Transcript Islamic Retail Finance in North America

Islamic Retail Finance in
North America
A Discussion Outline
for the Working Group
on Islamic Retail Finance
at Harvard University
March 19, 2005
Yusuf Talal DeLorenzo
Shariah Consultant
The Definition and Objective of
Retail Islamic Finance
the provision of financial services and
products that can replace
conventional/riba-based services and
products is the ultimate goal of modern
Islamic Finance in both commercial and
religious terms
Chicken or Egg?
Products developed for Institutional/HNW
investors lead to Retail products. Retail
deposits for Islamic Banks (investment
capital) lead to product development…
Examples
1. Murabaha structures on
metal markets
developed for Institutions
trickles down to retail as
Murabaha for home
finance
2. Mudaraba-based closedend funds (leasing, real
estate, stocks) trickle
down to retail as mutual
funds
3. Demand for stocks by
institutional/HNW
investors leads to
creation of Dow Jones
Islamic Market Indexes
which then form the
basis for dozens of retail
investment products.
A Further Example
Demands for increased sophistication… by
stock pickers and hedge fund
managers… lead to further refinements
in the screening criteria for stocks: i.e.,
two changes in the DJIMI criteria since
1999, and soon to-be-announced…
possibly through AAOIFI… refinements
in the screening criteria resulting from
hedge fund development
Demand for Islamic finance in
North America
Thirty percent of the seven million American
Muslims (who account for two percent of
the U.S. population) want to adhere to
strict Islamic principles when dealing
with their finances
The Numbers may be Enhanced by:
1. Consumer Education that introduces
Islamic Finance to those unaware of its
presence here and…
2. that dispels doubts and misconceptions
brought on by either:
1. early attempts (in the 80's and 90's) to offer
it here by small, inefficient, sometimes noncompliant (w/o proper Shariah supervision)
and costly operators
Or that dispels doubts and
misconceptions brought on by
2. failed attempts at "Islamization" of
financial systems in the Muslim world
(Iran, Pakistan, Egypt, Sudan)
Enhancing the Numbers
• Marketing efforts
• Tapping mainstream sources of
distribution
Examples
1. Islamic mutual funds offered as a choice
alongside conventional funds for the
401k plans of corporate employees
2. Islamic home financing options offered
as options through mainstream brokers
3. Takaful policies offered on the same
platform as conventional insurance
policies by the major insurance
companies
North American Muslim
Demographics
Better education and higher earnings mean
that a significant degree of sophistication
is required in whatever financial products
or services are offered to retail Muslim
consumers
Consumer Mandate
1. Islamic financial products and services
must be competitive in terms of pricing,
range of options, service features.
2. The notion of a religious premium is one
that many if not most Muslim consumers
in North America will reject!
Demand for Islamic-based
finance products
1.
2.
3.
4.
5.
6.
7.
8.
Financing home ownership
insurance
financing small businesses
saving plans
retirement
financing for education
credit/debit cards
investment vehicles
Beyond the Muslim Consumer
1. Synergies with ethically-based products, particularly
for investments – a market that is particularly strong in
the United States
2. While the Dow Jones Islamic Market Indexes may not
correlate exactly to the Domini 400, managers and
Shariah boards of Islamic funds may work together to
constitute portfolios of socially-responsible
investments (Azzad, for example)
3. Returns on profit-sharing deposit schemes may be
attractive to ordinary consumers… or rates on home
financing, or student financing, or takaful policies
Retail Growth
1. Real growth in the retail sector will begin
(has already begun) with home finance,
owing to:
1. the emphasis on home ownership in the US
2. Incentives like tax benefits
3. The perception that real estate is the best
kind of investment
The Key Product
1. Home finance is the key to the development
of all other Islamic financial products and
services in North America…
1. As a “big ticket” industry, in terms of revenues, it
leads all others
2. It provides the ideal “introduction to Islamic
Finance” to consumers
3. The qualification process may expose consumers
finances
2. THEREFORE… special care must be taken to
“get it right”
An Important Clarification
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N.B. There is no value to the argument that different
Shariah boards, or regions of the Muslim world, have
their own opinions in regard to the characteristics of
different transacting models (like murabaha, etc.),
because the only result of such an argument will be
anarchy in the marketplace.
Free market forces are one thing, participation in a
global industry (with its own standards and
established standard-setting institutions) is another.
Finally, consumers will decide what is right; but our
govt agencies must be allowed to see for themselves
what the issues are, and what is at stake.
Compliance
Compliance with regulations designed for
finance that is heavily dependent on
interest returns and rates for the
management of risk and profitability
demands cooperation from both sides.
The growing Islamic financial industry needs to
commit resources to the education of both
regulators and consumers. Such a
commitment may take the form of advocacy
group(s), lobbyists, resource center(s);
perhaps under the umbrella of an
organization(s) for Islamic financial service
professionals, or Islamic financial service and
product providers.