The City That Offers Sharia-Compliant Loans to Muslim Business Owners

Somali entrepreneurs are transforming neglected neighborhoods with the help of a Minneapolis Islamic financing program.

A Somali immigrant-owned shop in the Karmel Square shopping mall in southwest Minneapolis.
National Journal
Alexia Fernández Campbell
June 30, 2014, 1 a.m.

In­side the Karmel Square shop­ping mall in south­w­est Min­neapol­is, wo­men wear­ing head­scarves paint cus­tom­ers’ feet with henna. Oth­ers sell beaded caf­tans in nar­row stalls. On the first floor, shop­keep­ers kneel to­ward Mecca to pray.

Somali en­tre­pren­eurs in the neigh­bor­hood have trans­formed an aban­doned ma­chinery ware­house in­to this bust­ling in­door bazaar. Karmel Square is one of sev­er­al com­mer­cial dis­tricts they’ve re­vived in re­cent years with sup­port from an un­ex­pec­ted ally: the city.

Since 2006, Min­neapol­is has loaned more than $1 mil­lion to Muslim busi­ness own­ers through a pro­gram that com­plies with sharia law, which pro­hib­its Muslims from pay­ing or earn­ing in­terest in a fin­an­cial trans­ac­tion. The pro­gram, which is op­er­ated in part­ner­ship with the Afric­an De­vel­op­ment Cen­ter, makes Min­neapol­is the only city in the coun­try to of­fer Is­lam­ic fin­an­cing at a time when states are try­ing to ban sharia from the courts. “Min­neapol­is is a very wel­com­ing city,” says Kristin Guild, the city’s busi­ness de­vel­op­ment man­ager. “Be­cause [Somali im­mig­rants] wear head­scarves, they are vis­ible as en­tre­pren­eurs and people see that they are set­ting up busi­nesses in our town and cre­at­ing jobs.”

Min­nesota is home to the coun­try’s largest Somali com­munity, which is pre­dom­in­antly Sunni Muslim. An es­tim­ated 32,000 people of Somali an­ces­try live in the state, and about one-third of them live in the Min­neapol­is-St. Paul metro area, ac­cord­ing to the latest census fig­ures.

In the past 10 years, North Afric­an im­mig­rants have opened teashops, phar­ma­cies, and child-care cen­ters in south­w­est Min­neapol­is store­fronts that were once boarded up. But many of these en­tre­pren­eurs struggled to grow their busi­nesses be­cause Is­lam­ic law for­bids Muslims from earn­ing or pay­ing in­terest, known as riba. So they couldn’t take out loans or par­ti­cip­ate in the city’s low-in­terest fin­an­cing pro­gram for small busi­nesses.

“We had to be cre­at­ive to meet the de­mand,” says Nas­ibu Sar­eva, ex­ec­ut­ive dir­ect­or of the non­profit Afric­an De­vel­op­ment Cen­ter, which brought the idea of cre­at­ing an Is­lam­ic fin­an­cing pro­gram to the city in early 2006. City lead­ers were un­aware of the sharia re­stric­tion, but agreed to the plan. Less than a year later, the city’s com­munity and eco­nom­ic de­vel­op­ment de­part­ment launched the sharia-com­pli­ant Al­tern­at­ive Fin­an­cing Pro­gram.

This is how it works: A barber who needs new chairs for his shop goes to the Afric­an De­vel­op­ment Cen­ter or an­oth­er non­profit lender that has partnered with the city. The lend­ing part­ner buys the chairs, split­ting the cost with the city, and then re­sells the chairs to the barber at a 2 per­cent profit. The barber pays it off in monthly in­stall­ments. This is called a Mura­baha sale.

The first per­son to par­ti­cip­ate in the city’s pro­gram was Shukri Gedi, a 50-year-old wo­man from the Somali cap­it­al of Mogadishu. Gedi had opened Glob­al Cloth­ing and Ac­cessor­ies in the Karmel Mall in 2004 with money from her re­l­at­ives. She sold head­scarves, caf­tans, and long black robes from her stall in the bazaar.

But when she needed money to im­port more products, Gedi re­fused to take out a tra­di­tion­al loan. “We feel it’s haram [for­bid­den], and that brings a lot of stress,” says Gedi, who learned about the riba-free fin­an­cing through the Afric­an De­vel­op­ment Cen­ter.

Gedi says the ini­tial $20,000 loan and a sub­sequent $25,000 loan helped her keep her store open dur­ing the re­ces­sion. In­come from the busi­ness has helped put two sons through col­lege, she says. “It feels good to be able to sup­port them with school,” says Gedi, who has about $1,000 left to pay off on her loans.

Since launch­ing the pro­gram, Min­neapol­is has made 64 loans worth a total of $1.2 mil­lion. It has also partnered with sev­er­al oth­er non­profits in the area. Last year, one wo­man used $40,000 to ren­ov­ate the build­ing for a new child care cen­ter. An­oth­er wo­man who makes gour­met hot sauces got $40,000 for mar­ket­ing ma­ter­i­als and new equip­ment.

Is­lam­ic fin­an­cing is a re­l­at­ively new concept in the United States. Only a hand­ful of banks and fin­an­cial com­pan­ies provide mort­gages and loans that abide by sharia law. The Neigh­bor­hood De­vel­op­ment Cen­ter in St. Paul cre­ated the first non­profit mod­el of riba-free fin­an­cing in 2001 after Somali en­tre­pren­eurs voiced their con­cerns. It was im­me­di­ately lam­basted on right-wing ra­dio. “They ut­terly missed the point, but I was a little bit nervous,” says Mi­hailo Tem­ali, the cen­ter’s CEO. “We were the first in the na­tion.”

More re­cently, me­dia cov­er­age of a Min­nesota homeown­er­ship pro­gram that provided Is­lam­ic fin­an­cing op­tions promp­ted then-Gov. Tim Pawlenty to shut it down.

Min­neapol­is busi­ness de­vel­op­ment staffers point out that their pro­gram is open to any­one, even non-Muslims. Im­mig­rants from Mo­rocco, Ethiopia, and oth­er North Afric­an coun­tries have brought com­merce back to long-neg­lected neigh­bor­hoods, like Lake Street in Lyndale. Once a com­mer­cial cor­ridor in the early 1900s, shops on Lake Street began clos­ing as con­sumers moved to the sub­urbs.

With the help of the city’s pro­gram, more than 20 busi­nesses are open again on Lake Street. “I think this will spread,” says Tem­ali. “One of the most out­stand­ing fea­tures of the United States is its long his­tory of in­cor­por­at­ing im­mig­rants in­to the eco­nomy in­stead of ex­clud­ing them.”

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