Islamic Banking, a Market with U.S. Potential, Hampered by Politics (American Banker)

Friday, June 10, 2011

By Robert Barba

Islamic finance is growing, but politics, and perhaps prejudice, might be hamstringing this business in the United States.

In the past few years bills have been introduced in at least 20 states to forbid courts from invoking foreign laws in rulings. Proponents have touted the bills as a way to prevent Sharia, a code derived from Islamic law, from becoming the law of the land — a risk that many attorneys say is nonexistent. Arizona, Louisiana and Tennessee have passed "Sharia ban" laws, which critics call a way of scoring political points by exploiting anti-Muslim sentiment.

It is unclear whether those laws would directly affect the growth of Islamic finance, which follows the tenets of Sharia law, such as a ban on paying interest. But at the very least, the political climate for Muslims is certainly not fostering a welcoming environment for what experts call an emerging market.

"The U.S. is behind. There is a strong and rapidly growing Muslim population," said Steven Watts, a partner with KPMG's financial services consulting practice in Toronto. "The holdup seems to be largely political, but it is to the detriment of the U.S."...

The United States began to lag in Islamic finance after the 9/11 terrorist attacks, she said.

"Europe and other parts of the world decided to increase funding to study Islamic finance. Generally, the governments wanted to actively watch it and said they were going to be more involved and interested," Hunt-Ahmed said. "In the U.S., funding got cut and the sector became marginalized."...

Watts said there are more opportunities, namely "ethical" investments that avoid putting money in gambling or alcohol and could appeal to Muslims and non-Muslims alike.

However, Sharia-compliant mortgages (which are permissible under Islamic law because they are structured as lease-back or co-ownership arrangements) are a great entrance to the Islamic finance world, he said...

"Passing laws to ban Sharia when we have American soldiers in two Muslim countries and bases all across Europe where there are large minority Muslim populations is an ill-considered idea," Ranzini said. "The people that are hyped up about this issue are just very uninformed."...

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Islamic finance bodies have trillion-dollar potential but do you understand it?

April 6, 2010

* Analysis by: GLG Expert Contributor
* Analysis of: Islamic finance bodies have trillion-dollar potential - Moody's
* Published at: www.news.com.au

Summary

ISLAMIC financial bodies, which adhere to religious proscriptions against interest, have a market potential of at least US$5 trillion ($5.43 trillion), Moody's Investors Service said.

Its important to understand that Islamic Finance doesn't necessarily mean a new safe form of financing or investing.

Rather its an alternative source of funding respecting the religious beliefs and values of Islam.
Analysis

Islamic Shari’ah and its Objectives

Shari’ah principles underlying equity investments.
Prohibition of riba (interest). Investors may not deal in equity or monetary transactions involving riba. This includes interest leverage instruments and gearing. Nor may they invest in entities whose primary income is derived from interest (banks). Also prohibited are stocks guaranteeing fixed returns (preference shares).

Gharar (uncertainty accompanied by deceit), excessive speculation and maysir (gambling and leisure).

The business activities of the companies targeted for investment must fall within Shari’ah acceptable parameters.

The net assets of a company targeted for investment must not consist of highly liquid assets (cash; deposits and receivables).

Non-Shari’ah permissible income must not exceed certain specified thresholds.


What is Shari’ah?

Islamic laws are known in Arabic as "shari’ah”, this term includes laws of all aspects of life.

The two primary sources of Shari’ah are:

Al-Quran

Sunnah (prophet Muhammad’s way)

The other sources of shari’ah are:
Ijtihad – making decisions about existing financial issues
Ijma - consensus of the Muslim scholars on Islamic laws
Qiyas - analogical deduction
Uruf – approved custom (not contradicting with shari’ah)

The goals and objectives of shari’ah are important and are based around benefits to the individual and community. The primary rule is that everything in financial transactions is permissible unless there is a text of prohibition and so shari’ah laws function as a protection. This protection provides a real benefit, in terms of facilitating a higher uality form of humanity...

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Recession sparks interest in Islamic finance

By Mark Tutton
For CNN

LONDON, England (CNN) -- With irresponsible banking practices taking the blame for bringing about the global economic crisis, there has been a surge of interest in Islamic finance.

Islamic finance is estimated to be worth $700 billion and has been growing by 15 to 20 percent per year.

Now, a slew of academic courses are springing up to meet the demand of those wanting to break into an expanding market.

According to ratings agency Moody's, the global Islamic finance sector is worth $700 billion and has the potential to be worth $4 trillion.

What's more, the ethical principles underpinning Islamic finance are seen by some as offering a more sustainable alternative to profit-oriented conventional banking. The result is that academic institutions are lining up to offer formal training in the area.

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Islamic Finance Weathered the Global Economic Crisis Better Than Most

Islamic Finance and SRI: Two Investment Approaches That Have Weathered the Global Economic Crisis Better Than Most

Business Wire
July 20, 2009

Islamic Finance and Socially Responsible Investing (SRI) are receiving considerable attention in the financial press. Islamic Finance is a banking system and investment approach that adheres to the principles of Islamic law (sharia). Most notably this includes the sharing of profit and loss, prohibition against investing in certain types of businesses and charging a fee for lending money. In the last decade Islamic Finance has exceeded 10% annual growth. Latest figures from ISFL (International Financial Services London) estimate that the global market size was $729 billion at the end of 2007. All financial institutions have been hit by the current crisis since then, but numerous analysts agree that the outlook for Islamic Finance remains positive. Indeed, there is a growing trend amongst Western financial institutions, especially in France in the UK, to push harder to attract investment from Middle East and Muslim Asia.

SRI: Safe haven investments amidst global crisis

SRI is an investment management approach which integrates Environmental, Social and Governance (ESG) criteria in traditional financial analysis. Despite having less framework and detailed rules than Islamic Finance, SRI shares a focus on non-economic factors in its economic and social principles. According to the Social Investment Organization, SRI is seeing considerably lower shareholder redemption rates than conventional funds - strong evidence that suggests investors are committed to SRI for the long-term. Also, it is reported across the board that in the last few years SRI assets have been increasing at a higher rate than other professional managed assets. In France for example, SRI continues to grow despite the current economic turmoil with total assets amounting to 30 billion EUR at the end of 2008 (up 37% from 2007).

Bounce back potential

Economies around the world will bounce back from today's tough times, but confidence in conventional banking won't. This means that traditional banking's long term prospects have been damaged and many people and institutions will look for alternatives. Islamic finance and SRI have somewhat resisted the economic downturn, and may prove to be in the long run, a popular choice to those looking for more sustainable investment solutions.

Novethic's working paper explores crossover between SRI and Islamic Finance

Although SRI as it is applied in France today has grown into a strategy in its own right, it stems from a desire to transcribe the religious beliefs of both individual and institutional investors into financial practices, like Islamic finance. Novethic's SRI research centre examined the crossover between these two investment universes and assessed the following issues:

• How do these investment strategies play off each other?
• Can the religious precepts of Islamic finance compare with those that founded ethical finance in predominantly Protestant and/or Catholic countries?
• If so, could the extension of Islamic finance throughout the Muslim world suggest any potential for the subsequent development of SRI as we know it in France today?

Click here to read the free working paper in full now: http://www.novethic.com/novethic/v3_uk/upload/Islamic_Finance_and_SRI_Working_Paper.pdf

Islamic laws of finance a cushion in hard time

By Stephen Magagnini
smagagnini@sacbee.com

Sacramento Bee
Published: Monday, Mar. 30, 2009

The recession gripping the nation has taken less of a toll on American Muslims who follow age-old Islamic laws against paying – or charging – interest.

They've also been shielded by socially responsible retirement plans because Shariah– Islamic law – forbids investments in banks and mortgages as well as tobacco, alcohol, gambling, pornography or weapons.

"If everybody was Shariah-compliant, there would be no recession," said Farouk Fakira, a Yemeni immigrant who moderated a discussion on Islamic finance at Sacramento's Masjid Annur last week.

Fakira, 57, rents a home – like hundreds of other local Muslims – because "interest is pretty much forbidden. If you're making money off of money, the only person who benefits is you."

Shariah – 1,400 years of Islamic legal knowledge based on the words of the Prophet Muhammad – guides Muslims in daily life, said Imam Muhammed Abdul Azeez of Sacramento Area League of Associated Muslims, or SALAM.

Shariah prohibits usury, which often took advantage of a desperate person who needed to feed or protect his family, Azeez said. "There's an element of exploitation here."

The bottom line for many Muslims is, "if I don't have the money to buy something, that means I can't afford it," said Deya Dean Elghassein, who's Palestinian American.

His family helped him buy his home in Folsom with cash. "I do use credit cards, but they have to be paid off in full at the end of the month," he said. He wouldn't invest in Costco because it sells pork and alcohol, but he and others shop there "out of necessity."

About 20 percent of the Sacramento area's 50,000 American Muslims closely follow Islamic rules of finance – especially the prohibition against interest – said Irfan Haq, an economist who's president of the Council of Sacramento Valley Islamic Organizations , an umbrella organization representing 10 mosques.

"Muslims in general have been much less affected by the recession because they're very cautious and conservative in matters of finance and take a longer-term view of life," Haq said. "They want to invest their funds in a way that pleases God so they can sleep peacefully – they care about the afterlife."

Along with avoiding interest, another tenet of Islamic finance is not to invest in enterprises that violate Shariah: alcohol, gambling, banking and weapons. Azeez counsels his Muslim flock not to buy businesses that sell alcohol because "you cannot be in the business of spreading sin: Drunk driving kills."

Mohammed Memon, a Pakistani American project manager for Oracle in Rocklin, has a 401(k) through Amana Mutual Funds – a Shariah-compliant fund based in Bellingham, Wash.

"They're relatively better than other funds; I'm down 15 to 20 percent while many of my friends are down over 50 percent," said Memon, 38.

Amana's income and growth funds avoid bonds and interest-paying securities.

"We screen about 5,500 stocks a month for our 75,000 shareholders, and 2,200 to 2,400 pass," said portfolio manager Nick Kaiser. "The growth fund's biggest holding is Apple Computer. We buy technology, health care stocks and stocks with low debt. The income fund focuses on drug companies, energy stocks, mining."

Shariah also prohibits gharar – the Arabic word for uncertainty or risk – and maysir – gambling – which includes real estate speculation.

Metwalli Amer, founder of SALAM, said he knows Muslims who speculated in real estate and lost their shirts.

Amer, 75, said Islamic finance is about living within your means and helping the needy. "If Muslims had followed that, we'd be much better off," said Amer, an Egyptian immigrant.

But he said the majority of Muslims he knows "became greedy."

Islam doesn't prohibit wealth as long as you give back, he said. "The Quran promotes going into business and trading ventures that share the profits and loss."

Amer said one Sacramento Muslim who was able to become a millionaire while adhering to Islamic financial principles is Kais Menoufy.

Menoufy left Egypt in 1976 and landed in California in 1985 after becoming vice president of a computer science company in Europe and saving his money by sleeping on floors.

"When I started my own company in Sacramento nine years ago, I rented an apartment for $800 a month in the Arden area and again was sleeping on a mattress on the floor," said Menoufy, 62.

By plowing the profits back into his business, Menoufy said he built Delegata Technology Consulting & Systems Integration into a multimillion-dollar company with about 100 employees. "You spend as much as you can make," said Menoufy.

He recently bought a home along the Garden Highway for cash.

While Islamic scholars generally say interest-based financial transactions are prohibited, sometimes American Muslims have no choice, said Azeez of SALAM. "Every day I get a question about interest and student loans – I tell them getting your education is an absolute necessity."

If a student can't get an interest-free federal loan, "get yourself a loan with an interest rate as close to inflation as possible – they cancel each other out," Azeez said.

Some scholars say the financial relationship between consumers and banks is OK if there's no exploitation.

Akhtar Khan, who has a doctorate in economics, bought his home with a conventional mortgage out of necessity, he said, but hopes to pay it off as soon as possible.

Muslims are allowed to buy a home directly from the owner with owner financing, some scholars believe.

Mohammed Memon bought his home from the builder. "No banks are involved – there can't be a third-party contract."

Hamza El-Nakhal, a retired microbiologist from Egypt, said he came to the United States with $10 in his pocket 40 years ago.

He got a bank loan to buy property here. "Many scholars say that if it's necessary to buy your home and take out a loan to survive in a foreign country, it's OK," said El-Nakhal, who is on the board of the Islamic Center of Davis. "There were no Islamic lending institutions when I bought. Now there is."

The Shariah-compliant Lariba Bank of Southern California, founded in 1987, lends money without interest – instead, it goes into partnership with its clients and then charges rent on the property.

Here's how Lariba works: If you borrow $80,000 from Lariba on a $100,000 home, you send a monthly payment to Lariba that has two components. The first is a portion of the money you owe Lariba. The second component is a rental payment that declines each month as you build up equity.

The first month, you pay 80 percent of the monthly rent to Lariba. Every month, you pay off a portion of the loan without interest, and then pay a smaller percentage of the rent based on your share of the principal.

"The approach is one of investment as opposed to just lending money," said Lariba's president Mike Abdelaaty.

Rather than checking to see if a client has the ability to pay back a loan, he said, "we use the rental value of the property in measuring whether it's a good investment."

The monthly rent is fixed over the term of the loan, which is competitive with other banks, said Yahya Abdur Rahman, Lariba's founder. "We've never kicked anybody out of their homes. We give them a three-month grace period, and then we tell them, 'Maybe your home is too big for you and you need to move to an apartment.' " If the house is sold, 100 percent of the profit goes to the customer, he said.

Other religions, including Judaism and Catholicism, also had prohibitions against usury, said Rahman, whose more than 3,000 clients span all faiths.

Islamic Banks Withstand Mortgage Crisis

Islamic Banks Withstand Mortgage Crisis


MANAMA — Islamic banks have succeeded where all others have failed, withstanding the US subprime mortgage crisis which left global markets rattling.

"The Islamic bank has a fantastic year, the underlying trend of Islamic banking businesses within ABC is very good," a senior official of the Arab Banking Corporation told the Reuters Islamic Finance summit.

Duncan Smith, the head of the Corporation's Islamic operations, said a focus on regional business and efforts to ensure products complied with Shari`ah helped shield his unit from credit-market losses.

[My note: According to the Arab Banking Corporation, Mr. Duncan Smith who is quoted in the article left the bank some months ago]

The bank's 2007 earnings from conventional non-Islamic departments fell to $125 million from $202 million in 2006.

The ongoing American subprime mortgage crisis, which is making international headlines, was sparked off last year when a steep rise in the rate of foreclosures caused more than 100 lenders to fail or file for bankruptcy.

The crisis had a domino effect on the US economy and stock market, which in turn affected almost all stock markets worldwide as early as last month.

Global banks have written down more than $80 billion in credit market losses since October alone as defaults on subprime mortgages triggered a credit crisis that threatens to tip the US economy into recession.

None of Malaysia's Islamic banks have been hit by write-downs resulting from the crisis and the resulting global credit crunch, second finance minister Mohamed Nor Yakcop told the three-day summit in the Bahraini capital Manama.

He said holders of sukuk or Islamic bonds have been shielded from the worst effects of the subprime mortgage meltdown.

Instead of interest, Islamic banks operate on the principle of sharing risk and reward among all parties in a business venture.

"Sukuk has now become a very popular product," said Nor Mohammad. (Reuters)

Economists say the global credit crunch triggered by the subprime crisis has spurred greater interest in Shari`ah-compliant financing.

"There is a feeling that the way Islamic finance is structured — the lack of freedom in leveraging, the need for real assets — that there will be some who will find Islamic financing interesting," said the Malaysian official.

He said interest in financial instruments that comply with Islamic prohibitions against investing in sectors such as alcohol, pornography and gambling was starting to emerge in China and South Korea.

"Sukuk has now become a very popular product," Mohamed Nor stressed, adding that officials from Hong Kong had consulted with Malaysia on Islamic finance.

Rasheed al-Maraj, the governor of Bahrain's Central Bank, believes the mortgage crisis could encourage weary investors to throw their weight behind Islamic assets and stocks given the collapse of Western asset prices.

"Maybe Islamic banking will be a safe bet for them," he said.

"I think opportunities exist in the United States and Europe as a result of this financial distress."

Giant banks like America's Citigroup, Britain's HSBC and Germany's Deutsche Bank recently launched Shari`ah-compliant branches.

A Deutsche Bank executive told Reuters that it was helping US and Canadian firms to sell Islamic bonds in Malaysia this year worth between $300-500 million in ringgit.

Having about 76 percent of the world's Islamic bonds, Malaysia has been promoting itself as a hub for Islamic finance but faces rivalry from neighboring Singapore and Brunei.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

There are an estimated 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2010.

Watch Ayloush's interview on this topic on FOX Business News

Ayloush discusses Shariah compliant and Islamic finance on FOX

CAIR-LA Executive Director Hussam Ayloush discusses Islamic financing on FOX Business Network. His interview was intended to offer a balancing perspective to a guest on the program earlier this week who sought to demonize Islam and Muslims by demonizing Islamic law, or shariah.