Islamic Finance brings new model of banking
There is no shortage of banks in the Tysons Corner area, but the branch that recently opened in an office building on Spring Hill Road does business a bit differently than the rest. In accordance with Islamic law, none of the interactions conducted by University Islamic Financial Corporation involve interest, the primary source of income for any traditional bank.
« A few money lenders can gain tremendous power with interest, » said Sami Ahmad, the branch’s business development officer. « If you keep giving people money and putting all the risk on them … they’ll get in a bad situation. » The Islamic style of banking, he said, promotes « a certain social justice in the community » by shifting risks and returns across the strata of society.
Islamic law, called Sharia, prohibits interest because it perpetuates economic inequality, said Ahmad. « Just because you have capital doesn’t mean you should be able to make money. You have to employ that capital, and you should share that risk. » Otherwise, he said, the result can be a situation wherein « the masses owe their entire lives to a few people just because they had money. »
Instead of charging or paying interest, he said, University Islamic enters into partnership with its clients. Bank accounts offer profit sharing, rather than fixed interest rates. « We’ll give you whatever we earn on our investments, » said Ahmad. « Right now, most of our funds are going into mortgages. Whatever we get back, we’ll share with depositors. It could be 3 percent one month and 5 percent the next month. »
The mortgages the bank invests in, however, are not of the traditional sort. Rather than issuing a loan and charging interest on it, University Islamic buys the house and then might sell it to the homebuyer at a marked-up price, with the money to be paid back over a period of time. Other arrangements could include co-ownership of the house or a rent-to-own agreement. « The consumer would be paying the same. It’s just that we’ve removed interest out of it, » said Ahmad.
However, the client is not faced with interest rate hikes if a payment is late. « We try to be as lenient as we can, » said Ahmad. Because the bank may be a co-owner of the client’s house or, in the case of a business loan, a partner in the client’s business, it is in the bank’s interest that the business succeeds or that the house is not foreclosed upon, he said. « We don’t look for ways to squeeze them any more. We look for ways to help them. »
The partnership model also discourages the Islamic banker from allowing clients to get in over their heads. This is one reason the bank is doing well at a time when many lenders are suffering, said Ahmad.
« We never did any of the funny mortgages, » said Amjad Quadri, University Islamic’s assistant vice president of business development, noting that the bank had stuck with fixed, 30-year payment plans while some others were issuing high-interest loans with adjustable rates to risky clients. « We made sure people could afford the homes they were going into. »
Ahmad said the bank had seen only one foreclosure since the housing crunch set in.
Also, said Quadri, the bank’s profit-sharing model for its depositors means it pays out less when it makes less. However, he said, « Islamic CDs, rate-wise, are doing better than the market, » although he noted that they were previously paying out at lower rates than the market average.
Jared Rubin, a post-doctoral fellow at George Mason University’s Mercatus Center in Arlington, said he thought the major distinctions between Islamic banking and traditional banking are that the Islamic system circumvents the practice of paying and collecting interest and that Islamic banks do not invest in certain companies, such as those that trade in alcohol. Rubin is also an organizer for the university’s Center for the Economic Study of Religion and a professor of economics at California State University, and he recently finished his dissertation on interest restrictions in Islam and Christianity.
« A lot of scholars would say there’s very little difference, » said Rubin. However, he said the system of partnerships does put « a little more of the risks » on the banker and give « a little more power » to the client. « There are certainly arguments that could be made that it’s a more equitable system, » he said.
As for the bank’s continued health during the current economic downturn, he said there was little inherent in the Islamic banking system that would necessarily cause a bank to fare better during a slump, although the careful screening of clients and investments that can result from the bank being a partner in the transactions would help it to survive tough times. He said the bank might also not reap profits as large as its competitors during times of economic growth. « I think it’s a good thing, to kind of soften the blows, » he said.
He added that it had been argued that Islamic banks had a level of immunity to competition because many of their clients are willing to pay a « small premium » in order to bring their banking in line with their religion.
University Islamic Financial was started by University Bank, a community bank in Ann Arbor, Mich. that was looking for a way to attract business from Muslims in the area, said Ahmad. The bank began offering Islamic banking four years ago, he said, and it has since opened an office in New Jersey, as well as the new Tysons Corner office.
« We’ve got a lot of Muslims in this area, » he said, noting that many keep their money in a checking account to avoid being paid interest and do not own a house in order to not pay interest.
He said Islamic banking is booming in the Middle East and that the industry as a whole is growing by about 20 percent per year, with several major banks beginning to offer services. However, he said, there is only one other bank in the U.S. – Devon Bank in Chicago – that offers Islamic services as extensive as those provided by University Islamic. That bank now deals primarily in home financing but is developing auto financing and insurance programs.
Systems similar to present-day Islamic banking were used in the Middle East in the early days of Islam but died out with the decline of the Islamic empire, said Ahmad, noting that usury was also once frowned upon by all of the Abrahamic religions — Judaism, Christianity and Islam.
The Old Testament prohibited Jews from collecting interest from other Jews, said Rubin. Later, he said, the Catholic Church forbade any usury, particularly during the Medieval centuries. However, the prohibition was of less and less concern, until the early 19th century, when the Church officially gave acceptance to modern banking. For all practical purposes, « it hasn’t been a moral concern in the Christian world for four or five centuries, » he said.
However, said Ahmad, in recent years, « non-Muslims are starting to see the benefit of banking this way as well. »
By Mike DiCicco, Connectionnewspapers.com – April 22, 2008