Muslims have pent-up demand for financial services

Products scarce in U.S. because of Shariah restrictions

Oct 1, 2007 @ 1:49 pm

By Deborah Nason

Muslims in the United States number anywhere from 7 million to 10 million, and many are professionals, according to studies. Yet for the majority, there are almost no outlets for their financing and in-vestment needs.

The reason is that Islamic law, or Shariah, doesn't allow the charging or paying of interest, or investment in any industry involved in forbidden areas such as gambling, pornography, alcohol, tobacco or defense.

U.S. institutions have been slow to create an environment for developing Shariah-compliant instruments, due to a lack of legal and regulatory precedents, and a general lack of awareness, but not a lack of demand, observers said.

The pent-up demand is huge, said Akram Sheikh, senior vice president and chief financial officer of Anchor Finance Group in Hauppauge, N.Y., a Shariah-compliant business- and financial-consulting firm.

“For the majority of [American] Muslims, their only option is to put their money in non-interest-bearing checking accounts,” he said.

And because of a dearth of home-financing options, a significantly large percentage of American Muslims aren't able to purchase homes, and feel forced to rent, Mr. Sheikh said. He estimated that if just one-half of one percent of the U.S. Muslim population were able to buy a home through Shariah-compliant financing, it would represent a market potential of $1.8 billion in new housing loans.

But interest in meeting the needs of Muslim investors is growing. Islamic-finance conferences are popping up throughout the world, with two major conferences taking place in New York this month. Islamic Finance in North America — Accessing Innovative Islamic Investment Opportunities will be held Oct. 24-25, and the Islamic Finance Summit — Innovations in Shariah Compliant Finance for U.S.-Based Financial Institutions is scheduled for Oct. 29-30.

Meanwhile, the few firms that do cater to Shariah-focused clients have found a very lucrative niche.

Best known is the success of the two Amana funds from Bellingham, Wash.-based Saturna Capital Corp. — Amana Growth Fund (AMAGX) and Amana Income Fund (AMANX). Together, they are called the Amana Mutual Funds Trust.

The funds' adherence to Islamic principles has contributed to consistent above-average returns and accolades from New York-based Lipper Inc. and Chicago-based Morningstar Inc. As a result, assets — from Muslims and non-Muslims alike — have grown to $850 million as of June 30 for the two funds combined, from $40 million in 2003.

“Many Muslims are starting to buy through major platforms,” said Monem Salam, director and vice president of Islamic investing at Saturna.

The Amana funds are two of just five Shariah-compliant mutual funds available to American Muslims, he said. The others are offered by Allied Asset Advisors Inc. of Burr Ridge, Ill., and Azzad Asset Management Inc. of Falls Church, Va.

Allied offers the Dow Jones Islamic Fund (IMANX), and Azzad offers the Azzad Ethical Income Fund (AEIFX) and the Azzad Ethical Mid Cap Fund (ADJEX).

Meanwhile, Chicago's Devon Bank began offering Shariah-compliant home financing a few years ago.

“We have grown to be one of the top two or three Shariah-compliant mortgage providers, in terms of volume, in the country. It has become the majority of our mortgage business,” said David Loundy, vice president and corporate counsel.

“For a bank our size, it's a good niche. For a lot of big banks, it's not worth their time,” Mr. Loundy added.

Devon provides a residential-financing product, available in 35 states, whereby the bank buys the customer's desired property, then charges a marked-up sale price that the customer pays in installments.

“Islamic finance is generally equity based, not interest based, [i.e.,] you don't get a loan; you get a partner,” Mr. Loundy said.

“Speaking generally, pooled resources is a recurring theme in Islamic financial transactions; capital providers must take on some type of ownership or risk. [Shariah compliance] requires a fuller understanding of the asset business, sources of financing, its way of doing business and with whom it does business,” said Umar F. Moghul, an associate in the Islamic-finance practice at Hartford, Conn., law firm Murtha Cullina LLP.

Mr. Salam, a former registered representative in Texas for New York-based Morgan Stanley, suggested that advisers who are interested in serving Muslim clients learn more about their needs. For example, a common need is financial planning for a hajj, a pilgrimage to Mecca that is required of all able Muslims and can cost at least $5,000.

It is also important to be aware of the concept of Zakat, one of the pillars of Islam, which refers to obligatory charity paid to the needy, Mr. Salam said.

“Visit the mosques; a lot of them hold open houses,” he said. “Especially in larger metro markets, if you don't know where your local mosque is — as you know where the churches and synagogues are — you're missing out on a sizable market.”

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