Islamic Banking Makes Inroads in U.W. Market
Brown, Ken, THE JOURNAL RECORD
Dr. Ala-ud-Din, a dentist in San Jose, Calif., had two choices: save for years to buy a house with cash, or take out a mortgage and violate the law of the Koran.
That was until a third choice emerged. A small Islamic financing company bought the house and leased it back to Din in a 15-year deal that made him a homeowner without violating the religious law that bans Muslims from paying or earning interest.
While still on the far edge of American finance, Islamic banking is making inroads as several groups of bankers and Muslim scholars work to create an interest-free banking system that relies on lease agreements, mutual funds and other methods.
And a new emphasis by lenders on improving service to minorities, including black, Arab and Asian Muslims, may be the key to their success.
"I wouldn't say that this is a major part of American finance, but it's definitely growing," said Nicholas Kaiser, president of Saturna Capital Corp. of Bellingham, Wash., which manages two mutual funds that follow Islamic law.
At least six Islamic financial organizations companies, in areas with large Muslim populations like Los Angeles, Detroit and New York, are offering mortgages and investment opportunities that comply with Islamic law.
Muslims are not allowed to pay or receive interest because the body of law of the Koran, called sharia, prohibits them from making a guaranteed profit on capital.
Investors can get around the ban by making investments that involve risk, like stocks, or by carrying out lease deals rather than loans for homes and cars.
"Most of the Muslims who practice Islam would not buy houses with interest-based mortgages," said Din, who is from Pakistan.
The good news for the country's Muslims, who number 3 million to 4 million, is happening on several fronts. One group of Muslim experts is trying to put together a mortgage that complies with sharia.
Others are refining lease agreements to bring them into compliance with Islam while making the agreements more palatable for lenders. And, coincidentally, car companies have embraced leasing, allowing Muslims to avoid the ethical dilemma of car loans.
But as Islamic banking becomes more common, some specialists warn that there is a risk that small investors will be duped by hustlers claiming to offer Islamic financial services.
"You cannot invest money on faith alone; that's a very bad investment," said Vincent J. Cornell, a professor of religion at Duke University who studied Islamic banking in Malaysia.
Experts in Islamic finance say that what they propose varies only slightly from conventional banking.
"The irony is that it doesn't take a lot of work, it takes creativity to convert a conventional home mortgage to a deferred payment sale" that complies with Islamic law, said Steven Thomas, the publisher of The American Journal of Islamic Finance.
Thomas, who works for a bank, has tried to use the newsletter to educate Muslims on the requirements of Islamic banking and show that it can be done in the United States. "Islamic finance is just another form of asset-based investment banking," he said.
In its most basic form, Islamic banking covers both savings and credit. Instead of being paid interest, depositors are considered shareholders and receive dividends when the bank turns a profit and lose money when it has a loss.
The Amana mutual funds, which Kaiser runs, work this way. Amana's income fund began in June 1986 and has between 1,200 and 1,300 shareholders and total assets of $11 million.
Amana has relied on word of mouth among Muslim Americans _ to attract new investors. Its income fund has kept pace with the Standard Poor's 500 stock index, Kaiser said.
But managing the income fund is not simple. The prohibition on interest …
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Publication information: Article title: Islamic Banking Makes Inroads in U.W. Market. Contributors: Brown, Ken - Author. Newspaper title: THE JOURNAL RECORD. Publication date: April 26, 1994. Page number: Not available. © 2009 THE JOURNAL RECORD. Provided by ProQuest LLC. All Rights Reserved.