Islamic Banking in America?

“We will invest in our people, quality education, job opportunity, family, neighborhood, and yes, a thing we call America.”  -  Dan Quayle, former US Vice President 

Even Dan Quayle in his typical misspeak understood, we need to invest in America.  Is our current banking system focused on investing in America?   

Malaysia is ground zero for Islamic Banking which now holds approximately 2/3 of Malaysian deposits in a country only 60% Muslim.  Islamic banking only arrived on the scene in Malaysia in 1983, and competes side by side against conventional banks.  All major conventional banks in Malaysia have an Islamic Banking division including HSBC (HSC) and Citibank (C). 

Here is a over-simplistic side by side comparison between conventional and Islamic Banks:

                                    Conventional Banks/Islamic Banks

Bank Purpose	Maximize profit for shareholders	Banking more resembles a mutual fund who defines what business it is going to do with the depositors money,  The bank is motivated to make profit for themselves and to share this with their depositors
Use of Financial Capital	Global	As Islamic banking involves a high level of bank involvement with its “borrowers” until the debt is satisfied. For this reason, the money lent tends to stay relatively close to the bank.
Deposits	Interest Paid to depositor	Money Deposited is pooled. The bank uses that money to invest in “borrowers”. Profits are shared with depositors
Loans	Interest paid to bank for money borrowed	The bank (on behalf of the depositors) does business with a “borrower”.  This business can take many forms including leasing, installment purchases, and partnerships.  All business is cleverly structured so interest is not involved – only profits are made.
Morals	Generally to the edge of legality	Ethical Business
Deposits insured	Yes	Yes
Fees for services	Yes	Yes

Islamic banks prosper in that they operate similar to a small town bank who has an intimate relationship with the town and its people. For this reason, Malaysia has greatly benefited from the capital investment these banks made into the local economy. They have proven they can stand side by side with conventional banks and provide depositors and “borrowers” with competitive value. 

There are regulatory disconnects for an Islamic bank to operate with a full range of banking services in the USA. These have yet to be resolved and include:

• The depositor sharing a loss for a bad investment by the bank, and
• The partnership of a business between the bank and a borrower

The Bank of Whittier in southern California is apparently the only US bank operating solely as an Islamic Bank.  They are FDIC insured and appear unscathed by the equity destruction happening at conventional banks.  They have a five star rating from Bankrate (RATE) and the highest CAEL rating a bank can receive.   

JP Morgan Chase (JPM), Deutsche Bank (DB), HSBC (HBC), University Bank (Ann Arbor), and Devon Bank of Chicago all offer Islamic banking alongside conventional banking.  Freddie Mac (FRE) and Fannie Mae (FNM) have purchased-mortgages from the Islamic Banking units of these banks. 

• Check out the strength of your bank on Bankrate.com.

Disclosure: None

Comments

[crankyinvestor:]

1. calling these institutions banks is a misnomer
2. the "trust" they're built on doesn't work as well in Western countries where honor killings are frowned upon.
3. the "trust" they're built on presupposes that a "borrower" will act honorably when faced with the choice of paying for his wife's medicine or repaying these loans.

2008 Aug 29 09:34 AM

[Big Al45:]

If the "borrower" fails to repay the loan, will he be treated as a thief and have his hand chopped off?

2008 Aug 29 01:53 PM

[Money Penny:]

Author forgot to "highlight/emphasize" the moral/ethical aspects. Traditional banking CEOs earn millions to squander investors money. Nothing happens to them for screwing up. Oh yeah, government will bail them out.... FRE/FNM CEOs combined got 32million for 500billion screw up... same with C/MER/BS... and story goes on... hey i am not saying mistakes do not happen, but somebody needs to pay for greed and irrational self promotion at the cost of investor.. do not let them fudge numbers for bonuses... if you get bonus for good fudged profits,, why not loose when you screw ups... do these CEOs return their bonus after fraud is detected.. oh no govt will bail them out..... i hope this new banking systems, whatever they are based on do not lose their ethics..... I am willing to give them a chance over our govt promise and jackass CEOs.

2008 Aug 29 05:23 PM

[1worldcurrency:]

The Islamic interest taboo encourages "clever" financial shenanigans designed to deceive everyone involved, including themselves. Things may be working in Malaysia, but most Arabian states are still basically just pumping oil and the distribution wealth is more inequitable than even the US.

2008 Aug 30 01:11 AM

[notsosmart:]

circumventing interest is just more bs.the shennanigans involved to do this are just the same scam as all the others.these folks dont want to charge interest or collect it. no they willonly kill their own family member for some perceived slight that disses them.what a crazy world.

2008 Aug 30 12:58 PM

[Menachem Be...:]

I have been a shareholder of HSBC for ten years. I have no objection to the banks determination to open markets further in the Middle East.
In fact while HSBC does a great deal of business in the Arab world it is also a member bank of The Tel Aviv Stock Exchange and maintains offices in Israel.
One can only wish that those involved in the diplomatic process were as astute as HSBC in bridging the gap between cultures.

2008 Aug 31 05:24 PM