ABA Banking Journal - November 2007 - (Page 53)

out, was the simplest part of a complex venture. The central issue is Shariah, Islamic law. All forms of traditional Western financial relationships involving payment or receipt of interest violate the Shariah prohibition of participation in usury, whether as payor or receiver. Any pre-determined return on a contract, in the sense of interest, is barred. Investments in activities forbidden to or distasteful to Muslims under Shariah are also barred, ranging from mutual funds involving investments in interest-bearing instruments, or involvement in alcoholic beverages, gambling, pork processing, or pornography. (For further discussion, see the digital edition of the September ABA Banking Journal, page 38c, “Cultural challenge makes banking Minneapolis’ Somalis difficult.”) Further, some basic concepts of Western credit are not accepted under Islamic law. Ranzini explains that the Islamic culture has no concept of a personal guarantee, hence personal notes are irrelevant in Islamic banking, and therefore no parallel exists for unsecured credit. The arrangements aren’t even properly termed “loans,” because they are, in a sense, structured more as partnerships with the hope that the bank and the borrower/partner will both gain from the relationship. Thus, says Ranzini, “you have to make your recovery from the asset, and you can’t go after the individual,” should something go wrong. Thus, while the bank’s operation, University Islamic Financial Corp., which is structured as an 80%-owned, “firewalled” bank subsidiary, offers multiple home financing options and is about to launch a commercial real estate secured loan product, personal unsecured loans and credit card offerings don’t appear to work in the Islamic vein. (The remaining 20% is owned by Virtue Investors, LLC, an Islamic investors group.) What does work is up to groups of experts. There is no central authority in Islam, no equivalent of a Pope. Thus institutions that would engage in “financings,” as Ranzini terms Islamic credit arrangements, as well as offering deposits and investments, must obtain rulings from groups of scholars called “Shariah boards.” If the scholars engaged by the institution approve of the structure of the institution’s programs—including every document involved, lest a slip of terminology taint the arrangement—a “fatwa,” or holy document, is issued to that effect. (Some institutions attempting to serve the Islamic market have actually been hit by fatwas criticizing their programs.) This is an ongoing challenge, not unlike compliance with secular laws. The program must be re-assessed annually, to make sure nothing has gone off track, says Ranzini. Adding further challenge, should the scholars find something lacking, the fault is not disclosed. The bank must review what it is doing and submit to re-examination after addressing what it perceives to have caused the disapproval. When University Bank developed its initial product line, it took about nine months to come up with arrangements that met Designing a Shariah compliant product package The University Islamic Financial product lineup today includes the following: S MORTGAGE ALTERNATIVES. The bank offers two alternative forms of mortgage-type arrangements. One is a murabaha, a marked-up instalment sale of the underlying home, the other an ijara, a redeemable lease, or, a lease followed by an acquisition (in full, ijara wa iqtina). In the murabaha, the bank buys the home and resells it to the Islamic customer at a marked-up price, to be paid in instalments. This transaction includes what would typically be a down payment, but which is characterized as the homebuyer’s initial investment. Title is given to the homebuyer, however, at closing. These arrangements are structured such that they are not technically sold, but being offered in partnership with Freddie Mac, under a $1 million master commitment executed in early 2006. This product is used for what would be termed fixed-rate mortgages in conventional financing. In the ijara arrangement, an independent trust, owned by the bank, acquires the home and leases it to the resident. Monthly payments represent rent plus a further payment on-account to the down payment made up front. The payments represent increasing beneficial rights. The ijara loans are used for what would be called adjustable-rate loans in conventional financing, and are held in portfolio. S PROFIT-SHARING DEPOSIT ACCOUNTS. These include a selection of FDIC-insured checking, money-market, and CD accounts. The bank sets up profit sharing accounts performance sheets, similar in concept to rate sheets, stating the account holder returns as “profit-sharing percentage,” rather than as an interest rate. “Profit paid as an annualized % of deposited funds,” the sheets note. The bank also offers special checking and CD accounts for Islamic nonprofit organizations, such as mosques, schools, and Islamic cultural centers. In both cases the bank offers to gift back a small percentage to the depositor, and the bank will also gift back a small percentage of organization member accounts, on request. The deposits are designed to fund, and track the profits of, the bank’s mortgage alternative products. Thus, returns are not set, nor promised, in advance, but based on calculations that look to the returns realized on the mortgage alternatives. The bank is the only U.S. bank to offer FDIC insured deposits that are compliant with Shariah. S SHARIAH COMPLIANT MUTUAL FUNDS. Through the bank’s insurance and investment services subsidiary, the Islamic operation provides access to two mutual funds, one investing in blue chip growth and technology firms, the other in all types of bluechip firms. www.ababj.com/subscribe.html ABA BANKING JOURNAL/NOVEMBER 2007 53 http://www.nxtbook.com/nxtbooks/sb/ababj0907/index.php?startpage=42 http://www.nxtbook.com/nxtbooks/sb/ababj0907/index.php?startpage=42 http://www.nxtbook.com/nxtbooks/sb/ababj0907/index.php?startpage=42 http://www.university-bank.com/IslamicBanking/IBDmain.htm http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - November 2007

ABA Banking Journal - November 2007 Contents Editor’s Column Briefing: Good News for Mortgages Sleight of Mind N.Y. Hiring Bonanza May Be Bane Snapshot: A Look at Held-For-Investment Loan Growth ABA Resources ABA Chairman’s Position “The Moose Bank” Thrives on Manufactured Housing Loans Finding the Middle Way for Your Bank’s Retirement Program Pass the Aspirin Cover Story: Self-Service Steps Up DIY U.K. Style Marketing to Millennials Getting Real With “Gen Wired” Ethnic Marketing: Disinterested Banking Getting Good at Global Sourcing Case in Point Turn Compliance on It's Head Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2007

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