Bridging the gap between faith and finance presents an ethical debate for some religious groups, but with the help of Fannie Mae, American Muslims devout to their religion are able to purchase homes in the United States without sacrificing Islamic beliefs.

Among the strictest Muslim values, Islamic law forbids the payment or collection of interest – a major aspect of seeking a typical home mortgage.

However, as part of its “American Dream Commitment” program, national lender Fannie Mae has committed to invest $10 million in home financings originated by American Finance House LARIBA – which is available in 29 states, including Massachusetts – to allow more American Muslim families to purchase a home in this country while abiding by the Islamic religious prohibition against paying or receiving interest.

Fannie Mae’s pledge, which began in March 2000, attempts to help shrink the nation’s “homeownership gaps” through a 10-year, $2 trillion “American Dream Commitment” program to increase homeownership rates and serve 18 million targeted American families, according to Fannie Mae Chairman Franklin D. Raines.

Islamic finance institution American Finance House LARIBA, based in California, entered into a partnership with Fannie Mae in December 2002.

LARIBA, which means “no interest” in Arabic, enables Muslims to purchase a home while still observing Islamic law.

Dr. Yahia Abdul-Rahman, founder of American Finance House LARIBA, said LARIBA is based on the concept that all money should be used toward good investments, and not for the purpose of pleasure spending.

“People are more concerned about the renting of money and less concerned about what they are using the money for. Investments are different,” said Abdul-Rahman. “[American Finance House LARIBA] is not a bank that is in the business of renting out money. We want to know what [clients] are going to do with the money and then we will invest together. We are the only company in America that might reject you [even though] you might have the best credit rating – we would reject you if the investment that you are bringing to us does not make economic sense.”

Abdul-Rahman said people should not consider money the most important thing in life.

“Money is nothing but a measuring device,” he said. “If you are prudent and look at money as a tool, then you [should also] look at the investment. And then, if it makes sense, you invest.”

A contrast to the conventional way of banking and homebuying, LARIBA provides the homebuyer with a “lease-to-purchase” type of contract, which prevents the borrower from having to pay interest on the home mortgage.

The LARIBA model is based on the actual market rent of a similar property in the neighborhood where the prospective buyer is looking to own a home.

LARIBA and the prospective homeowner establish a negotiated maximum monthly payment price based on the property’s sale price and fair rental value that is indicative of the current market.

Using that agreed-upon payment, LARIBA calculates the “implied interest rate” that represents the rate of return on the transaction. The transactions are serviced like conventional Fannie Mae mortgages.

“This is an ‘opportunity for all’ strategy which is designed to increase homeownership rates and serve groups that have not been traditionally well served by the mortgage industry,” said Lesia Bullock, spokeswoman for Fannie Mae’s New England region.

“LARIBA enters into contract with the homebuyer and then Fannie Mae purchases the loan,” she added. “This model is like a lease-to-purchase agreement that is entered into by the institution and the homebuyer.”

‘Role of Necessity’

Bullock said such an agreement is no different than a conventional mortgage agreement that Fannie Mae would purchase and explained that the “payments are structured in such a way that it [works like] rent, but it’s a joint purchase [on a home].”

However, some Muslim scholars in Massachusetts say it is perfectly acceptable for American Muslims to purchase a typical home mortgage without denouncing their faith, because that is the only option available in the state.

Imam Talal Eid, religious director of Islamic Center of New England, said he purchased a typical home mortgage because he had no other alternative.

“In Islam, there is something called a role of necessity – if you have two evils, you choose the lesser one. I’m sure no one wants to pay interest, but sometimes you do not have a choice,” said Eid. “[LARIBA] needs a larger down payment and money up front.

“Many Muslims today will not accept that and are forced to seek [mortgages] with interest payments.”

Eid said the idea of the rent-to-own mortgage contract based on religious beliefs is a good one, but Bay State banks choose to ignore the idea because it is unfamiliar and banks would not generate enough revenue without adding on interest.

“The information is available to banks and mortgage companies if they want to know about it,” said Eid.

With clients around the nation, LARIBA is making its way to American Muslim homebuyers in Massachusetts, unbeknownst to banks in the area that have never even heard of the program.

“If there is a perceived need [for this type of financing], we would certainly be interested to learn more about the problem and meet with the people in need,” said Steve Antonakes, senior deputy commissioner of the Massachusetts Division of Banks. “We are not sure that these mortgages are necessarily prohibited in Massachusetts, but it’s nothing we have looked at or seen before.”

With the news that FleetBoston Financial recently closed at least 15 accounts of individuals or institutions with Arabic names, the Muslim American Society and other Muslim organizations in Massachusetts have been outspoken about the perceived discriminatory practices of banks and have looked to Islamic-based companies for business.

“Companies like LARIBA are allowing Muslims to show that ethics and religious values are not [conflicting] with economic life and prosperity,” said a spokesman at the Muslim American Society in Virginia.

Banks in Boston contacted by Banker & Tradesman – including Citizens Bank, Eastern Bank, FleetBoston Financial and Sovereign Bank New England – were unaware of the LARIBA product offering, but were not concerned about losing business to the California-based company.

“Citizens Bank works hard to understand and meet the needs of its very diverse customer base,” said Melodie Jackson, senior vice president and director of public relations at Citizens Bank of Massachusetts. “With 42 languages and many different cultures represented across our corporation, our employees are committed to working with customers to address their individual financial needs.”

According to Bullock, LARIBA is not the only lender offering non-interest-bearing services for purchase mortgages or other products.

“Each year, in marking the anniversary [of the American Dream Commitment program], we announce our progress thus far and discuss the lenders that we work with and other community partners,” said Bullock. “Because Fannie Mae is committed to increasing homeownership, we were approached by various lenders who have an interest in serving this [Muslim] community.”

Melanie Nayer may be reached at mnayer@thewarrengroup.com.