BRIDGING THE FINANCIAL GAP

BYELINE: Turki Buyabes

WASHINGTON- Islamic Finance is a growing concept in the business world, particularly in Europe and the Middle East as alternative form of financing.

 

What makes Islamic Finance different from conventional financial methods is that it adheres to sharia islamic law, which prohibits interest rates and the relationship between the Islamic Finance institution and the client, sometimes, is partnership. That is in addition, that Islamic Finance deal with productive and useful ventures (no gambling, pornography, for example are included in the list of ventures to be financed).

Some of the common Islamic Finance concepts are prominently used around Europe and the Middle East. For example when a bank does not loan money to a person who buys a house; instead, it buys the property itself, this allows the customer the option to either buy it back from the bank at a higher price paid in installments, this concept is called murabaha literally  meaning “winnings” or they can make monthly payments to the bank comprising both a repayment of the purchase price and rent until the customer owns the house completely, this is the concept ijara meaning “leasing” in Arabic.

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This growing global financial tool has not made its way into the United States, but Dr. Ghiyath Nakshbendi, an executive in residence at the Kogod School of Business at American University  and an international businessman with over 35 years of experience, working in several Middle Eastern countries, is trying to change that. Nakshbendi, an executive in residence at the Kogod School of Business at American University  and an international businessman with over 35 years of experience, working in several Middle Eastern countries, is trying to change that.

 

Dr.Nakhsbendi with a few of his students

Dr.Nakhsbendi with a few of his students

He currently is trying to form an advocacy group that will lobby for the implementation of Islamic Finance in the United States. He began teaching a class on Islamic Finance. Last fall, the first of its kind in the area, to educate students, on this growing concept. Now he wants to educate the country.

 

“I am trying to explain the foundations and the principles of the field, because the knowledge base is very limited here in the U.S. I use conferences, lectures, etc. to share my knowledge of the field to whomever is interested to listen. There is no such opposition, because, as I said, our knowledge in the U.S. about it is still limited,” He said.

 

Although Islamic Finance offers interest free product and services, and puts an emphasis on institute-client relationship, there are still certain aspects to it that will make it hard for U.S. financial institutions to accept and integrate it into their economy. Dr. Nakshbendi explains that Islamic Finance is not perfect even with its specialized core concepts.

 

“There are definitely pros and cons to Islamic Finance, like any other financial tools. The pros are many including investing in ‘socially responsible businesses’ and avoiding charges that are not justified. The cons are it will take a long time to modify and make changes in our legal regulations (banking and taxation) to make it feasible.”

Dr. Hossein Askari, a fellow International Business professor at George Washington University and author of several books on Islamic Finance laments the fact that most people think Islamic Finance provides interest free loans, but it is more then that .

 

“Islamic Finance prohibits risk-shifting and advocates risk-share. It still carries the notion of debt which is called Qard Al Hassan which literally translates into “loan of goodwill” , but you cannot have debt that carries that interest. It is a system that promotes equity finance (owning shares, being a partner in a contract, even bonds are allowed, as long as said bonds have direct access to assets. For example, a Sukuk which are Islamic bonds, allows you to buy an asset such as a house and rent the house and pass the income to the bond holder, which important that they have access to assets,” he said.

 

A prime example of a successful Islamic finance operation that operates on these principles is the Ijara Loans company. Ijara literally means “lease” in Arabic and Ijara Loans provides is a company specializing in Islamic finance alternatives. It is operated by SAMAD American Holding Corporation.

 

According to their website they are not a loan originator or broker, but a Sharia (Islamic Law) structuring company working with licensed providers to structure Sharia compliant financial transactions. They offer  services in Commercial, Business and Residential finance and Sukuk/Murabaha investments.

 

“Our mission, we are a community oriented, non-profit organization that is striving to keep people out of Riba (interest), and I believe that Allah has blessed us for our motives and has allowed us to survive despite the pettiness of our competitors.” says Shoeb Sharief an Ijara representative and agent for the company.

Although they are successfully operating in more than 50 states, they still faced obstacles to their success.

 

Mr. Sharief, talked about how in 2001, SAMAD American Holding Corp. (SAHC) attempted the creation of an Islamic Bank.

 

“I was invited to join them, but after 9/11, it was nearly impossible to get any governmental support for the creation of an Islamic bank,”  he said.

 

They also faced obstacles from political and business perspective. Firstly, from the government, IjaraLoans had to comply with licensing requirements, specifically the Dodd-Frank Act. The second obstacle from a business point of view was that their competitors would badmouth their services in the community.

 

“ We get a lot of bad mouthing from our competitors, some more subtle than others, one of the comments made is “we have been in business for X year and we only operate in 16 states, how can they operate in all 50?”  so this simply leads people to have doubts for no reason, when the reality is that it is not profitable for them to be in all 50 states, so they only chose to focus on profitable states, while we use our model to service all 50 states and as we are a non-profit, the motive is different, they also try and attack our Sharia compliance, even though they use essentially the same processes and funding mechanisms, but Alhamdolillah, most of our community is smart enough to see beyond these tricks and see the real benefit of our product,” he said.

 

Dr. Askari however sees that in the bigger picture it would be very difficult to integrate Islamic Finance in the United States. As it would require a complete overhaul of the US financial system.

 

“The U.S. bank system is based on a subsidy FIBC, which makes banks takes risks and handout loans. Banks will accept these risks, and if it goes bust they get bailed out by the government.”

 

There is no incentive to change the financial system. In 2012 the Financial Reform Act was introduced in order to lay out regulations, but as soon it was passed, the government went back on it.” He said.

He says Islamic Finance will never be accepted in the US due too much opposition and interests that will be comprised.

 

“The Financial Lobby is most powerful lobby here, and they own the congressmen.”

 

Nancy Wells, a veteran in the finance industry based in New York City, stated that it would not be easy at first for the American people to accept the cores of Islamic Finance

 

“Although many of the principles such as Allah owns all wealth and allowing for a free market system would seem to integrate. However, this means there is no interest because growing existing wealth would violate some of the principles. Foremost, the prohibition of certain practices such as gambling, which if viewed in a certain way is a standard practice in financial markets, also would not go over with the American people,”  she said.

The biggest obstacle she says is the inherent lack of understanding and somewhat biased view of the Islamic religion and practices by the American people.

 

“We fear what we do not understand, so this would be difficult to get the average investor to do. However, as large banks like Goldman Sachs, have recently started to issue Islamic bonds, there is a chance that in the financial world, these practices would be accepted.”

She also thinks that  the media would play the deciding role in whether Islamic Finance would be accepted by the masses.

 

“The media does not usually show any facet of the Islamic culture, religion, or financial world with a lot of depth or understanding, exacerbating the problem of an uninformed American public fearing Islam. The media would be central in educating the masses on the importance of the Islamic finance system, and how certain parts of it can be applied to the United States. We will never see a full integration, but the media would need to help educate people, especially those outside the financial world,” she said.

Nakshbendi and Askari have different views in regards to the growth of Islamic Finance in the United States.

 

Askari believes the only thing that could help Islamic Finance grow its reputation here is its complete adoption by Muslim countries and whether or not it would be successful .

 

“If Muslim countries adopt the system and make it work, then in 100 years it will spread across the United States.”

 

Professor Nakshbendi on the other hand sees no problems to Islamic Finance being accepted as an alternative form of financing.

 

“I do not see it having any problems of it being accepted here and other countries, after people learn more about it and having institutions who are willing to offer such services. As it prominently used in a few European capitals, like London and Paris who are working to expand the use of this alternative methods of financing. The more we learn about, the more, I think, will join forces to advance it in their economies. It just make sense. IF withstood the global financial crisis, is in that a strong testimony of its value and benefits!”

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