March 1990, Page 40b

Islam in America

By Uzra Zeya

How US Islamic Financial Institutions Provide Interest-Free Services

America's increasing Muslim population is creating a growing market for goods and services designed to meet its specific needs. Such products range from ritually slaughtered halal meats to high-tech digital watches which remind the wearer of the correct times for prayer. New services include this country's first Islamic financial institutions.

Islamic law, in principle, strictly prohibits the earning of interest, referred to as riba, from financial transactions. Since interest is a vital component of the American financial system, it is difficult to imagine how an American Muslim can avoid being involved in such routine transactions as opening an interest-bearing savings account, or purchasing a home, car or other necessities on credit. In the past decade. however, a number of institutions have been created to provide Muslims with economically viable alternatives within the strictures of Islamic law.

Three of the most successful Islamic financial institutions in the US are MSI Finance Corporation, in Los Angeles, CA; BMI Inc., in Secaucus, NJ; and the North American Islamic Trust (NAIT), headquartered at the central offices of the Islamic Society of North America in Plainfield, IN. These organizations provide investment activities operated on the principle of musharaka, or shared profits, in which money earned from co-owned property or investments is divided between the financial institution and the customer.

MSI Inc. has enjoyed the most rapid growth. Founded in 1985 on an initial investment of $45,000, today the organization boasts assets of $4.35 million, a 200 percent increase over the previous calendar year. MSI operates much like a credit union, as all investors are shareholders in the company.

Over 50 percent of MSI's investments are in construction financing, in which profits are shared between MSI members and Muslim developers. In recognition of the need for interest-free home financing, 36 percent of MSI's funds are invested in the SHARE (Shared Home Appreciation in Rent and Equity) program.

Shared Equity Differs from Mortgage Payments

The difference between this system and a household mortgage is that clients and MSI jointly purchase a home from the builder or seller. Then the client makes payments to cover rent on and buyout of the MSI-owned portion. While this system does not normally provide a savings over conventional home financing, it does not involve the payment or receipt of interest.

For customers interested in obtaining a car, MSI offers a short-term auto leasing program, which accounts for 10 percent of its investment portfolio. MSI is involved in international export-import transactions as well, and is currently a member of the International Association of Islamic Banks.

BMI Inc., also founded in 1985, operates as an investment bank, with customers both in the US and abroad. Its resources are almost exclusively concentrated in real estate and construction projects in the New Jersey, Boston, and Washington, DC, areas. In its early years of operation, BMI attracted mostly overseas investors from the Middle East. Since 1989, however, BMI has pursued a marketing strategy targeting Muslim professionals in the US as potential investors.

Such efforts are hampered by a lack of reliable marketing data on the American Muslim community, and the risk factor of large scale investments. Nevertheless, BMI has turned a profit on investments since 1986, with an 11.3 percent rate of return in 1988. In the future, the company hopes to expand into the area of international trade financing. Currently, it is exploring the possibility of exporting food and textiles to Egypt.

NAIT is the oldest of the three organizations, founded in 1972 by the Islamic Society of North America. With assets of over $32 million. it offers both interest-free loans and investment opportunities to Muslim groups. So far, over $3 million in interest-free loans have been made available. The rate of return on investments, 5 percent in 1987, is generally lower than that of BMI or MSI. In 1986, NAIT set up Amana Mutual Funds as a long term investment alternative for Muslims. Today Amana has net assets of more than $4 million, with close to 1,000 shareholders nationwide.

Potential Drawbacks

While Islamic financial institutions have made rapid progress in the US in a relatively short time, to date most of the opportunities are only suited for wealthy or upper middle-class customers.

Minimum investment for membership in MSI is $1000, while the marketing strategy of BMI Inc. is geared towards Muslims with a net worth of over $200,000. Muslims with middle to lower incomes, who most need assistance with major purchases, are largely unable to partake of such programs. MSI President Masood Ajazi explains the contradiction by pointing out that because there is no guaranteed profit in such transactions, only "low-risk" investors can be considered. Four years ago, he notes, there were no alternatives at all for Muslims in the US desiring interest-free transactions.

Although these new institutions are geared towards Muslims, they are open to anyone financially qualified to join. However, due to the risky nature of such investments in comparison to interest-paying ventures. those without religious motivation have little reason to participate. However, for American Muslims, Islamic financial institutions solve a moral dilemma and, no doubt, will be an increasingly viable economic alternative in years to come.

Uzra Zeya is a program coordinator for the American Educational Trust specializing in Islamic affairs.