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Scott Jagow: Mortgages aren’t the only interest-bearing loans. We wondered what happens with something like a student loan.
Tess Vigeland: Yes and we thought that topic was perfectly suited for another Marketplace Money reporter. Regular listeners to our series “Educating Rico” may remember this:
[recorded voice:] The amount required to pay your student loans in full is $52,611.85.
Rico Gagliano: Uh… what?!
Jagow: Yes, Rico Gagliano has struggled with his student loans since we first aired that tape back in 2004, but he discovered that’s nothing compared to dealing with student loans under Sharia law.
Rico Gagliano: I didn’t think this’d be a difficult assignment, ’cause hey, if U.S. airlines offer Sharia-compliant meals for flyers, I figured my big U.S. loan provider would offer Sharia-compliant loans, right? I’d just call and have them explain one to me.
Customer Service: How can I help you tonight?
Gagliano: Yeah, do you have any student loan instrument that is Sharia law compliant, that is compliant with Islamic law?
Customer Service: …
I took that as a “no.”
And if you think that’s unusual, think again. On the line with me is listener Ahsan Ahmad. He’s an engineer who follows Sharia.
Gagliano: And Ahsan, you did not have an easy time looking for a Sharia-compliant grad school loan?
Ahsan Ahmad: Uh, yes — I tried to do that and I was just unsuccessful. I sent out a bunch of emails. There were very few of them that I found that were actually in the United States.
Gagliano: So how’d you pay for grad school?
Ahsan: They gave me a scholarship, so I was able to do it with only federal financial aid loans instead of the interest-bearing ones.
Gagliano: Something like a Stafford loan?
Ahsan: The equivalent of a Stafford loan for grad students.
Gagliano: And that’s interest-free?
Ahsan: It does have interest, it’s just that the government pays the interest for you on it until six months after you graduate. I paid it off before that six-month window expired.
Gagliano: All right, now that’s impressive and clever of you if I may say, but honestly, you were still technically entering into a contract where interest was involved, right?
Ahsan: I actually thought I was doing something wrong in terms of Sharia by doing that. I just figured it was just the least of several bad alternatives.
Gagliano: What were your other alternatives?
Ahsan: Taking out an interest-bearing loan or not going to grad school at all.
So, not much of a choice. But why? What is it about student loans — as opposed to say car loans — that’s so difficult to fit into Sharia?
Economist Kabir Hassan is editor of “The Handbook on Islamic Banking.”
Kabir Hassan: Any financial transaction, in order to be halal, or Sharia compliant, it has to involve a buying and selling of something tangible. A bank cannot lend you money directly, but the bank can buy things for you and arrange a financing so you can pay it back later.
But education is intangible. What would the lender buy and then sell back to you? An appreciation of Faulkner? How do you calculate the value of that? This would seem to be one place where Sharia and personal finance just don’t mix.
But there’s at least one place in the Western World where they do: England.
[clip from advertisement:] Now there is something worth considering: Islamic Bank of Britain. We make your money work hard and our products and services are fully halal, so they’re consistent with your faith!
Several UK banks provide some Sharia-compliant services, but IBB — Islamic Bank of Britain — was the country’s first Sharia-only bank.
Baron Junaid Abbas Bhatti is an Islamic finance expert who helped set up the bank’s operations. He says non-UK residents can get standard accounts, but Brits can sign up for something special:
Junaid Abbas Bhatti: We have an equivalent of personal loans called “personal financing.”
Gagliano: How does that work?
Bhatti: Um, it’s very simple.
Actually, this is banking, so it’s not simple, but it is fascinating and it starts with metal. IBB constantly buys metal commodities. Now, say you need to pay for tuition at Oxford worth, oh, 10,000 pounds sterling.
Bhatti: We’d sell you 10,000 pounds worth of, say, copper, which we bought at wholesale price and we’d sell it to you for 12,000 pounds, so we’d add a retail markup to it.
That markup is what the bank gets instead of interest. Now you sell the copper for its cash value — 10 grand you can use to pay for school — and you owe the bank that 12 grand, which you pay off over time. In other words, the bank isn’t buying and selling you intangible education; it’s buying and selling metal.
IBB has a team of Sharia scholars who sign off on the bank’s products. Still, not everyone agrees this sort of transaction is, if I may mix my religious terminology, kosher. Economist Kabir Hassan:
Hassan: In form, it is compliant, but not in spirit. Islamic finance, the essence is not geared towards debt. It is more geared towards equity, partnership.
So the future, we could see Sharia student loans that work like venture capital. The lender would get a cut of the student’s future earnings. If the student does well, the bank does well. Equitable risk.
Hassan: And that is being discussed and analyzed, and hopefully that product will come out pretty soon.
Meanwhile, listener Ahsan Ahmad says he’s glad Sharia forced him to avoid a student loan debt.
Of course, not every Sharia-observant student can pay off their loans within six months of graduating. For now, in America anyway, they’ll just have to have a little faith.
In Los Angeles, I’m Rico Gagliano for Marketplace Money.
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