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Islamic finance presents opportunities for US banks
Islamic, or more accurately Sharia-compliant, finance is a huge potential market for specialist providers and global banking giants alike. Estimates place the global Muslim population at 1.6 billion, equivalent to approximately 23% of the world total, this offers an excellent potential client base but the range of available Islamic finance products and services is largely under-developed. Some countries with majority Muslim populations, such as Malaysia and Saudi Arabia have relatively advanced offerings, and although there are signs that the market in Europe is finally taking off in earnest, North America’s Sharia-compliant banking market is almost non-existent.
The US banking sector is the largest in the world, accounting for approximately 10% of the global total. Banks such as Bank of America, Citigroup, and JPMorgan Chase are among the largest in the world, but when it comes to Islamic finance products, the United States offers very little.
The country’s major players have been slow to realize the market’s potential and none of them is active in the field of Sharia-compliant finance in the US. Demand is therefore serviced only by small, highly specialized provincial players with limited distribution networks. The most notable example is Ann Arbor-based University Bank Michigan, which has been providing Islamic finance products through its subsidiary UIF since 2003. UIF offers a range of products that include mortgages (both Murabaha and Ijara), savings accounts, commercial loans, and commercial real estate financing. While UIF services its clients well, its assets total just $115m, a minute proportion of the country’s overall sector. Its limitations are demonstrated by the fact that it is currently unable to finance gas stations, hotels or restaurants and that its maximum lend is just $2.6m.
With an estimated 2.6 million Muslims living in America, there is a potential market but according to Stephen Lange Ranzini, president and CEO of University Bank Michigan, “there’s not enough of a business to attract a major bank. It is a big enough niche for us to make a small profit.” There are also suggestions that politics and perhaps anti-Muslim sentiment are hampering efforts to grow the market. In recent years 20 states have passed legislation forbidding courts from invoking foreign laws in rulings. Arizona, Louisiana and Tennessee have passed such “Sharia ban” laws, and although these states have a very small number of Muslims, such action does little to inspire confidence among prospective new entrants. The future of Islamic finance in the United States therefore appears to be somewhat uncertain and the world’s largest banking market may continue to lag behind other banking centers.
If any bank chooses to get serious about offering Sharia-compliant products, they may just establish themselves as the provider of choice and profit greatly from what is undoubtedly a potentially lucrative market.
For a more in depth look at the future of Islamic banking across the world, see MarketLine’s Case Study ‘Islamic Finance: The state of the market.’
For news and views on the financial services sector, follow me on Twitter @NickMarketLine