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Islamic Retail Finance in North America


... investors leads to creation of Dow Jones Islamic Market Indexes which then form ... While the Dow Jones Islamic Market Indexes may not correlate exactly to the ... – PowerPoint PPT presentation

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Title: Islamic Retail Finance in North America

Islamic Retail Finance in North America
  • A Discussion Outline
  • for the Working Group
  • on Islamic Retail Finance
  • at Harvard University
  • March 19, 2005
  • Yusuf Talal DeLorenzo
  • Shariah Consultant

The Definition and Objective of Retail Islamic
  • the provision of financial services and products
    that can replace conventional/riba-based services
    and products is the ultimate goal of modern
    Islamic Finance in both commercial and religious

Chicken or Egg?
  • Products developed for Institutional/HNW
    investors lead to Retail products. Retail
    deposits for Islamic Banks (investment capital)
    lead to product development…

  • Murabaha structures on metal markets developed
    for Institutions trickles down to retail as
    Murabaha for home finance
  • Mudaraba-based closed-end funds (leasing, real
    estate, stocks) trickle down to retail as mutual
  • Demand for stocks by institutional/HNW investors
    leads to creation of Dow Jones Islamic Market
    Indexes which then form the basis for dozens of
    retail investment products.

A Further Example
  • Demands for increased sophistication… by stock
    pickers and hedge fund managers… lead to further
    refinements in the screening criteria for stocks
    i.e., two changes in the DJIMI criteria since
    1999, and soon to-be-announced… possibly through
    AAOIFI… refinements in the screening criteria
    resulting from hedge fund development

Demand for Islamic finance in North America
  • Thirty percent of the seven million American
    Muslims (who account for two percent of the U.S.
    population) want to adhere to strict Islamic
    principles when dealing with their finances

The Numbers may be Enhanced by
  • Consumer Education that introduces Islamic
    Finance to those unaware of its presence here
  • that dispels doubts and misconceptions brought on
    by either
  • early attempts (in the 80's and 90's) to offer it
    here by small, inefficient, sometimes
    non-compliant (w/o proper Shariah supervision)
    and costly operators

Or that dispels doubts and misconceptions brought
on by
  • failed attempts at "Islamization" of financial
    systems in the Muslim world (Iran, Pakistan,
    Egypt, Sudan)

Enhancing the Numbers
  • Marketing efforts
  • Tapping mainstream sources of distribution

  • Islamic mutual funds offered as a choice
    alongside conventional funds for the 401k plans
    of corporate employees
  • Islamic home financing options offered as options
    through mainstream brokers
  • Takaful policies offered on the same platform as
    conventional insurance policies by the major
    insurance companies

North American Muslim Demographics
  • Better education and higher earnings mean that a
    significant degree of sophistication is required
    in whatever financial products or services are
    offered to retail Muslim consumers

Consumer Mandate
  • Islamic financial products and services must be
    competitive in terms of pricing, range of
    options, service features.
  • The notion of a religious premium is one that
    many if not most Muslim consumers in North
    America will reject!

Demand for Islamic-based finance products
  • Financing home ownership
  • insurance
  • financing small businesses
  • saving plans
  • retirement
  • financing for education
  • credit/debit cards
  • investment vehicles

Beyond the Muslim Consumer
  • Synergies with ethically-based products,
    particularly for investments a market that is
    particularly strong in the United States
  • While the Dow Jones Islamic Market Indexes may
    not correlate exactly to the Domini 400, managers
    and Shariah boards of Islamic funds may work
    together to constitute portfolios of
    socially-responsible investments (Azzad, for
  • Returns on profit-sharing deposit schemes may be
    attractive to ordinary consumers… or rates on
    home financing, or student financing, or takaful

Retail Growth
  • Real growth in the retail sector will begin (has
    already begun) with home finance, owing to
  • the emphasis on home ownership in the US
  • Incentives like tax benefits
  • The perception that real estate is the best kind
    of investment

The Key Product
  • Home finance is the key to the development of all
    other Islamic financial products and services in
    North America…
  • As a big ticket industry, in terms of revenues,
    it leads all others
  • It provides the ideal introduction to Islamic
    Finance to consumers
  • The qualification process may expose consumers
  • THEREFORE… special care must be taken to get it

An Important Clarification
  • N.B. There is no value to the argument that
    different Shariah boards, or regions of the
    Muslim world, have their own opinions in regard
    to the characteristics of different transacting
    models (like murabaha, etc.), because the only
    result of such an argument will be anarchy in the
  • Free market forces are one thing, participation
    in a global industry (with its own standards and
    established standard-setting institutions) is
  • Finally, consumers will decide what is right but
    our govt agencies must be allowed to see for
    themselves what the issues are, and what is at

  • Compliance with regulations designed for finance
    that is heavily dependent on interest returns and
    rates for the management of risk and
    profitability demands cooperation from both

  • The growing Islamic financial industry needs to
    commit resources to the education of both
    regulators and consumers. Such a commitment may
    take the form of advocacy group(s), lobbyists,
    resource center(s) perhaps under the umbrella of
    an organization(s) for Islamic financial service
    professionals, or Islamic financial service and
    product providers.

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