“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:
|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|
|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.