By Martin, Josh
Management Review , Vol. 86, No. 10
The growth of Islamic banking is a reflection of the demand for ethically acceptable financial mechanisms, but they're still prohibited in the United States.
Imagine being able to borrow money without paying interest and have your banker assume half the risk. Impossible? No, it is a commonplace transaction in the rapidly growing world of Islamic banking.
U.S. companies doing business globally, particularly in countries with large Muslim populations, are turning to Islamic finance as an alternative source of funding for everything from trade finance to equipment leasing. Although Islamic banks do not operate yet in the United States, due to restrictive banking legislation here, the number of U.S.-based Islamic financial-service providers is growing - from home finance companies and asset managers to leasing companies.
Their customer base is increasing as well, ranging from individuals setting up college funds to corporate giants using sophisticated lease/purchase and project finance packages both at home and abroad.
Multinationals such as General Motors, IBM and Xerox have raised money through a U.S.-based Islamic leasing fund set up by the United Bank of Kuwait, while international oil giants Enron and Shell have used Islamic banks to finance their activities in the Arabian Gulf and Malaysia. "We've utilized Islamic financing techniques for U.S. real estate developers and corporations," says Sam Byrne, principal of Boston Capital Institutional Advisors, which provides Islamic real estate finance and manages Islamic funds for Arab investors. "As long as they can be educated about the Islamic product, there's no problem."
Boston Capital, which expects to arrange $200 million in real estate financing this year, is one of many U.S. financial companies that now offer Islamic banking products or services. Others include Citibank, Goldman Sachs and Kleinwort Benson (see "Key Players to Know," page 28).
Islamic banks have fast emerged as a major pool of international development and investment capital, with assets exceeding $160 billion. That's a dramatic growth rate considering there were fewer than 10 Islamic banks back in 1975, with combined assets of barely $1 billion. Today, there are several hundred institutions operating in more then 40 countries in Africa, Asia and Europe.
Their funds are growing, too, at annual rates of more than 15 percent. This growth reflects the demand from Western corporations operating globally, and from Islamic countries looking for ethically acceptable financial mechanisms. In some instances, there is little choice in the matter. Both Malaysia and Pakistan insist that part or all of any project carried out in their country be financed through Islamic banks, while Iran, Pakistan and Sudan now have entirely Islamic banking systems.
But business is increasing in the West also, particularly the United States, where many nonbank Islamic financial-service providers are opening up shop. "Islamic finance is occurring now, left and right" says Soliman Biheiri, president of BMI Leasing Inc., an Islamic leasing company based in Secaucus, N.J. "Investment banking comes close to Islamic banking here in the United States." In both cases, the banker and the client share the risk of a particular project. Although investment banks, unlike their Islamic cousins, charge interest, both have consulting and other user fees for various services they offer.
Islamic financial companies can draw on two significant client bases in the United States. First, there are the 8 million to 10 million resident Muslims, who are increasingly seeking Islamic financial tools. Second are the consumers and businesses seeking alternate sources of finance for everything from car loans to real estate development.
Elsewhere, Islamic banking is beginning to operate in local communities around the country. The Muslim Community Credit Union of Philadelphia, the first of its kind in the United States, was created in 1996 for the local 30,000-member Islamic community and is expected to serve as a model for other credit unions around the country. …