Interest Free Loans

[Masood Amin]

Hello BP,

I am a muslim trying to get started with my investment career. However, as part of my religion it is forbidden to pay or recieve interest. However there is an alternative way which is charging the profit on top of the purchase price. Let me give you an example.

Normal/regular loan: 

House Price: $600k

Interest: 5%

30 year fixed

Total price after 30 years: $1,295,029.13

$1,295,029.13 - 600k = 695,029

Bank makes: $695,029 in profit

Islamic Loan:

House Price: $600k

30 years 

Profit margin for bank: $695,029 (Add this to house price)

Total loan amount over 30 years: $1,295,029.13

0% APR

As you can see the bank will still make the same amount of money. So its pretty much the same thing but we cancel interest out. Do you think banks can structure a deal like this?

[Chris Seveney]

Quote from @Masood Amin:

Hello BP,

I am a muslim trying to get started with my investment career. However, as part of my religion it is forbidden to pay or recieve interest. However there is an alternative way which is charging the profit on top of the purchase price. Let me give you an example.

Normal/regular loan: 

House Price: $600k

Interest: 5%

30 year fixed

Total price after 30 years: $1,295,029.13

$1,295,029.13 - 600k = 695,029

Bank makes: $695,029 in profit

Islamic Loan:

House Price: $600k

30 years 

Profit margin for bank: $695,029 (Add this to house price)

Total loan amount over 30 years: $1,295,029.13

0% APR

As you can see the bank will still make the same amount of money. So its pretty much the same thing but we cancel interest out. Do you think banks can structure a deal like this?

 there are specific banks out there that do this from what I have heard from some of my friends who are in similar position, unfortunately that is all I know - a quick google search can probably answer this question.

[Myeasha Jones]

I think if you ask for a reasonable accommodation with the bank this is possible. 

[Steve Vaughan]

Quote from @Masood Amin:

Hello BP,

I am a muslim trying to get started with my investment career. However, as part of my religion it is forbidden to pay or recieve interest.al like this?

A reasonable person should write you a $1.2M mortgage only giving you $600k, but the value of the collateral isn't high enough.  If the borrower defaults and walks away, the lender is out and gave a loan for $0 compensation. 

I have done what you describe,  but on a smaller scale.  Since interest is simply the rent rate of money,  I lent someone $141,000 and wrote them a $150k mortgage, payable in 1 yr.  No interest, no payments.  After 1 year, the rent rate became $750/mo on the $150k. 

If it looks like a duck.   So if you are able to pay rent or a gain on borrowed money, but not interest, call it rent.   

[Carlos Ptriawan]

Quote from @Masood Amin:

Hello BP,

I am a muslim trying to get started with my investment career. However, as part of my religion it is forbidden to pay or recieve interest. However there is an alternative way which is charging the profit on top of the purchase price. Let me give you an example.

Normal/regular loan: 

House Price: $600k

Interest: 5%

30 year fixed

Total price after 30 years: $1,295,029.13

$1,295,029.13 - 600k = 695,029

Bank makes: $695,029 in profit

Islamic Loan:

House Price: $600k

30 years 

Profit margin for bank: $695,029 (Add this to house price)

Total loan amount over 30 years: $1,295,029.13

0% APR

As you can see the bank will still make the same amount of money. So its pretty much the same thing but we cancel interest out. Do you think banks can structure a deal like this?

 There's no bank that would do like this but there're LOT of religious private institution that's offering the same, only by different method (shared equity,limited appreciation,etc,etc).

But just FYI, in my own view, the current fixed rate mortgage of 30 year I felt it's more "kosher" than those private company that's offering, is simply because on the private offering, the house is owned by them and not by you.

 Also since interest rate is low in US and home is appreciating a lot, you have the advantage, if you purchase with the private institution, then they would gain all the benefit of appreciation since it's more like shared-equity model.

[Zane Cress]

You will have a very hard time in todays economic environment getting a bank to lend like that on an asset that doesn't appraise anywhere close to the loan value on their books. This is a creative financing issue to me, I'm sure there are places/people that do this since there are a lot of Muslims in the world and I assume a lot of them borrow money from somewhere. 

[Joe Stout]

Good afternoon, it really seems the knowledge regarding halal investing in the investment community is scarce. I have some Muslim friends that are looking for answers to this too. I have found SukFin (sukfin.com) claims to be a sharia compliant loan provider. They apparently share profit and loss with the customer and ban all collection of interest. one of their products is called Musharaka which is a joint venture, where a bank and a customer both contribute funds — for either an investment or purchasing an asset. The profits (and the risks) are shared proportionally. It looks like this is more for actually developing houses on land you bought or major rehabs where they fund 100% of the money needed. It looks like you'd have to split a good bit of the profits with them (they're mentioning 60/40 and 50/50 splits. I'll keep searching but that's what I have for now-