An Emerging Islamic Financial Landscape In North America

An Emerging Islamic Financial Landscape In North America Alfatih Aryasantana GP Kamal Hassan Muhamad Kholid Rehan Saeed (G 0515575) (G 0510637) (G 0517003) (G 0515171)

Outline ® Islamic Financing Landscape in: Malaysia ® North America ® ® Genesis: How it all began ® Identifying the Markets in NA ® Islamic Financing Products ® Challenges ® Conclusion

Islamic Financing in Malaysia A national agenda backed up by the government Islamic Financing in North America Grassroots started by the Muslims of North America

“One of the basic functions that determine the robustness of an Islamic banking system is …” ® Adequate institutions and ® Market Infrastructure

North America Malaysia Islamic Financial Landscape Islamic Financial System Islamic Financial Market Surplus Sector Direct Financial Market Islamic Money Market Indirect Financial Market Commercial Banks Islamic Capital Market Islamic Bond Market Deficit Sector Islamic Equity Market Finance Companies Takaful Unit Trusts Merchant Banks

North America Islamic Financial Landscape Conventional Islamic Financial System Surplus Sector Conventional Islamic Financial Market Direct Financial Market Islamic Money Market Indirect Financial Market Commercial Banks Conventional Islamic Capital Market Islamic Bond Market Deficit Sector Islamic Equity Market Finance Companies Takaful Unit Trusts Merchant Banks

1969 Tabung Haji “…genesis of the present Islamic financial structure began with the institutional building in 1983. ” Islamic Unit Trust Arab-Malaysian Unit Trust Syarikat Takaful Malaysia Islamic Banking Act Time Line 1983 – present day 1969 1984 1983 1993 Tabung Haji The First Islamic 1994 1999 Islamic Inter-bank Bank Islam Bhd KL Shariah Index 1981 Islamic Cooperative Housing Canada Money Market Financial Institution in Malaysia Amana Mutual Funds (WA) 1986 SAMAD Group (OH) United Bank of Kuwait (NY) Dow Jones Islamic Fund (NY) UM Financial Canada Time Line 1981 – present day 1981 1987 1994 LARIBA (CA) MSI (TX) HSBC [NY only] University Bank/University Islamic Financial Corp in 2005 1996 1998 1999 2000 Islamic Cooperative Islamic Financial Housing Canada 1996 Takaful USA (NJ) Bank Whittier (CA) Azzad Funds (VA) 2002 Institution Dow Jones Development Islamic Index (NY) 2003 2004 Devon Bank (Chicago) Guidance Financial Group (VA) 2005 Shariah Capital (NY) (Hedge Fund) Salam Financial (Canada)

Name of Institution Location Type of Institution Islamic Financial Products Offered LARIBA USA Finance House Home, auto, and business financing Guidance Financial Group USA Finance House Home Financing SAMAD Group USA Finance House Services – Home Financing MSI USA Finance House Home, auto, and equipment Islamic Co-operative Housing Corp Canada Finance House Home financing Ansar Co-operative Housing Canada Finance House Home financing Qurtuba Islamic Housing Coop Canada Finance House Home financing Salaam Financial Canada Finance House Home financing UM Financial Canada Finance House Home financing, Takaful Canada Islamic Insurance First Takaful USA* USA Islamic insurance Insurance United Bank of Kuwait* USA Conventional Bank w/ Islamic window Home financing University Bank USA Fully fledge Islamic Bank Interest-free deposit accounts, home financing HSBC USA Conventional Bank w/ Islamic window Home financing, interest-free checking accounts, credit/debit card Devon Bank USA Conventional Bank w/ Islamic window Home and business financing Bank of Whittier USA Conventional Bank w/ Islamic window Interest-Free Personal and Business Checking Account, Riba-Free VISA ATM/Debit Card, USA Islamic Mutual Fund Halal investment, Education saving account, retirement plans, saving for hajj Azzad Asset Management USA Islamic Ethical Fund Hala Investment Shariah Capital USA Islamic hedge fund Halal Investment Dow Jones Fund USA Islamic mutual fund Halal Investment Dow Jones Islamic Index USA Shariah Index Investment screening Saturna Captial Mutual Funds) (Amana

IDENTIFYING THE MARKET

Experts identify three distinct levels of observance in the Muslim community. ® Most observant Muslims who don’t use conventional financing. ® the core market for Islamic financing arrangement ® Muslim who currently use conventional financing, but might switch to Islamic financing if available. ® consist of N. American born children of immigrants ® Least observant Muslims, who currently use conventional financing, would continue even if religious compliant alternative were available.

Mosque affiliation does not necessarily imply a demand for Islamic finance, financial institutions assume that mosque attendees would form the basis of their Islamic market and have concentrated their outreach efforts on this population. In 2001, there were 1, 368 mosques in the U. S. The states with the greatest number by rank were; 1. California – LARIBA 2. New York – HSBC only offers Islamic financing in New York. . 3. Michigan – University Islamic Financial 4. Pennsylvania – Guidance Financial Group 5. Texas – MSI (Muslim Savings & Investment) 6. Ohio - Samad Group In Canada, it largest population of Muslims and mosque can be found in Toronto; Co-operative Housing Society of Toronto, UM Financial, An- Nur Cooperative Corp. headquarters are located.

WHAT WERE THE NEEDS TO THE MUSLIMS IN NORTH AMERICA? Muslims needs in the West have primarily been the willingness to become homeowners.

HOW IS CAPITAL MOBILISED BY IFIs IN NORTH AMERICA?

UM Financial Model: Capital Mobilization

CHOICE OF ISLAMIC FINANCING PRODUCTS IN NORTH AMERICA

Early Stages: ® Murabahah ® Ijarah ® Due to “similarities” in structure with conventional financing ® Murabahah is close to loan contract ® Ijarah close to leasing contract

MURABAHA 1. Consumer selects house and applies to financier. 2. Financier approves consumer and house. 3. Financier pays seller and obtain title 4. Financier sells on deferred basis to customer a. Financier transfers title. b. Consumer makes monthly payments and c. Grants mortgage and signs note.

Murabaha Illustration (1) Customers Identify the Assets and Request bank to finance the house. (2) Islamic Bank purchase aforesaid assets Customer/ Owner Islamic Bank (5) Settlement on deferred term (4) Sell the Goods/Assets at marked-up price (3) Payment using Bank’s own funds House Developer

IJARA wa IQTINA Ijara wa iqtina: The words mean ‘leasing and acquisition’ and it is variably called ijara muntahia bitamlik, ‘leasing ending in ownership’ or lease to own. The United Bank of Kuwait and La. Riba as well as others have applied this concept. It has a history of informal application as well as program application dating to the 1920’s.

Ijara Illustration 1. Client identifies and approaches Vendor or supplier of the asset that he/ she needs, collects all relevant information; 2. Client approaches Bank for ijara of the asset and promises to take the asset on lease from the Bank upon purchase; 3. Bank makes payment of price to Vendor; 4. Vendor transfers ownership of asset to Bank; 5. Bank leases the asset, transfers possession and right of specified use to Client; 6. Client pays ijara rentals over future (known) time period(s). 7. Asset reverts back to Bank.

Musharaka / Declining Balance Partnership 1. Consumer selects house and applies to financier. 2. Financier approves consumer and house. 3. Financier and Consumer jointly buys house and obtain title in common tenancy 4. Consumer leases house from common tenancy for monthly rent 5. Upon buyout, title is solely in consumer’s name

The Challenges faced for further development ® ® ® Extensive regulatory environment ® Organizations offering Islamic finance both product and service conformance from state and federal regulations as well as the Shariah ® Restrictions on the range of permissible investments that commercial banks may hold ® Costs of offering products that have little precedent ® Disapproval to offer profit-loss sharing deposits Capitalization of Funds Market Infrastructure

Conclusion ® ® Islamic investment and financial products remain unmet in North America To increase the availability of Islamic financial services, local Islamic financial institutions must: Access the capital markets ® Leverage capital by securitizing assets ® Ally with investment and brokerage firms in the US and Canada The legal and regulatory framework in North America is not completely opposed to Islamic financing ® ®

THANK YOU Wassalam