U.S. Islamic finance market underserved
Ask about Islamic finance in the United States and the answer, even from a government regulator, is often another question: “Do you mean terror financing?”
Far from it.
Indeed, for what was once a main destination for devout Muslims around the world looking to invest using Islamic law as a guideline, the United States appears to have lost out to Europe, especially the United Kingdom, and Asia.
Many foreigners from the Middle East have been reluctant to bring their investments to U.S. financial markets after the Sept 11, 2001 attacks, as they fear their money might be miscontrued as linked to the activities of Islamic radicals.
That concern was compounded by the national security fears raised by U.S. politicians in 2006 after the United Arab Emirates’ company, Dubai Ports World, bought major U.S. port facilities, and were forced to sell them to an American firm to quell the uproar.
“The common perception is that the U.S. is anti-Islamic finance, anti-Muslim, anti-Arab,” said Isam Salah, head of the Islamic finance practice at the New York law firm King & Spalding.
“People in our shop sit around and think that is wrong. The Federal Reserve has had study groups (on Islamic finance) looking at it and is open to receiving applications. But they don’t have their marketing hats on as much as the UK does,” Salah said.
In 1997 and again in 1999, the Office of the Comptroller of the Currency, one of the regulators of U.S. banks, issued rulings giving permission for financial institutions to sell certain Islamic financial products.
Under sharia law, devout Muslims will not purchase assets that pay interest or earn profits from industries related to alcohol, gambling, or pork processing, among others.
Freddie Mac , the second-largest U.S. provider of home-loan financing, has for years bought Islamic home financing products to help borrowers who do not want to pay interest. Instead they pay a fee to the lender for sharing risk.
“The concept of interest does exist in Islam but it is more akin to the lender sharing the risk along with the borrower. The real prohibition is against both onerous collateral and usury,” said Jean-Marc Oppenheim, professor of Middle East history at Teachers College, Columbia University in New York.
Assets invested according to Islamic guidelines, set out under sharia law, have been growing at 20 percent a year worldwide, reaching $900 billion in 2007, and are set to hit $2 trillion by 2010, accountants Ernst & Young estimated.
“We think a significant portion of the investments, if not a higher dollar volume, was going into the U.S. from 1995 until maybe the early 2000’s,” said King and Spalding’s Salah, who has worked with Islamic finance legal issues for 13 years.
There are an estimated 2.35 million Muslim Americans, of which roughly 1.5 million are adults, a May 2007 study by the Pew Research Center found.
The Pew estimate is not univerally accepted and many believe it is too small a number, but the U.S. Census does not ask about a respondent’s religious affiliation in its national surveys.
The Pew study, titled “Muslims in America: Middle Class and Mostly Mainstream” found that the average incomes of Muslims in the U.S. is higher than in western Europe.
The domestic U.S. Islamic finance industry needs to innovate and try to tap an underserved, generally well educated and affluent Muslim American community.
But choices have been limited, in part because the Muslim population is concentrated in only a few places, and the large number of state banking rules make structuring a nationally-marketed product difficult.
“I am concerned there isn’t enough product. We are seeing on a daily basis money go to Europe, and the UK, Singapore now and the Far East. We have to catch up,” said Naveed Siddiqui, chief executive officer of New York-based Zayan Finance.
“I will tell you, in my conversations with Islamic institutions, they clearly tell me if Islamic finance and the creation of Islamic finance products in the U.S. was motivated and stimulated there would be definite interest in the U.S. markets,” said Siddiqui, who has long experience in the field.
In four months and with little formal marketing, Zayan has built a portfolio of sharia compliant commercial real estate assets with a pipeline of deals worth $250 million, he said.
While the U.S. may welcome Islamic finance, it is still an economy built on conventional financial concepts where the use of interest is ubiquitous. That poses a problem for the handful of domestic fund managers looking to invest along sharia guidelines.
The lack of a globally uniform set of sharia guidelines sometimes also results in differences of opinion among scholars who rule on compliance within sharia law.
“That is why we went to the FIQH Council of North America. They are trying to interpret Islam for North Americans, which may be different than how Saudi Arabians invest. This is allowed,” said Nick Kaiser, president of Saturn Capital and portfolio manager of the Amana funds based in Bellingham, Washington.
“If you are too strict there is really nothing to buy. All American companies deal with interest. There is some interest but the question is, is it their primary business,” he said.
The top-rated $620 million Amana Growth fund, launched in 1984, made Kaiser a pioneer in Islamic mutual funds in America. The fund grew 12.24 percent last year. In 1994 he launched the Amana Income fund ($352 million) which grew 14.12 percent in 2007. Both are top performers as measured by mutual fund tracking firms Lipper and Morningstar.
Year-to-date thru Feb 5, the Amana Growth fund is down 7.48 percent while the Income fund is off 5.7 percent, Kaiser said.
But sharia principles forbade Kaiser from investing in banks and financial institutions, allowing him to avoid the direct impact of the U.S. sub-prime mortgage crisis.
In an ironic twist, it is the uniformity and flexibility of the U.S. financial system that may prove a benefit to Islamic finance when opinion among Islamic scholars is divided.
“Sharia scholars really enjoy working in that framework because they know what the true limitations of creating a product are. It is not a clean slate design,” said Siddiqui.
“Sharia compliance for us is a standard for doing business that we apply in our every day work, but we are not in the business of selling religion,” he added.