Finance the Islamic way at Michigan bank

By JEFF KAROUB and SEBASTIAN ABBOT
Big financial institutions have been battered by mortgages gone bad. But a tiny Michigan bank is getting attention in the industry by turning a profit on loans without even charging interest.

Its specialty: financial products that comply with Islamic law. That means no collecting interest, no short selling and no contracts that are considered exceedingly risky.
It also rules out some of the activity that got Western finance in trouble - subprime mortgages, credit default swaps and the like.

"When you look at the economic crisis we're in, if you were to follow Islamic or Sharia financing, you couldn't have this crisis," said John Sickler, corporate director for the bank, University Islamic Financial Corp. in Ann Arbor.

Islamic finance operations aren't prohibited from making a profit. Far from it. Instead, banks that comply with Islamic law, or Sharia, earn money from fees that are part of the cost of the loan, some paid up front and some over time.

University Islamic Financial has two types of financing, one called a marked-up installment sale and the other a lease-to-purchase sale. Fees in both cases are comparable to interest payments in traditional loans, bank officials say.

For example: A seller who bought a house for $100,000 could sell it for $120,000 or even $300,000, provided the buyer agrees it's a fair deal. The home could be sold on an installment plan negotiated by buyer and seller.

The bank is a subsidiary of Michigan-based University Bank, and its leaders say they have talked recently with executives from two national banks hoping to learn more about the business.
Islamic law says money cannot grow by itself, the way it does with compounding interest. Trade is acceptable as long as the equal amounts of money are traded or two different things are swapped with a fairly negotiated price.

So a dime for an apple would be considered "halal," or religiously acceptable, while one apple for two apples would be "harem," or unacceptable.

Even at University, not everyone is on board. Some customers have closed their accounts when they learned it was engaging in Islamic finance. Some employees who objected to the move quit. The bank also stopped having a Christmas party and no longer serves alcohol at after-hours events.

The Michigan bank focuses on contracts that clearly spell out the risk and reward between lender and borrower. University Islamic Financial says it's the nation's first to offer Sharia-compliant, federally insured deposits.

Islamic banking is more common overseas, but some U.S. banks and credit card companies are exploring the idea of branching out into Sharia products to reach out to the growing Muslim population.

So Islamic banking is only expected to increase in coming years. Already, Citigroup (nyse: C - news - people ) offers Sharia products and services to clients overseas, and Visa says it has worked with banks around the world to offer Islamic-compliant products.

The conventional banking system could learn a lot from the idea, said Jawad Ali, a finance lawyer based in Dubai and London who specializes in structuring Sharia-compliant deals.

"We haven't made as much money as the conventional banks because we can't, for example, sell what we don't own," he said. "We have to own it before we sell it. We may have missed out on gains in good times ... but we haven't suffered any losses."

Of course, there's no guarantee that banks will find immunity in Islamic finance from a severe global downturn.

"I am not doing banking on Mars," said Afaq Khan, the head of Saadiq, the Islamic banking arm of Standard Chartered (other-otc: SCBEF.PK - news - people ) Bank, based in London. "If real economic activity slows down significantly, the Islamic banking industry will also be affected."

A Sharia-compliant mortgage is like rent-to-own: There is no note, or mortgage, but typically part of each month's payment is held toward the ultimate purchase. The property is titled to an individual trust, or limited liability corporation.

Deutsche Bank (nyse: DB - news - people ) estimates total assets in the Islamic finance market at $1 trillion - a tiny fraction of global financial assets, but the bank said in a recent report that the sector been growing at a clip of 15 to 20 percent per year.

Most big international banks already have Islamic banking arms, and a November report by Moody's (nyse: MCO - news - people ) Investors Service shows that Islamic banks have been fairly resilient to the global economic downturn.

The U.S. banking industry has not embraced Sharia banking. Wachovia (nyse: WB - news - people ), Wells Fargo (nyse: WFC - news - people ) and JPMorgan Chase (nyse: JPM - news - people ) said they have not adopted Sharia practices and declined to comment about what they may do in the future.

"As far as the future, we are always looking for opportunities to better serve our customers, but our specific strategy is proprietary," Wells Fargo spokeswoman Lisa Westermann said.

University Bank President Stephen Ranzini declined to name the U.S. banks that University Islamic has talked to. But he said his bank soon plans to offer its services such as residential lending to other banks and credit unions nationwide.

Sharia banking is an idea "that is long overdue in this country," said Amal Berry-Brown, vice president at Comerica (nyse: CMA - news - people ), a Dallas regional bank that has talked with Ranzini. "At the same time, there really is quite a bit of work to be done."

Comerica has a strong customer base around Detroit, home to the nation's most concentrated Muslim population.

One issue: There is "a big variance" within Sharia law about exactly which financial practices are considered good and bad, said Mustafa Gultekin, a finance professor at the University of North Carolina at Chapel Hill.

For University Islamic, the niche appears to be paying off. Ranzini said he expects it to generate more than 25 percent of the overall bank's revenue this year, up from about 20 percent last year.

AP Business Writer Jeff Karoub reported from Detroit; Associated Press Writer Sebastian Abbot reported from Cairo; AP Business Writer Ieva M. Augstums reported from Charlotte, N.C.; and AP Business Writer Emma Vandore reported from Paris.

Source : Associated Press

First Islamic Equity Product Launched In UK

By Mushtak Parker
LONDON: The London-based ABC International Bank's Islamic Asset Management (IAM) entity, both of which are subsidiaries of the Bahrain-based consortium bank, Arab Banking Corporation (ABC) Arab Banking Corporation (ABC) , has launched the first retail Shariah-compliant capital-protected equity product in the UK under its 'Alburaq' brand.

The savings product, which has a minimum subscription of just £500 and is a Shariah-compliant alternative to a conventional guaranteed equity bond, adds to an increasing number of retail Islamic financial offerings in the UK market, which now includes mortgages, Takaful (insurance), pensions, current and deposit accounts and even escrow accounts for money transfers. Other Shariah-compliant retail products in the process of being launched include ISAs (investment savings accounts) and child trust accounts.

The product was structured by ABC International Bank and is offered in partnership with the Bank of Ireland, which has a long history of providing guaranteed equity bonds to UK consumers. ABC Group ABC Group is one of the largest banks in the Arab world with assets totaling around $32.7 billion at the end of December 2007. The group announced net profits of $125 million for the year 2007.

The government of Prime Minister Gordon Brown has been very supportive of developing the Islamic finance sector under the Labor Party's social and financial inclusion policies. At the same time, it is the stated policy of the UK to develop London into an international hub for Islamic finance, investment and trade. Only yesterday at the Jeddah oil summit, Brown reiterated that oil producers in the GCC states should divert some of their record liquidity surpluses to investment in the developed countries in renewable energy initiatives and other sectors. These funds could be channeled through sovereign wealth funds; through conventional or Islamic capital flows. Bahrain-based Arcapita Bank Arcapita Bank , for instance, was one of the first Islamic financial institutions to invest in alternative energy in the UK in a wind farm project developed by Innogy.

The UK Treasury and Financial Services Authority (FSA), however, are only too aware that the Islamic finance industry in the UK needs to improve customer access to and awareness of Islamic retail financial products. UK Economic Secretary and City Minister Kitty Ussher, who is effectively in charge of Islamic finance at the treasury, at a meeting of the Islamic Finance Experts Group (IFEG) at the treasury earlier this year, stressed that "the UK is at the forefront of developments in Islamic finance and London continues to seize new opportunities. We have made tremendous inroads in the wholesale markets...But there is also an important domestic market, which we want to be accessible and open.

"There are nearly two million Muslims living in the UK and, thanks in part to legislative changes introduced by this government, the Islamic mortgage market is now worth over £500 million. Going forward, the government and industry want to continue to do all it can to see the retail market flourish and ensure that everyone - regardless of faith - has equal access to competitive financial products," he said.

ABC International Bank claims that the Alburaq savings plan provides a new way for those wishing to invest in accordance with their faith and provides savers easy exposure to potentially unlimited returns linked to shares in major companies, all with the added comfort of capital protection and Shariah compliance.

According to Keith Leach, head of Alburaq at ABC International Bank, said, "Alburaq is very excited to be the first to bring a Shariah compliant capital protected product to the retail market in the UK. Over the past few years the UK has seen an increase in the availability of Islamic home finance products, but there remains very few options for Muslims wishing to save money in accordance with their religious beliefs. This new account is also an easy way for Muslim savers to gain exposure to the equity markets, in a secure way. While it is considered permissible within Islam for Muslims to own shares, there are restrictions on the type of companies that are considered allowable. The companies must not be over-reliant on debt nor must they be engaged in activities that conflict with the principles of Shariah. Many of these principles will be similar to those required by ethical investors."

Savers will be able to deposit funds with the Bank of Ireland for five years in an account structured under the Wakala contract. At maturity, savers will receive their initial capital back together with 100 percent of any gain in the performance of a basket of 20 shares in global companies selected from the Dow Jones Islamic Market (DJIM) Titans 100 Index.

Des Crowley, chief executive of the Bank of Ireland UK Financial Services, is confident that "this is a highly innovative product, which is the first of its kind and directly addresses the saving needs of the Muslim community. We have been working with Alburaq for four years providing Islamic Home Finance and (this product) should be seen as the next stage in our development of Shariah compliant products."

The Alburaq fixed-term savings product offer closes on Sept. 5 2008 and investors will have their funds tied up for five years. The maximum opening deposit is £1 million and the promoters stress that there is no cap on the returns; in other words customer's enjoy 100 percent of the calculated return.

Capital protected funds are not new in the market. Several institutions - such as HSBC, the National Commercial Bank, Al-Rajhi Bank, Deutsche Bank and others - have launched Shariah-compliant capital protected funds in the Middle East.

While this product is new in the UK, Islamic equity funds per se are not, although they have had a very mixed record. Al-Madina Equity Fund, the Al-Safa Equity Fund and the Parsoli Global Equity Fund, which were launched at different times over the last decade or so, have all dismally failed. The first two were closed soon after they were launched. The latter has failed to make any impact. The reasons are manifold - the wrong promoters, wholly inadequate marketing strategies and resources, and perhaps the wrong timing.
Source : Arab News