A Vermont credit union is developing the state’s first Islamic law loan program to help more Muslim households buy homes.
Islamic law or Sharia law prohibits the collection and payment of interest by lenders and investors, which means that many existing loans, including mortgages, are not up to par. In general, relationships that favor the lender are prohibited or considered haram.
Financing models that conform to Islamic law include agreements in which a bank buys real estate for a customer and leases it back, or in which the bank and customer jointly acquire real estate and share in the profits and losses.
Timothy Carpenter, senior lending manager at Opportunities Credit Union, which is developing the framework, said the organization hasn’t worked out all the details but is trying to develop a model where it and its clients share ownership of a house.
The credit union has offices in Burlington and Winooski.
Several organizations across the country offer Islamic funding, but currently none in Vermont. One such institution is Devon Bank in Chicago, which, according to its website, offers Islamic-compliant financing in around 35 states.
Carpenter said one reason this type of funding is not yet available in Vermont is because the state does not have a large Muslim population and demand is greater in other states. He also said the products the credit union thinks likely will require special approval from Vermont officials and would be unavailable at least until the end of the year.
The loan manager worked with Imam Islam Hassan of the South Burlington-based Islamic Society of Vermont on developing the new model.
Hassan said he knows five families who want to buy houses but are reluctant to do so through funding that does not conform to Islamic law. And there are more Muslim Vermonters currently renting, he said, but would use such a model.
“If we had that,” said Hassan, “a lot of people would benefit.”
The imam said that it may be permissible to take out a loan in certain situations, but in general, most Muslims would not be comfortable with managing the interest.
Islamic finance is based on the belief that money should have no value in itself. Rather, money should just be a way of exchanging products and services.
“The underlying concept is that the commodity will not be money,” said Hassan. “It will be the house.”
Another organization that sees a need for funding under Islamic law in Vermont is the Champlain Housing Trust, based in Burlington, said Julie Curtin, the organization’s homeowner director.
The trust’s shared equity program enables people to buy a home with no down payment and with a reduced mortgage. But that second piece, Curtin said, had deterred several households from participating in the program because of their beliefs.
“If they find out they need a mortgage – the regular, traditional, interest-bearing mortgage – they end up stuck,” she said.
Curtin said the trust was also asked to buy one of the new condos it is currently building in Winooski without an interest-bearing loan.
Looking ahead, “we expect even more interest,” she said.
Do you want to stay up to date with the latest business news? Sign up here to receive a weekly email with all VTDigger reports on local businesses and economic trends. Take a look at our new business area here.