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A Growing Market

Islamic Financing Going Mainstream


Not too long ago a representative of American Finance House visited a mosque in the Northern California community of Santa Clara, where he talked to the faithful about his company’s Islamic financing activities. The talk, a marketing pitch, was welcomed by the congregants, which included Arab-Americans and other ethnicities.

A couple of months later, when Ahmad Adam was looking to purchase a car, he remembered American Finance House - LARIBA and their activities as they relate to Shari’aa, or Islamic law. Adam, who was born in Alexandria, Egypt and currently works at Sun Microsystems, contacted Pasadena-based American Finance House - LARIBA and eventually obtained a $10,000 loan to purchase his car.

Adam says he felt it was important to at least try and conduct his business activities in accordance with Islamic financing practices. “Islamically, we are not supposed to be dealing with interest, unless we have no other choice,” the 40-year-old Adam says. “But as long as we have the choice, it’s obligated upon us to use the Islamic way.”

Like Adam, a growing number of Muslim Arab-Americans are increasingly turning to Islamic financing practices, also known as LARIBA (no Riba.) While, it is estimated that 23 percent of the 3.5 million Arab-Americans in the United States are Muslim, it is unknown how many actually subscribe to Islamic finance practices.

Just what is Islamic finance? As with many religious concepts, it depends on who is interpreting or defining it. For the most part, however, certain basics as derived from Shari’aa principles seem to apply to everyone:

The financial instrument cannot charge or derive interest. The investment funds must be used in means in accordance with Islamic law, namely in socially responsible investment activities. Invested funds cannot be used to promote or sell sex, pork, alcohol or tobacco. The law is mainly a response to the often excessive interest rates that lenders charged in ancient times. Accordingly, the main vehicle for subscribing to Islamic finance law has become the lease-to-own option, which an increasing number of Muslim Arab-Americans are turning to.

The trend toward Islamic financing, not only in the U.S. but also among Muslims worldwide, has caught the attention of major institutions. While Islamic financing practices have been embraced to some degree since the time when the Koran was first revealed, the growth of this sector and interest in it by the West is a relatively new phenomenon.

Not too long ago, New York-based Citigroup Inc. set up a subsidiary in Bahrain -- Citi Islamic Investment Bank – to target the estimated 1.2 billion Muslims worldwide. London-based HSBC Holdings and Melbourne-based Australia and New Zealand Banking Group (ANZ) have similarly established programs targeting Muslims.

Given the large and growing worldwide Muslim population – as well as the estimated eight million Muslims in the U.S. – it is not surprising that the major financial banks and Wall Street institutions are taking notice. Islamic financing is practiced, in some form or another, in more than 100 countries, with the total market estimated to be about $100 billion.

“It’s a rapidly growing sector of the world economy,” says Thomas Mullins, executive director of Harvard University’s Center for Islamic Finance Information Program, which was set up in 1994 to study and quantify the growth of business associated with this practice.

The establishment of such a program by one of the pre-eminent universities in the world -- yet another example of the interest in Islamic financing practices – was in response to one of the major problems associated with the practice: The lack of information and research on Islamic financing and applications.

The decision to create the program, Mullins says, was “prompted by a request from some friends in the investment and money management business. There was no clear easy place to go and find out information on this Islamic market.”

Among other things, the program has produced a book -- Islamic Law and Finance-- regularly hosts conferences and conducts studies on the topic. PLEASE Include LARIBA Bank Book by myself, the pioneering book in America on Islamic Banking & Financing. Pleasealso include the portal for those who want to learn more.

“Islamic financial markets are a transnational emerging market,” says Mullins, who adds that providing timely and comprehensive information will help companies and consumers better understand the practice. “This is what our program is aiming to provide.” Mike Maguid Abdelaaty, president of American Finance House - LARIBA, says Harvard University’s involvement has gone a long way towards propelling Islamic finance into the mainstream.

“I think this adds a lot of credibility and points to the fact that there’s a lot of focus in the field.”

While the interest in Islamic financing practices and their real world applications is a relatively new phenomenon in the West, Arab banks have long sought to tap this niche, especially as it applies to the affluent Arab-American community in the United States. Hani K. Findakly, president of the Arab Bankers Association of North America, says he has seen an increased interest in the Islamic finance practices among the association’s members.

“There’s been a rise in using Islamic instruments for financing projects and investments, both in the U.S. as well as in the Middle East and elsewhere,” he says. “You see a number of institutions that have been set up here with a specific mandate for Islamic investments as well as U.S. institutions that have set up separate departments or units and even separate organizations that deal with Islamic banking and Islamic financing.”

The institutions establishing these programs may not necessarily subscribe or believe in the principles behind Islamic financing. Nonetheless, motivated by potential profits, they are offering instruments and vehicles that are in accordance with those religious laws, Findakly says.

“There’s nothing religious about Citicorp setting up a unit that deals with Islamic finance, except that there are customers there,” he says.

But if Islamic financing is becoming mainstream, it’s not quite there yet. For example, the American Bankers Association, the industry’s major trade group, had little or no knowledge of the practices behind Islamic financing. Indeed, a spokesperson indicated the organization is not aware of any major American financial institutions that are practicing Islamic financing.

Even with the heightened awareness of the profit possibilities presented by Islamic financing, Muslim and Arab-Americans who subscribe to that faith sometimes still find it difficult to fully subscribe to it. Mostly, that’s a reflection of the relatively limited number of options offered them.

That problem, however, is expected to be addressed by the growing number of institutions – some Arab-American – that are quickly moving to fill that void.