The Customer Effect
How US community banks appeal to Muslim customers
- Despite over $920 billion of assets from Islamic banks worldwide, Islamic banking services are still the domain of community banks in the U.S.
- Analysts say the market is not big enough for major U.S. banks to offer Islamic banking services across the U.S.
A growing number of smaller institutions in the United States are offering Muslim-specific retail banking services for the 3 million-plus Muslims across the U.S. -- a market some estimates say is worth $170 billion. The industry is growing globally -- its assets surpassed $920 billion in 2015, according to Ernst and Young. While the sector's core markets are still in Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Turkey, Kuwait and Pakistan, there are glimmers of growth in the U.S. as well. Islamic banking differs from conventional banking because its operations must be consistent with the principles of the Shariah, or Islamic rulings. Among the central tenets are the prohibition of interest ("riba") when lending or accepting money. Investments in companies involved in gambling, alcoholic beverages or pork products are also not allowed. Only handful of community banks --Devon Bank in Chicago, University Bank in Ann Arbor, Michigan, and the Bank of Whittier in Texas and California, to name a few -- offer Islamic banking services. It's a market that major U.S. banks haven't touched as of yet on the retail side. (In investment banking, JP Morgan and Standard Chartered offer Islamic services.) "There's not enough customers to justify the substantial time and expense to offer the product from a legal, regulatory and back office standpoint," said Isam Salah, a partner at law firm King & Sparling who heads up the firm's Middle East and Islamic Finance Practice, noting that most of the Shariah-compliant financial activity in the U.S. involves capital investments from the Middle East. Here are four features of Shariah-compliant retail banking offered by some U.S. institutions. Interest-Free checking The Bank of Whittier, an Islamic bank launched by former Citigroup vp Yahia Abdul-Rahman, offers a checking account with no interest accrued. The bank, which has assets of more than $10.6 million, also provides other types of loans, and the idea is to serve the local community. (However, it's important to note that banks that offer Shariah-compliant services, including Devon Bank and University Bank, also offer customers interest-bearing checking and savings accounts.) Murabaha mortgage Devon Bank offers a purchase and deferred-payment resale plan. At closing, the customer enters into a purchase contract with the bank, which lets the bank buy the home from the seller on the same terms and conditions agreed upon between the buyer and the seller. After the bank has purchased the home, it sells the property to the customer at a fixed price, along with an amount known as the "bank's profit," which is determined by taking into account the purchase price, down payment amount, repayment term and the market rate of return on real estate transactions. Since the bank purchases the property on behalf of the buyer, the bank isn't lending the individual money and no interest is involved, which makes it compliant with Islamic regulations. "The lender and customer own an asset together, with the borrower’s share of the property increasing gradually with his payments until he assumes ownership entirely, with profits and losses shared," wrote Renee Haltom in a report for the Federal Reserve Bank of Richmond. Ijara (Lease-to-Own mortgage) Offered by Devon Bank, the bank buys the property for a fixed price, and the buyer acts as a lessee who makes rental payments over time. Once the full price has been paid to the bank, the property is transferred to the lessee. The bank and the buyer agree to a payment schedule. The buyer avoids paying interest by agreeing to a payment schedule with the bank. Protection for customers who fall on tough times Stephen Razzini, president and CEO of University Bancorp, told the Richmond Fed that institutions engaging in Shariah banking can't profit from a customer that's fallen on tough times, as late fees are only meant to cover collection costs, and most Islamic financial institutions must vet contract details through a board of Shariah scholars.