OC Builder Opts for Interest-Free, Equity-Based Islamic Loans
Hazem Abdellatif could easily obtain financing at any major financial institution. His Laguna Niguel-based homebuilding and contracting firm Abdellatif Enterprises Inc. has a well-established credit record and the underlying real estate to serve as collateral for any loan.
But for the past seven years, Abdellatif has taken his business to American Finance House, a Pasadena-based lending firm that subscribes to Islamic financing practices.
“I feel that if I can do my part to help an Islamic entity, then I should,” says the 32-year-old Abdellatif, who so far has financed more than $1 million worth of development activities through American Finance House.
The loans,because Islamic law forbids the imposition or collection of interest,are structured in a way that gives American Finance House an ownership stake in the project Abdellatif is undertaking. At the end, when the house is sold, American Finance House collects the full amount of its loan plus a portion of the profits, which average about 12%.
Currently headed by Mike Abdelaaty, American Finance House was founded in 1987 and today has offices in San Jose and Dallas. The company is accredited to do business in California, Arizona, Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, Texas and Virginia.
Additionally, American Finance House has affiliated branches in Turkey, Kazakhstan, Saudi Arabia and Egypt.
In the U.S., roughly 20% of American Finance House’s customers are Arab-Americans such as Abdellatif. The rest is comprised of mostly Muslims of Southeast Asian roots.
Eventually, American Finance House plans to offer a wide range of products and services. For now, however, the company is limited to its lending activities,mostly home, auto and business equipment financing.
“Ideally we would like to have a diversified financial services company that could provide everything that a Muslim would need from money management to insurance to some checking account services,” says the 41-year-old Abdelaaty, who was recently named president of the company after a career with mainstream companies such as Bank of America and Sanwa Bank. “This is our dream or goal, but it’s not something we can provide right now.”
Among the hurdles are the many regulatory approvals needed from governmental institutions, which have strict requirements for new banks and strictly monitor their activities.
Today, American Finance House is a $5 million in assets institution, a small operation but one that has grown substantially from its humble beginnings with $200,000 raised from a few investors.
Given its size, resources and personalized brand of lending requirements, American Finance House takes a low-key marketing approach, preferring to make its services known primarily by word of mouth and by visiting mosques.
“We have a lot of interest already in our products without having to do much external marketing,” Abdelaaty says.
In addition to the basic credit-worthiness of an individual, the company will often go to great pains to determine if a potential customer possesses the qualities it looks for, namely a religious outlook and business practices to match.
While the bulk of its customers are overwhelmingly Muslim, the company has extended loans to non-Muslims who meet and agree to abide by its requirements.
“Anyone who accepts our criteria and financing model, we are required to lend to them,” Abdelmaaty said. “But it’s a minority.
“Most of the people coming to us are coming for the Islamic nature of it,” he adds. “We are not a typical finance company.”
While the firm’s lending activities are heavily reliant on home purchases (60%), it is trying to diversify its holdings into a more balanced approach with car and business equipment financing.
But the constraining factor remains its small size. Availability of funds, Abdelaaty admits, is an ongoing issue, although the firm has yet to turn away anyone seeking a loan because of this.
“We’re not a depository institution,” he said. “We can’t accept deposits. The way we get funds is people,on an unsolicited basis,approach us and say ‘I want to invest my money in your activities.'”
Given federal restrictions and requirements, even those potential investors may find their ability to actually invest limited. Abdelaaty says the firm seeks “sophisticated investors” who must meet federal requirements of $200,000 in annual income and a net worth of $2 million.
Returns for investors have ranged from 4.5% to 10% annually over the company’s history, somewhat lower than what has been available for the past few years in other investment vehicles such as the stock market.
But with lower returns there comes a lower risk, Abdelaaty says. Since the company first opened its doors, only two customers have defaulted on their loans, which together totaled less than $100,000.
“Everybody here and there gets delinquent on their loans,” Abdelaaty said. “We talk to them and reschedule (payment terms of) the loan if we have to. We have an actually enviable rate of default, primarily attributable to the rule we follow of knowing our borrowers.”
American Finance House has “prudent and conservative” down payment requirements for potential borrowers. On a house, the company will typically require a down payment of between 20% and 40%. (Some federal programs, which would not meet a Muslim’s desire to subscribe to Islamic requirements, will accept as little as a 3% down payment on the purchase of a home.)
The company’s future plans envision a rapid expansion of its services and geographic reach. To raise funds, the company considered going public, but that plan has been temporarily shelved over concerns about how receptive Wall Street would be to an initial public offering at this time.
“We’re looking at institutional investors, people who would like to invest with us,” Abdelaaty said. “We prefer it to be a local organization, but if there’s an offshore Islamic source, we would consider that.”
To further expand its market presence, American Finance House is formulating a plan under which it hopes to approach mainstream financial institutions such as Bank of America. The goal, Abdelaaty said, is to form some sort of joint venture where organizations such as Bank of America would offer an “Islamic window,” with American Finance house offering its knowledge, expertise and contacts in the community.
Still in the conceptual stage, American Finance House officials have not approached the management of Bank of America or other mainstream institutions. n
