With the relatively high standards of living, high demand and spending on financial services, Islamic finance is certainly a viable option in the USA. Ruth McKee reports
Conservative estimates deem there are six million Muslims living in the US, and it is believed that this figure will double in the next eight years. A large percentage of that market is well educated and affluent, with an estimated 46% being college graduates. Customer expectations are very high and pricing aggressive, and financial institutions that will end up developing as Islamic financial institutions will need to be of a very high standard in order to compete and survive. Education is also key, and it is said that whilst it is still somewhat limited, Islamic finance practitioners are focusing on educating the consumer, even more so than the Middle East.
The Islamic finance industry in the USA is thought to have started off with the creation in 1984 of Amana Mutual Funds Trust. According to Monem Salam, director of Islamic investing at Washington-based Saturna Capital, the finance house LARIBA arrived in the late '80s, but it has only been since 2000 that many companies have come into the industry. He notes, "There were attempts in the 1990s to start something in the US, but most pulled out, since the size of the market is only profitable for niche players, and not large companies. UBK came in to offer a housing product under the 'Manzil USA' monicker, but they didn't last long. Also in the 1990s many community based programmes were created to tackle the Islamic housing issue. For example, Muslim Savings and Investment was an off-shoot of the Islamic Circle of North America. These community based programmes were not-for-profit and thus, because of operational inefficiencies, they did not survive. There were also attempts to take on a cooperative structure modelled from the very successful programme in Canada and three are still operational."
Mohamad Hammour, executive chairman of Virginia-based Guidance Financial Group, agrees that whilst some 'cottage industry' style players might carry out some transactions that will be emphasized by the press, "it's not going to make a market. The market will be made by much more committed long-term thinking, dedicated high quality institutions." He does point out that the US plays a role beyond the interest of its own. "The US is a source of know-how and technology that can be exported to the rest of the Islamic financial industry globally. And as is the case with the conventional financial industry, you can trace a lot of the new product development and financial innovation back to what happens in the US, such as credit default swaps and private equity development. You see the US being a continuous source of innovation and global export of financial innovation. There is something to watch in the US market, and that is its ability to affect the rest of the world, including the rest of the Islamic financial industry."
But Mohamad agrees that the US domestic market is still in its infancy. "Mostly I think this has to do with demand as the Muslims in the US are not sophisticated enough to want or need Islamic hedge funds, Sukuk, and so on. They have stuck with housing options and investment options and that is where the demand has been."
And the housing market is one area in which Guidance Financial has found profitability through demand. The company originates Islamic home finance contracts in the US retail market, pooling them into agency securities issued and guaranteed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and offering these investments through a fixed income fund.
The needs of the Muslim population in the US are essentially to have access to financial services and products that are competitive with what they are accustomed to in the conventional market, and that the community can be educated about and can be supported by solid and stable institutions. However, the product offering is still very limited, bar home financing, and there are not that many institutions that are solid and established. But still developments are taking place. The end of last year saw the creation of the first US Islamic banking subsidiary. Ann Arbor, Michigan's University Bank announced the formation of University Islamic Financial Corporation (UIFC) capitalized with $15.6 million in shareholder equity and assets.
Stephen Lange Ranzini, president and chairman, says UIFC intends to engage in Islamic banking with an initial focus on its existing product set: Soliciting Islamic Sharia'ah FDIC-insured deposits held by University Bank and originating Islamic Sharia'ah home financings as agent for University Bank.
The 9/11 effect
Post 9/11 things are said to have become awkward for Islamic finance in the US, and what happened forced Islamic finance practitioners to think creatively in their continued approach to the market. However, the US has continued to be a viable market for Islamic finance.
Monem says moves had been made by large investment firms like Morgan Stanley to offer Islamic products in the US for Muslims, however, that came to a screeching halt on 9/11. "It is a very politically sensitive issue, so firms have stuck to offering products in the Middle East."
He says real growth will only occur when Islamic finance in the US grows out of the Muslim community and is competitive initially in the area of 'socially responsible' and then eventually in conventional finance. "Also, at least in the immediate future, in order to penetrate the mainstream, they have to be marketed as alternative rather than Islamic."
Monem also notes that the Federal Reserve has become more open to the idea of Islamic finance, and there have been a few papers written in various regional federal districts regarding this issue. "I think currently their stance is a wait and see approach, but at the same time to become educated about the issues. More so here than anywhere, creating an Islamic bank in the US is like fitting a square peg into a round hole. Not impossible, but difficult. Also, because of this, the political environment, and because of the population size, I think we are still a few years away from creating an Islamic bank."
Islamic offerings
The Islamic markets have been measured since 1999 when the Dow Jones Islamic Market Indexes were introduced as the first benchmarks to represent Islamic-compliant portfolios. Today the series encompasses more than 60 indexes and is a comprehensive family of Islamic market measures.
Private wealth management is being addressed too out of New York by HSBC Amanah, the global Islamic financial services division of the HSBC Group. With Islamic finance being one of the fastest areas of growth for the HSBC, it has operations throughout the world including the US where it has a private wealth.
And the legal side of the business is notably being addressed by US law firm King & Spalding, which has one of the strongest Islamic finance and investment practices worldwide and a very significant Middle East-Islamic finance and investment practice.
Elsewhere, Chicago-based Failaka International was founded in 1996 and has, over the past 10 years become a recognised leader in the field of Islamic equity funds. The Failaka Islamic Fund Review compiles data on the world's Shari'ah compliant equity funds and is used resource for bankers, industry insiders, and outside observers. Failaka has just recently moved to Dubai to be closer to the action.
Sukuk
On the debt capital market side, Sukuk has made it onto the US Islamic finance scene with the East Cameron Gas Sukuk earlier this year. The idea was sold for the $165.67 million US debut Sukuk to Houston, Texas-based East Cameron Partners. BSEC the Beirut, Lebanon-based investment bank is the deal structurer and Merrill Lynch the bookrunner. It is also the first securitization embedding Shariah compliant hedges. The transaction attracted several US conventional investors, and as the structure gains the attention of investors, it may set the course for more in the not too distant future.
© Banker Middle East 2006
