What happens when a business owner wants city financing but cannot pay interest for religious reasons? Minneapolis has an alternative. According to Alpha News, the city has offered Sharia-compliant financing since 2007 for businesses that avoid interest under Islamic law.
The program has reportedly provided $1.44 million to 48 businesses, with 8 loans currently active. The program is receiving renewed attention after journalist Natalie Winters has highlighted similar government efforts across the country.
Minneapolis’ alternative financing program works
Minneapolis created its Alternative Financing program to give businesses another option besides conventional loans. The Alternative Financing program changes the structure for businesses seeking Sharia-compliant financing. Islamic law prohibits charging or paying interest, known as riba. Instead, the program uses a 2 percent rate of return based on the city’s Two Percent Loan Program.
Under the regular program, a private lender provides half the financing, while the city provides the remaining amount, up to $75,000, at a 2 percent rate of return. The private lender determines its own return and loan terms, while Minneapolis receives a financial return rather than scheduled interest. Businesses can use the money for equipment or building improvements, and the loan term cannot exceed 10 years. The city also charges a 1 percent origination fee, with a minimum of $150.
Sharia-compliant financing expands beyond Minneapolis
Minneapolis says the program produces the same financial return for the city as its conventional loan program. Some alternative and regular loans have also defaulted. The alternative program is available to Muslims and non-Muslims. Minnesota also has guidance for Sharia-compliant home financing. The Minnesota Department of Revenue explains that these mortgages can use a cost-plus profit structure instead of traditional principal and interest payments. Its guidance explains how the state’s mortgage registry tax applies to these transactions…