Thursday, March 27, 2008

Banks and customers write contracts 

Given the lengthy comments made in the chat accompanying this article, there appears to be a great deal of interest in banks trying to cater to Muslim businesses seeking credit. The comments seem to think this some great injustice, that Muslim borrowers are getting a favor from these banks.

It means no such thing.

Islamic banking in the United States is still relatively new, and there are regulatory concerns regarding it. In short, Islamic or shari'a law forbids the use of interest (riba, in Arabic) in any debt contract, be it as a payment on deposits or as a payment for a loan. Western banks see this set of customers as a potential source of revenue, and seek ways to accommodate the religious beliefs of the borrowers. It's similar in type to producing food that is Kosher to capture a Jewish client�le.

Islamic loans involve a different risk-sharing arrangement, so that banks in essence have an ownership stake in the business for a fixed period. On loans, that doesn't appear to be too hard. Deposits are a little harder. I can find several examples of lariba or no-interest financing of business firms. (I'll note that the Islamic bank I've just linked to, American Finance House LARIBA, has Islamic mortgages that qualify for repurchase by Fannie Mae and Freddie Mac.)

Now this is pretty much all I know about these types of loans as made in the USA, from my notes for teaching Money and Banking. I am not an expert in this field.

I fail to see, however, why anyone should be upset by the presence of a finance instrument that conforms to Islamic law. An ingredient to a hand up (vs. a hand out) is to give people access to credit. These loan programs are a good way to get someone into the role of entrepreneur, invested in and connected to the local community.

One person I spoke with asked if a Christian or a Jew would be able to take out this kind of contract? I would hope that answer is yes; I wish I could speak with a local banker who's offering them to see if this is true. Meanwhile, to qualify for these loans here in St. Cloud, potential borrowers are going through a financial education program.

It doesn't appear anyone has started the programs locally. I certainly hope some of the ignorance in the discussion from the Times does not leave a useful idea stillborn.

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