Babacan promotes Islamic finance in US

Economic risks that arose after the crisis in 2008 were better managed under Islamic finance models when compared to other schemes, as they offered additional financial instruments with shared risks and less uncertainty, Deputy Prime MinisterAli Babacan said in Washington on Friday.

Speaking on the sidelines of annual spring meetings held jointly by the International Monetary Fund (IMF) and the World Bank, Babacan stressed that Islamic finance models are compatible with other financial models used across the world.

Highlighting that Turkey, as the rotating chair of the G20 group, appreciates the virtues of the Islamic finance models, Babacan also pointed to the inclusiveness of these models, referring to the millions of people in Muslim countries who are sensitive to Islamic rules but who avoid entering the global financial system due to a lack of options.

Previewing the G-20 discussions, Babacan told reporters on Thursday that the G-20 countries needed to do more to carry out commitments they made last year to jumpstart growth by investing in infrastructure projects and removing barriers to trade. "Growth is there, but it is weak ... and uneven," he said.

The finance ministers will produce a plan of action to be discussed by US President Barack Obama and other G-20 leaders at a scheduled summit in Turkey in November, as they attempt to boost global economic output by more than $2 trillion over the next five years. These finance officials from the world's major economies are searching for a mix of policies that will bolster a still-weak global recovery, nearly six years after a recession, while confronting a range of new threats from a soaring US dollar to a big drop in oil prices. The financial officials from the group of 20 nations also expressed concerns regarding potential market instability once the US Federal Reserve starts increasing a key interest rate which has been at a record low, near zero, since late 2008.

The discussions were being held among finance ministers and central bank presidents representing traditional economic powers such as the United States, Japan and Germany, as well as emerging countries such as China, India and Brazil. Treasury Secretary Jacob Lew and Federal Reserve Chair Janet Yellen represented the United States at the meetings, which began with a dinner on Thursday night and concluded with a news conference on Friday afternoon. Ali Babacan will sum up the group's discussions.

The G-20 talks came ahead of the spring meetings of the 188-nation IMF and its sister lending organization, the World Bank.

In addition to concerns about boosting global growth, the meetings were also to address issues including a plea for more aid to fight the Ebola outbreak in the West African nations of Liberia, Guinea and Sierra Leone. The presidents of those three nations were scheduled to meet with World Bank President Jim Yong Kim and UN Secretary-General Ban Ki-moon on Friday.

The meetings took place when much of the global economy remains stuck in a prolonged period of sluggish growth following the 2008 financial crisis and a recession that was the worst in seven decades. IMF Managing Director Christine Lagarde told reporters on Thursday: "The good news is that the global recovery continues. The not-so-good news is that growth remains moderate and uneven." She said the goal of this week's talks was to produce a revamped plan of action that will "prevent this new mediocre [growth] from becoming the new reality.”

The IMF's latest economic forecast predicted only modest overall growth and downgraded the prospects for some nations, including the United States, forecasting US growth of just 3.1 percent this year, a half-point lower than its January estimate. The reason: IMF economists believe the sharp rise in the value of the dollar will hurt American companies trying to export goods overseas. Growth prospects in oil-exporting nations are being hurt by the big drop in oil prices over the past year, but those declines are expected to boost prospects in many oil-importing countries.

This week the IMF also raised new concerns that severe volatility in financial markets could be triggered if the Federal Reserve moves, as is widely expected, to start raising interest rates later this year. If the Fed's rate hikes after a prolonged period of ultra-low rates, causing investors to rush for the exits, it could cause stock prices to tumble and interest rates to rise sharply.

(Todays Zaman / 17 April 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance’s global surge remains a missed opportunity for banks in US and Canada

Islamic finance is surging across the globe, gobbling up an ever increasing share of the more than $220 trillion in international assets outstanding. It’s a trend that has accelerated since the 2008 crisis shook confidence in conventional banking, prompting most of the world’s financial capitals from London to Dubai to join the battle to dominate the industry.

That is, everywhere except in the US and Canada. How come? We can blame a combination of regulatory hurdles, a lack of proper rules and standards and general Islamophobia. But the result is that banks in the region risk missing out on a fast-growing and lucrative market and the patronage of wealthy foreign investors – not to mention the millions of Muslims living in North America eager for products and services that match their beliefs.

To be fair, most countries are struggling to craft rules and regulations that standardize Islamic finance and enable it to compete with its conventional counterpart. It’s just that North America is falling further and further behind.

To understand why – and see how the region’s banks could still grasp the industry’s reins – we must first explore the world of Islamic finance.

What is Islamic finance?

Islamic finance is much like traditional finance except that the services and products it creates conform to Islamic teachings,also known as sharia. The most well known of these is the prohibition against charging interest, known as riba in Arabic and a term whose explicit meaning is in dispute (more on that below).

Anyone who’s ever used a credit card knows you can’t borrow a dime without paying interest, but in Islamic finance, banks must find other ways to make money off their loans and other products. They usually do this by charging a service fee and/or engaging in profit-and-loss-sharing contracts. The most popular of such methods for home financing, for example, is called murabaha, which is similar to rent-to-own schemes. A bank purchases a house for a customer and then sells it back at an agreed-upon markup.

Islamic assets must also follow other ethical norms. Investments in high-risk ventures, gambling, non-halal foods, alcohol, pornography, and so on are all off limits. In addition, the rules generally require that risks be shared between the lender and borrower, and that all finance be directly backed by real assets – a far cry from some of Wall Street’s exotic creations that bear only a distant relation to an actual asset.

The industry is growing so quickly because its primary demographic comprises one-sixth of the world’s population, most of which is based in the Middle East and increasingly interested in parking its growing wealth outside the region. This is creating a pressing need for financial products and services that conform to Muslim beliefs.

A fast-growing market

The overall market in Islamic assets has grown at an average pace of 20% a year since the financial crisis struck in 2008.

According to the Dubai-based Al Huda Centre of Islamic Banking and Economics, the industry is projected to boast more than $2.5 trillion in assets this year.

Islamic bonds, or sukuk, are perhaps the most prominent segment, with companies and governments expected to sell about $145 billion of the debt in 2015.

Iran, Malaysia, and Saudi Arabia currently dominate the industry, but many Western countries are vying to become European and international hubs for Islamic finance.

The UK in particular has been pushing hard to get in the game. Last year, it became the first Western country to issue an Islamic bond. The former lord mayor of London, Roger Gifford, went so far as to say that Islamic finance should be as British as fish and chips.

Yet in a 2014 ranking of 42 countries with some form of Islamic finance activity, the US placed 15th and Canada last – a puzzling reality given the importance of each country’s banks to the global financial system.

Why did they fall behind?

It’s not that Islamic finance is new to the New World. Mutual funds and mortgages that adhere to Islamic laws have been around since the 1980s. And in 1998, the US comptroller ruled that certain Islamic mortgages were equivalent to mainstream mortgages, as far as banks were concerned, encouraging Freddie Mac and Fannie Mae to purchase millions of dollars worth of sharia-compliant housing loans.

But such activity was short-lived despite rising demand.

One key explanation why can be found in regulations and laws that discourage Islamic finance, even ones ostensibly designed to keep the overall financial system safe. Meanwhile, the overlapping regulatory layers between the states and federal government that make setting standards incredibly complex.

One example involves a Tennessee mosque that lost its property tax exemption after it took out an Islam-compliant mortgage, which makes the bank the owner until the debt is paid off. Since the technical owner of the property was no longer a religious institution, the tax exemption (for the property) was lost.

Another is the requirement that US banks keep their risk ratios fairly low. In order to be compliant while also maximizing profit, banks usually invest in the huge supply of fixed-income securities such as Treasuries and conventional corporate bonds, which are prohibited by Islamic laws.

An entirely different reason also appears to be xenophobic fears of sharia spreading across the country. This even sparked an inquiry by the US senate in 2005 to look into whether Islamic finance supports terrorism. Experts at the hearing testified that there is no evidence suggesting Islamic finance is more prone to facilitate terrorism than its conventional counterpart.

Lack of standards a global problem

More broadly, the lack of standards in Islamic finance and costs and complexities involved in entering the market have made some mainstream financial institutions wary. For example, there continue to be disagreements over what actually makes an asset permissible under Islam and who is qualified to determine this in the first place.

In fact, even the most fundamental tenant of Islamic assets – the prohibition of interest – is under dispute. More orthodox schools of thoughts claim all forms of interest are forbidden, while modernists contend only its most excessive and exploitative forms (namely usury, the ninth-greatest sin) should be prohibited.

There are now increasing fears that this lack of standards will hurt the industry in the long run. But rather than serving to put off banks in North America, this actually presents an opportunity to lead the way in crafting regulations that set standards globally and developing products at the cutting edge of the industry.

A fresh opportunity

Both the US and Canada are a natural fit as homes to the bustling and dynamic Islamic finance industry, despite the above challenges.

The region’s energy and natural resources, as well as its stability, are a strong draw for wealthy investors from the Middle East, while the presence of highly educated and high-income Muslim populations offers a sizable domestic customer base.

This is a segment that has been much neglected despite its desire for sharia-compliant financial products. A new survey of US Muslims by Dinar Standard shows that 65% of respondents want Islamic finance available at their local bank and 57% want to know such products are verified as sharia-compliant.

As they are unable to find avenues within institutional finance to invest in ways that conform to their beliefs many Muslims have fallen victim to ponzi schemes and other scams. High profile cases involving an alleged ponzi scheme in Chicago and insolvency of a mortgage provider in Toronto point to the vulnerability of the nascent industry.

Regulators need to clear the way

Fortunately, banks have been showing increased interest in recent years in adding Islamic finance to their offerings, and mainstream lenders are exploring how to tailor their contracts to meet sharia’s requirements. Goldman Sachs issued its debutsharia- compliant bond last year, becoming the fourth US-based issuer to do so.

And there is also much interest in fusing the similarly fast-growing halal food industry with Islamic finance.

But even if the banks are growing more interested, regulators must get involved to provide sufficient guidance to allow them to move ahead. The fundamentals of Islamic finance need to be strengthened and standardized if it is to emerge as a viable alternative.

At its heart, the purpose of Islamic finance is to promote the social good through financial markets, allowing companies and consumers to raise money while following the moral precepts enshrined in the Koran. But the way it is currently practiced is far away from realizing this goal.

(The Conversation / 06 March 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Shariah Financing Helps US Muslims Achieve Home Ownership Dream

Khadijah Sahak, 59, sits in the family room of her neatly-kept townhouse in Sterling, Virginia. The Afghan news program broadcasting from her wall-mounted flat-screen television is discussing the Taliban. 

This leafy Washington suburb is a long way from the refugee camp in Pakistan where Khadijah’s family says they lived after leaving Kabul in 2002.

“We like the house very much,” she says in Dari, adjusting the white headscarf draped loosely around her face. “We are very comfortable here. We are at peace.”

It is a peace Khadijah thought she could never enjoy in the United States.

 

When her grown son, Nabi, offered to help his parents buy a home, Khadijah and her husband refused to live in a house bought with a traditional mortgage.

As practicing Muslims, they believe demanding or paying interest on money - like the kind paid on a home loan - is prohibited by strict Islamic practice.

“Everyone in my family was, in one way or another, against the idea of conventional mortgages,” says Nabi.  

A piece of the American Dream

Then he heard about the Michigan-based Ijara Loans, one of a handful of Islamic financing companies in the United States. They've tapped into a niche market of devout Muslim-American homebuyers by offering “Sharia compliant” home purchasing contracts which do not include actual interest.

“That day they got really excited, when they learned that they were able to still buy a house and not compromise their religious values,” Nabi says of his parents.

When the Sahak family bought the Sterling townhouse in 2010, they joined about 10,000 other Muslim-Americans who've purchased homes in the past 10 years using Sharia-compliant financial transactions.

Guidance Residential, based in Reston, Virginia, is the largest company in the United States which offers Sharia financing. At its spacious headquarters, phone operators manage calls from customers mostly in a mix of English and Arabic.

Spokesman Hussam Qutub says the company has processed $2.3 billion in Islamic home financing transactions since it launched in 2002.

“Relief that it does exist is definitely the feeling among the majority of the people who contact us,” Qutub says. “We are in a sense impacting the ownership rates of Muslim-Americans in a positive way.”

'Sharia' financing

Instead of charging interests on a monetary loan, Islamic finance companies generally offer homebuyers a sale, rent or partnership contract on the home.

In the sale model, the Islamic bank purchases the home, immediately sells it to its customer at a mark-up and the customer pays the bank in installments, according to Georgetown University law professor Babback Sabahi, who lectures widely on Islamic financing.

In the rent model, the Islamic bank purchases the home and rents it to the customer in a rent-to-own type agreement.

In the partnership model, says Sabahi, both the Islamic bank and customer purchase the home together. The customer gradually purchases the bank’s share of the home while also paying a fee for occupying the house.

“In order to be done right,” says Sabahi, “the bank needs to truly purchase the asset, own it and then transfer this ownership to its customers. And a trade - as opposed to lending in the conventional sense of the word - is what Sharia signs off on and approves.”

The arrangement works for devout Muslim-American homebuyers because Islam does allow making profit on a trade transaction or the sale of a commodity - in this case the house. The buyers never feel they are paying interest on money.  

“We feel we’ve only scratched the service here…with this niche market.” says Qutub of Guidance Residential. “There [are] still plenty of consumers out there of the Muslim faith that don’t even know this option is available.”

Keeping the faith 

Sharia financing in the U.S. has accounted for less than $3 billion in home sales over the past 10 years - a small fraction of the total U.S housing market. But Islamic finance companies are making the American dream of home ownership come true for more and more practicing Muslims, like the Sahaks.

“If I can live in America and feel that I own a home that is completely in line with my Islamic system,” says Nabi, “then I guess the pleasure of living in that house would be tenfold.”

“We were very happy that we found an Islamic bank,” Khadijah chimes in. “We didn’t like the other banks. If we want to buy another house it will be from an Islamic bank and I tell my friends that, too. We are more comfortable like this.”

(Voice Of America / 25 June 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com