Saturday, October 23, 2010

How can Islamic finance in the West grow?

One of the key drivers for Islamic finance in the West has been the immigration of Muslims into those countries. As these immigrants have moved in, the domestic banks have tried to develop products that cater to their needs. However, the process has been slower than one might expect, particularly in some countries like France and Germany which have relatively large shares of Muslim residents compared to their populations. The first Islamic bank branch in Germany, a branch of Kuveyt Turk, opened earlier this year in Mannheim. Al Baraka Bank says it plans on opening an Islamic bank in France in 2011, something it has planned for several years.

An article recently described the growth of multicultural banking in Canada and alluded to the relative shortage of Islamic banking in the country despite the growing Muslim population, that is growing in large part because of immigrants to the country. The country has had Islamic home finance co-operatives for decades and in the last several years, UM Financial has offered Islamic mortgages (as well as a pre-paid Shari'ah-compliant debit card and some work on forthcoming sukuk). The larger banks, including Bank of Montreal and Scotiabank are considering whether to enter the market while RBC offered Islamic mortgages, before dropping the product due to low volumes. In Canada, it appears that the large banks entering the market have been hamstrung by difficulties entering the Muslim marketplace, while the smaller institutions have been set back by shortage of capital for new originations. In the United States, the shortage of capital has been eased with the entrance of Freddie Mac, which provides the financing for Shari'ah-compliant mortgages. There is not a similar institution in Canada, so the best way forward may be for the large banks to work through the smaller providers to combine the former to benefit from the latter's better exposure within the Muslim community and the latter to benefit from the former's access to capital. Were this to happen, it would open up the possibility of the larger banks securitizing Islamic mortgages, which could then be sold to fund managers to allow them the investment possibilities they need to offer retail Shari'ah-compliant fixed income investment products to the Muslim marketplace where fixed income is always a challenge (and very often limited or absent from the market).

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