Islamic Finance Unit Takes Bank beyond Mich. Roots

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It took four years for University Bancorp in Ann Arbor, Mich., to develop a home loan product that both complied with the strict laws of Islamic financing and satisfied its regulators, but it was time well spent.

Last year its University Islamic Financial Corp. subsidiary generated roughly 20% of the company's revenue, and that number is expected to rise significantly over the next few years as University expands its Islamic lending into new markets.

This year the $90 million-asset University has opened Islamic finance offices in East Brunswick, N.J., and McLean, Va., and received regulatory approval to write its Islamic-law-compliant loans in eight other states. It plans to open at least five more offices in markets outside its home state over the next year.

"Our thought is to go big or stay at home," said Stephen Lange Ranzini, University's president and chief executive. "If we aren't going outside of Michigan, there is really no point in having an Islamic finance company. Our goal is to have people on the ground in the major markets."

The laws of Islam forbid adherent Muslims from charging or paying interest, meaning many of those in the United States are either paying rent or compromising their beliefs to get into homes. Companies such as University and its competitors, including the $287 million-asset Devon Bank in Chicago and the mortgage company Guidance Residential LLC in Reston, Va., have carved a niche by offering products such as lease-back and co-ownership agreements that comply with Islamic rules but still net a profit.

A 2007 study by the Pew Forum on Religion and Public Life estimated there were 2.4 million Muslims in the United States. But Islam, like most religions, is not monolithic, and not all sects observe the principles of Islamic finance, so the actual market size is not quite known.

However, many Muslims would prefer products that adhere to Sharia, or Islamic law, said Rod Taylor, the president of the Atlanta executive recruiting firm Taylor & Co.

"Most" Muslim investors, particularly those in the Middle East, "will choose a Sharia-compliant product if all other things are equal," Mr. Taylor said. "This is a trend that is also going to grow in the United States with homebuying."

Mr. Ranzini said University became interested in Islamic finance in June 2002, when it won an award for its community redevelopment efforts. Shortly after it won the award, he said, a Muslim man asked him, "If you are so great, why aren't you serving our community?" University began offering the loans on a small scale in 2003, and after working out all the kinks, it began actively marketing them in 2006.

Mr. Ranzini has become something of an authority on the topic of Islamic finance. In May he was one of the speakers at the Islamic Finance World North America 2008 conference in New York, an event designed to familiarize financial professionals with Islamic finance and the importance of Sharia-compliant products. (Mr. Taylor, who heard Mr. …