Islamic laws of finance a cushion in hard time

By Stephen Magagnini
smagagnini@sacbee.com

Sacramento Bee
Published: Monday, Mar. 30, 2009

The recession gripping the nation has taken less of a toll on American Muslims who follow age-old Islamic laws against paying – or charging – interest.

They've also been shielded by socially responsible retirement plans because Shariah– Islamic law – forbids investments in banks and mortgages as well as tobacco, alcohol, gambling, pornography or weapons.

"If everybody was Shariah-compliant, there would be no recession," said Farouk Fakira, a Yemeni immigrant who moderated a discussion on Islamic finance at Sacramento's Masjid Annur last week.

Fakira, 57, rents a home – like hundreds of other local Muslims – because "interest is pretty much forbidden. If you're making money off of money, the only person who benefits is you."

Shariah – 1,400 years of Islamic legal knowledge based on the words of the Prophet Muhammad – guides Muslims in daily life, said Imam Muhammed Abdul Azeez of Sacramento Area League of Associated Muslims, or SALAM.

Shariah prohibits usury, which often took advantage of a desperate person who needed to feed or protect his family, Azeez said. "There's an element of exploitation here."

The bottom line for many Muslims is, "if I don't have the money to buy something, that means I can't afford it," said Deya Dean Elghassein, who's Palestinian American.

His family helped him buy his home in Folsom with cash. "I do use credit cards, but they have to be paid off in full at the end of the month," he said. He wouldn't invest in Costco because it sells pork and alcohol, but he and others shop there "out of necessity."

About 20 percent of the Sacramento area's 50,000 American Muslims closely follow Islamic rules of finance – especially the prohibition against interest – said Irfan Haq, an economist who's president of the Council of Sacramento Valley Islamic Organizations , an umbrella organization representing 10 mosques.

"Muslims in general have been much less affected by the recession because they're very cautious and conservative in matters of finance and take a longer-term view of life," Haq said. "They want to invest their funds in a way that pleases God so they can sleep peacefully – they care about the afterlife."

Along with avoiding interest, another tenet of Islamic finance is not to invest in enterprises that violate Shariah: alcohol, gambling, banking and weapons. Azeez counsels his Muslim flock not to buy businesses that sell alcohol because "you cannot be in the business of spreading sin: Drunk driving kills."

Mohammed Memon, a Pakistani American project manager for Oracle in Rocklin, has a 401(k) through Amana Mutual Funds – a Shariah-compliant fund based in Bellingham, Wash.

"They're relatively better than other funds; I'm down 15 to 20 percent while many of my friends are down over 50 percent," said Memon, 38.

Amana's income and growth funds avoid bonds and interest-paying securities.

"We screen about 5,500 stocks a month for our 75,000 shareholders, and 2,200 to 2,400 pass," said portfolio manager Nick Kaiser. "The growth fund's biggest holding is Apple Computer. We buy technology, health care stocks and stocks with low debt. The income fund focuses on drug companies, energy stocks, mining."

Shariah also prohibits gharar – the Arabic word for uncertainty or risk – and maysir – gambling – which includes real estate speculation.

Metwalli Amer, founder of SALAM, said he knows Muslims who speculated in real estate and lost their shirts.

Amer, 75, said Islamic finance is about living within your means and helping the needy. "If Muslims had followed that, we'd be much better off," said Amer, an Egyptian immigrant.

But he said the majority of Muslims he knows "became greedy."

Islam doesn't prohibit wealth as long as you give back, he said. "The Quran promotes going into business and trading ventures that share the profits and loss."

Amer said one Sacramento Muslim who was able to become a millionaire while adhering to Islamic financial principles is Kais Menoufy.

Menoufy left Egypt in 1976 and landed in California in 1985 after becoming vice president of a computer science company in Europe and saving his money by sleeping on floors.

"When I started my own company in Sacramento nine years ago, I rented an apartment for $800 a month in the Arden area and again was sleeping on a mattress on the floor," said Menoufy, 62.

By plowing the profits back into his business, Menoufy said he built Delegata Technology Consulting & Systems Integration into a multimillion-dollar company with about 100 employees. "You spend as much as you can make," said Menoufy.

He recently bought a home along the Garden Highway for cash.

While Islamic scholars generally say interest-based financial transactions are prohibited, sometimes American Muslims have no choice, said Azeez of SALAM. "Every day I get a question about interest and student loans – I tell them getting your education is an absolute necessity."

If a student can't get an interest-free federal loan, "get yourself a loan with an interest rate as close to inflation as possible – they cancel each other out," Azeez said.

Some scholars say the financial relationship between consumers and banks is OK if there's no exploitation.

Akhtar Khan, who has a doctorate in economics, bought his home with a conventional mortgage out of necessity, he said, but hopes to pay it off as soon as possible.

Muslims are allowed to buy a home directly from the owner with owner financing, some scholars believe.

Mohammed Memon bought his home from the builder. "No banks are involved – there can't be a third-party contract."

Hamza El-Nakhal, a retired microbiologist from Egypt, said he came to the United States with $10 in his pocket 40 years ago.

He got a bank loan to buy property here. "Many scholars say that if it's necessary to buy your home and take out a loan to survive in a foreign country, it's OK," said El-Nakhal, who is on the board of the Islamic Center of Davis. "There were no Islamic lending institutions when I bought. Now there is."

The Shariah-compliant Lariba Bank of Southern California, founded in 1987, lends money without interest – instead, it goes into partnership with its clients and then charges rent on the property.

Here's how Lariba works: If you borrow $80,000 from Lariba on a $100,000 home, you send a monthly payment to Lariba that has two components. The first is a portion of the money you owe Lariba. The second component is a rental payment that declines each month as you build up equity.

The first month, you pay 80 percent of the monthly rent to Lariba. Every month, you pay off a portion of the loan without interest, and then pay a smaller percentage of the rent based on your share of the principal.

"The approach is one of investment as opposed to just lending money," said Lariba's president Mike Abdelaaty.

Rather than checking to see if a client has the ability to pay back a loan, he said, "we use the rental value of the property in measuring whether it's a good investment."

The monthly rent is fixed over the term of the loan, which is competitive with other banks, said Yahya Abdur Rahman, Lariba's founder. "We've never kicked anybody out of their homes. We give them a three-month grace period, and then we tell them, 'Maybe your home is too big for you and you need to move to an apartment.' " If the house is sold, 100 percent of the profit goes to the customer, he said.

Other religions, including Judaism and Catholicism, also had prohibitions against usury, said Rahman, whose more than 3,000 clients span all faiths.