Islamic financing and investment structures in USA

Islamic finance in the United States dates from the 1980s, when two institutions opened on the West Coast. Their services were limited to investment and home finance and were available only regionally. From the late 1990s, the market size grew significantly, paralleling the growth of the Muslim population in the US: from 50 per cent in the 1990s to 66 per cent in the 2000s. In an ironic twist, while Islamic finance abides by the goals and objectives of Islam – namely the shariah – these same goals overlap with environmental, social and governance (ESG) considerations and the broader aim of sustainable finance. Although this may sound obvious, the ESG, especially the social aspects, have until now been less obvious. Despite the impact of covid-19, the global Islamic finance market is growing moderately because of strong investments in the halal sectors, infrastructure and sukuk bonds, especially through electronic modes in all products and services.

The factors driving the growth of the market are directing investment toward the tremendous growth opportunities in the promising Islamic sectors. Trillions of dollars in play over the next decade will accelerate the economic recovery, and investors are showing interest in new performance and Islamic-based ESG and sustainability-linked debt products (SLDs), with North America following Europe's and the Middle East's lead.

At the same time, we see a tipping point pivoting to a turning point for accelerating and unlocking the long-term potential of the industry. Islamic banking is the largest sector in the Islamic finance industry, contributing to 71 per cent, or US$1.72 trillion, of the industry's assets. The sector is supported by an array of commercial, wholesale and other types of banks. Yet commercial banking remains the main contributor to the sector's growth. There were 505 Islamic banks in 2021, including 207 Islamic banking windows. However, the number of players is not necessarily indicative of the size of the industry, in terms of assets. Islamic finance's second-largest market, Saudi Arabia, has 16 Islamic banks, including windows, which is less than the smaller markets of Malaysia and the United Arab Emirates.

With the rapidly growing popularity of mobile banking and fin-tech, a growing number of digital-only, or 'disruptor banks' with no physical branches, have emerged. Islamic banks are also catching up on this trend, with the launch of digital-only subsidiaries, such as Gulf International Bank's Meem in Bahrain and Saudi Arabia and Albaraka Türk's insha in Germany and other countries with large Muslim communities.

Stakeholders are realising the importance of standardisation, as access to sukuk remains time-consuming and has higher transaction costs than conventional instruments. Lockdown measures have also shown the importance of leveraging AI technology. Furthermore, industry players have been discussing the potential use of Islamic SLDs to help companies and individuals economically affected by the pandemic. With the right coordination between different Islamic finance stakeholders, we believe the industry could create new avenues of sustainable growth that serve the markets. From experience in helping strategise and structure several major recent deals using these new instruments, Islamic finance-based SLDs will speed up this transition.

There are currently 25 Islamic financial institutions in operation in the US, the top three of which, according to asset size, are the American Islamic Finance House, University Bank (through its subsidiary University Islamic Financial) and the Harvard Islamic Finance Project. In 2013, JP Morgan started to offer Islamic banking services. Investment banks such as Standard Chartered Bank followed and now offer Islamic banking products in Asia, Europe, the Middle East and the US. Recently, in the US commercial real estate sector, banks such as Malaysia-based Maybank, Kuwait-based Warba Bank and National Bank of Kuwait, Italian bank Intesa Sanpaolo and MASIC, a Saudi private equity investment firm controlled by the Al Subeaei family together with asset manager, Boubyan Bank, have participated in commercial Islamic finance transactions in the US in connection with commercial real estate.

Retail banks operate in several states:

1. University Islamic Financial (a subsidiary of University Bank), based in Ann Arbor, Michigan, is the first and only exclusively shariah-compliant bank in the US;

2. Devon Bank in Chicago regularly offers Islamic finance services;

3. Guidance Residential, in Reston, Virginia, is the biggest non-bank financial institution that offers Islamic finance services; and

4. Lariba, in California, is another large Islamic mortgage lender, which also provides business financing.

   
   

Shariah requirements have made further proliferation of Islamic finance difficult. Possibly because US investors are still unfamiliar with shariah-compliant products, the secondary market for Islamic financial products is smaller in general. The result has been that Islamic mortgage lenders have had difficulty in remaining liquid, stemming further growth of the market. Starting in 2001 and 2003 respectively, Freddie Mac and Fannie Mae, the US housing agencies, had bought Islamic mortgage products to provide extra liquidity in the US Islamic finance market. They have now grown to become the main investors in Islamic mortgages: by 2007, Guidance Residential had been relying on Freddie Mac for more than US$1 billion in financing.