of the US
population was 45 years old or older which means that today
approximately 33% of the US population is 54 years old or above.
The NAR reported that in 2008 approximately five million existing
homes were sold in the US at an average of $198,000 each, for a total
of $976 billion. If three hundred and six million Americans bought
five million houses then it can be estimated that seven million
Muslims bought approximately 114,000 existing homes at $198,000 for
The seven million figure has been estimated by Council on American
Islamic Relations (CAIR) and was recently endorsed by President Barak
Obama. If Pew Research Center’s 2.35 million number is used then
Muslims bought 38,400 homes $7.6 billion.
According to a Shariah finance insider in the US, there have been only
$2-$2.5 billion worth of Shariah finance mortgage originations
including refinances thus far. This shows that the Shariah finance
houses are not penetrating the market due to a variety of reasons,
such as, indifference, price sensitivity, theological concerns and
distrust of the Shariah finance products.
With the availability of $6.6 trillion in residential equity spread
over more than 40 million residential “free and clear” units as per
American Planning Association, Muslims can enter into riba-free
transactions with Muslims as well as non-Muslims. These transactions
could be carried out by totally by-passing intermediaries that must
charge interest, profit or mark-up to sustain their existence.
This eliminates riba from transactions altogether and avoids the whole
interpretation exercise of what riba is and what it is not. These
transactions would most likely utilize murabaha or ijara contracts,
and are limited to older, existing properties.
The second large source of funding is retirement accounts in the US.
According to the Pension Research Council of Wharton School, those
retirement accounts were estimated to be at $16.4 trillion in the
fourth quarter of 2007. However, according to an Associated Press
report they shrank to around $8 trillion after the economic downturn.
There are two broad categorizations of these retirement accounts. The
“401(k)” is for employees of a corporation and the “IRA” is for self
employed people. There are limits to annual contribution to these
accounts, and the invested principal and return on investment are
either tax deferred or tax free depending on whether the account
holder paid tax before contributing to those accounts. The owners of
these accounts cannot generally withdraw money from their accounts
until they reach the age of 59 ½.
When the US Congress approved the Employee Retirement Income Security
Act (ERISA) to create the IRA and 401(k) in 1974, it only prohibited
retirement account holders from investing in life insurance and
collectibles, such as, painting and rugs.
However, Wall Street firms, where more than 96% of these retirement
accounts ended up, restricted investment options to stocks, mutual
funds, bonds, etc. Wall Street does offer money market as a money
parking option when investors get jittery due to the volatility of the
market. However, as soon as the stock market recovers efforts are
redoubled to get that money back into speculative financial
Due to the distrust of Wall Street, many of those retirement account
holders have started moving their money elsewhere, such as, Self
Direct Individual Retirement Accounts (SDIRA), specialized life
insurance policies, and other investment options. Unlike Wall Street,
SDIRA custodians allow the full range of investing options as allowed
by the ERISA, that is:
1. Residential real estate, including apartments, single family homes,
2. Commercial real estate
3. Undeveloped land
4. Real estate notes (mortgages and deeds of trust)
5. Promissory notes
6. Private limited partnerships, limited liability companies, and C corporations
7. Tax lien certificates
8. Foreign currencies
9. Oil and gas investments
10. Publicly traded stocks, bonds, mutual funds
11. Private stock offerings, private placements
12. Judgments/structured settlements
13. Gold bullion
14. Car loans
15. Factoring investments
16. Accounts receivable
17. Equipment leasing
Even though only 4% of retirement accounts were thought to be managed
by non-Wall Street custodians before the recent stock market meltdown,
the money exodus out of Wall Street would take hundreds of billions of
dollars into SDIRA accounts.
Unlike Wall Street, the SDIRA custodians currently operate strictly as
“money holders” and do not provide investment advice. Therefore, there
are huge market opportunities for financial houses of all types to
provide investment products to these self directed retirement account
At the current per capita income of $48,000 for the US population,
seven million Muslims have a cumulative GDP of $336 billion. It is
safe to assume that each Muslim has an equivalent of 6 months to one
year’s worth of income saved up. That would be around $168 billion to
$336 billion. As the general population moves towards SDIRAs, Muslims
will move their money there as well.
If the total retirement account value of $8 trillion is proportionally
applied to the Muslim population, they have $61 billion in their
retirement accounts if Pew’s population estimate is used. They have
$183 billion if CAIR/Obama population estimate is used.
With the rapidly growing SDIRA capital from its current value of $320
billion (4% of $8 trillion), and several billion dollars in Muslim
retirement accounts, Shariah finance houses can provide investment
products to Muslim as well as non-Muslim retirement account holders to
satisfy their flight-to-safety needs after being burnt by Wall
Street’s never-ending maysir (speculation) and gharar (uncertainty.)
Shariah compliant contracts among Muslims and non-Muslims can be
created for real estate and other investment products; as allowed by
the ERISA. The state and federal securities laws, corporate
structuring and the US legal system provide individuals and
institutions with the ability to craft and enforce such contracts.
This will resolve the thorny issue of the availability of “willing and
stable” sources of funding which prevented organic Shariah compliant
financing products to take root in the US in the past.
Liaquat Ali is the founder of http://www.TrulyInterestFree.com