Big financial institutions have been battered by mortgages gone bad. But a tiny Michigan bank is getting attention in the industry by turning a profit on loans without even charging interest.
Its specialty: financial products that comply with Islamic law. That means no collecting interest, no short selling and no contracts that are considered exceedingly risky. It also rules out some of the activity that got Western finance in trouble — sub-prime mortgages, credit default swaps and the like.
“When you look at the economic crisis we’re in, if you were to follow Islamic or Sharia financing, you couldn’t have this crisis,” said John Sickler, corporate director for the bank, University Islamic Financial Corp. in Ann Arbor.
Islamic finance operations aren’t prohibited from making a profit. Far from it. Instead, banks that comply with Islamic law, or Sharia, earn money from fees that are part of the cost of the loan, some paid up front and some over time.
Islamic finance operations has two types of financing, one called a marked-up installment sale and the other a lease-to-purchase sale. Fees in both cases are comparable to interest payments in traditional loans, bank officials say.
For example: A seller who bought a house for $100,000 could sell it for $120,000 or even $300,000, provided the buyer agrees it’s a fair deal. The home could be sold on an installment plan negotiated by buyer and seller.
The bank is a subsidiary of the Michigan-based University Bank, and its leaders say they have talked recently with executives from two national banks hoping to learn more about the business.
The Michigan bank focuses on contracts that clearly spell out the risk and reward between lender and borrower. University Islamic Financial says it’s the nation’s first to offer Sharia-compliant, federally insured deposits.
Islamic banking is more common overseas, but some U.S. banks and credit card companies are exploring the idea of branching out into Sharia products to reach out to the growing Muslim population.
So Islamic banking is only expected to increase in the coming years. Already, Citigroup offers Sharia products and services to clients overseas, and Visa says it has worked with banks around the world to offer Islamic-compliant products.
The conventional banking system could learn a lot from the idea, said Jawad Ali, a finance lawyer based in Dubai and London who specializes in structuring Sharia-compliant deals.
“We haven’t made as much money as the conventional banks because we can’t, for example, sell what we don’t own,” he said. “We have to own it before we sell it. We may have missed out on gains in good times... but we haven’t suffered any losses.”
Most big international banks already have Islamic banking arms, and a November 2008 report by Moody’s Investors Service shows that Islamic banks have been fairly resilient to the global economic downturn.
(Reported by by Jeff Karoub and Sebastian Abbot- AP)