Islamic Finance Gaining Traction in the U.S.

By Staff Reporter
Posted, Nov 22, 2007

Most news in the Islamic Finance sector invariably comes from one of a number of Muslim majority countries where Islamic Finance is a major part of the financial infrastructure such as the UAE, Saudi Arabia, Pakistan, or Malaysia. There is relatively less recognition for the fact that there are major Muslim consumer markets in non-Muslim majority countries such as India, the UK, and the US.

In the US specifically, the Muslim market is one of the most underserved, affluent markets which is slowly gaining the Industry’s attention with the creation of financial products and services that cater to its needs.  

Islamic Finance in the US

Just like its growth around the world, the Islamic Finance industry in the US has grown significantly over the last 15-20 years. The first, and most significant, attempts to systematically bring Islamic finance to the retail consumer in the US were made in the mid 1990s when the OCC (Office of the Comptroller of the Currency) formally recognized the Ijara (lease) and the Murabaha (markup) models as valid transactions for purchases of residential properties.

This green light from the government paved the way for Islamic Finance to get high levels of recognition on Wall Street with a focus on the US market.

Today there are a few national players on the field such as Guidance Residential, Zayan Finance, and the Amana Funds that are able to adequately serve a national market with proper supervision of Shari’ah advisors and close partnerships with regulators and key financial institution (see table below of other players). These firms are bringing Shari’ah compliant products to the American Muslim market which is quickly being recognized by mainstream financial institutions as a strong, niche US consumer market.

Muslims in the United States

In the United States, Muslims live is major urban centers in the Northeast ( Washington DC , New York , Boston , Philadelphia ), Midwest (Chicago and Dearborn), West ( California ), South ( Texas ), and the Southeast ( Florida and Atlanta ).

According to a Cornell University study from 2002, the Muslim market in the US is represented by a population of 7 million, comprised of 1.7 million households, which is growing at an annual rate of almost 6%.

The market segments are comprised of Muslims from the Middle East , South and Central Asia , Africa , and other regions who are all connected by shared religious values. The majority of individuals in these segments boast high income and education levels.

Promotional materials from Lariba (above) and Guidance Residential (below)

According to industry participants 1 out of every 7 Muslims in America are small business owners or entrepreneurs. Naveed Siddiqui , CEO of Zayan Finance, highlights the fact that over 25 percent of Muslim Americans earn $100,000 or more, compared to 15 percent for the overall US population. A majority of this segment are professionals and business owners, with over 65 percent completing college or graduate degrees. The markets credit worthiness is marked by the fact that over half of Muslim Americans have an excellent credit score (above 700 where max score is 850).

A broad cross section of the Muslim market is driven by entrepreneurial pursuits and actively seeks out opportunities for primary and passive income. Arab Americans are 75% more likely to be entrepreneurs or small business owners than the average American. 35% of Arab American entrepreneurs operate in the retail sector. South Asians overall own more than 20,000 hospitality properties, which have 1 million rooms representing over 50 percent of the economy of lodging properties in the United States. 74% of the Muslim work force is comprised of professionals and business owners. 67% have bachelors degrees or higher.

Estimated demand

Based on the profile given above, Muslims in the US represent a large, untapped, and lucrative market. In fact, Naveed Siddiqui of Zayan Finance, says that the market controls over $100 billion in financial assets and has an annual financial services spend of $16 billion.

According to a study by marketing firm JWT, cited in the New York Times, “Muslim Americans spend about $170 billion on consumer products annually”. High net worth 1st generation baby boomers have readily available disposable income while the young, affluent and increasingly religiously/culturally sensitive 2nd generation shows interest in Islamic financial products.

Both 1st and 2nd generation consumers require products for home financing, commercial financing, car leasing, construction financing, and investment products as well as ATM services, education loans, and deposit accounts. Demand for Islamic financial services among American Muslims is causing the industry to grow so fast that financial professionals are now building careers in the field.

US based Islamic Finance companies

Until now, the most successful Islamic finance company in the United States has been Guidance Residential. Based in Virginia , the company began offering Shari’ah compliant home financing in 2002 and has successfully closed over $1 billion in home financing. Community banks such as LaRiba in CA, Devon Bank in Chicago, and University Islamic in Michigan are focusing on their local communities by offering financing for local home and commercial property purchases as well as some deposit products.

The leading provider of Shari’ah compliant mutual fund investments is Amana Mutual Funds of Washington whose funds have grown to over $1 billion in November 2007.

Islamic Finance Institutions in the US

Current IF product offerings

The Islamic Finance sector in the United States has traditionally been involved in financing transactions at the consumer level. Some of the earliest efforts were by a company by the name of MSI which was an effort of ICNA (the Islamic Circle of North America). MSI pooled investor funds and redirected these to applicants who sought funding for purchases of homes and cars.

The company worked on a cooperative basis which severely limited the amount of funds available to new applicants. The result was a long waiting list of applicants who never received funding. In the late 1990s the United Bank of Kuwait launched its Manzil program but due to internal issues the Bank was unable to launch the product effectively. To its credit, however, is the fact that the Bank was able to secure the OCC’s (Office of the Comptroller of the Currency) recognition of Islamic finance contracts (Ijara and Murabaha) as functional equivalents of conventional financing. This would pave the way for systematic entries into the market by companies such as Guidance Financial in the early 2000s.

Zayan Finance: Filling the void for Commercial Real Estate Finance

In the United States, consumers have been able to buy homes and make equity based investments according to Shari’ah principles. But no company has offered Shari’ah compliant commercial real estate finance on a national scale. That is now changing.

Zayan Finance, LLC has recently launched nationally with offices in New York , Chicago , and Southern California with an exclusive focus on Shari’ah compliant commercial real estate finance.

According to the President and CEO, Mr. Naveed Siddiqui , Zayan Finance recognizes that the American Muslim community is one of the most affluent minorities in the United States. The community has been looking for a Shari’ah compliant product to finance their commercial real estate investments and Zayan Finance has decided to fill the void in the market. Zayan Finance brings a number of strengths to the market.

For starters, members of the executive management team are among the pioneers of Islamic Finance in the United States . They previously helped launch Guidance Residential which is now the leading provider of Shari’ah compliant home finance in America.

Zayan’s Shari’ah Supervisory Board includes Dr. Abdus Sattar Abu Ghuddah, Shaikh Esam Ishaq , and Dr. Muhammad Imran Usmani who all serve on the Shari’ah Supervisory Boards of leading international financial firms. The Board ensures that Zayan’s products are Shari’ah compliant and monitors them on a continuing basis.

According to Naveed Siddiqui, Zayan’s CEO, the company’s goal is to help American Muslim professionals, entrepreneurs, and investors realize the opportunity and attractiveness of owning their own commercial real estate. Through partnerships with key institutions, Zayan Finance has access to Wall Street capital which will aid in the growth of the American Muslim market. He sums up by saying, “Zayan Finance’s vision is to support American Muslims as employers and business owners in a vibrant US market.”

Opportunity / Challenges

While the Islamic Finance industry in the United States stands to gain in the midst of a market with unserved demand for financial products and services a number of challenges remain. Most providers entered the market with compelling value propositions none has been able to deliver a full-suite of financial products to the market. Limited product sets, lack of service quality based on industry standards, and non-competitive pricing have been challenges faced by market players.

However, these issues are changing as the market becomes more sophisticated and demands competitive pricing and world class service standards. The nascent market in the US still presents a tremendous opportunity for companies looking to offer a full-suite of products with effective marketing and distribution strategies.




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