Islamic Finance in the U.S.

Reuters has an article on the "political hurdles" facing Islamic finance in the U.S. I think the title is a little misleading; it is not politics (or regulation) that has pulled Islamic finance into an ugly argument about Islam and America, but politics. I have always hesitated to give any credence to the 'anti-Islamic finance' arguments because they are so disconnected from reality that I feel giving coverage on this blog would elevate them to the discussion on Islamic finance would give them undue credibility. However, at many times, I have thought of a way to cover the 'anti-' side without giving it additional credibility, but I have always come up lacking a good way to address it. However, the Reuters article makes it clear that opposition to Islamic finance as a subtext in an argument over Islam in America is becoming a narrative that needs to be addressed.

The first thought in my discussion is that the rise of opposition to things that are viewed as 'foreign' is a common thread in American history and one that has been expressed in ugly displays. In the 19th century, immigrants from China, Ireland and southern European countries like Italy faced significant discrimination. In general, religion was not the primary reason for this, but it was in some cases. America's history with Catholicism has many rather embarassing episodes. A blogger for the LA Times quotes a professor at the Ohio State University:

"the popularity of the Ku Klux Klan exploded after it rebranded itself a "patriotic" fraternal organization dedicated to safeguarding America against the threat of Catholics, Jews and the immigrants flooding the country in unprecedented numbers. […] At the time, these men did not consider themselves religious bigots. They believed themselves patriots, upright fathers and sons, husbands and brothers protecting their families, and the nation, against a foreign threat they feared was intent on their destruction."

The author was specifically focusing on the anti-Catholicism of the early 20th century, but the sentiment lasted well later in the 20th century: John F. Kennedy was viewed skeptically for his Catholicism and it was feared that he would be an agent of the Pope as president.

Of course, this was unfounded and the positive in American history is that the country does move past this type of fear mongering--no one questioned whether John Kerry's Catholicism would hurt his ability to be president when he ran in 2004. However, it is not a quick process for Americans as a whole to move beyond past their suspicions towards groups of people for which they have no justifiable reason to lump together as a 'threat' to America.

And today, the 'other' that nativist politicians have focused on is Muslims. Every effort of Muslims to express their religiousness is viewed by some as a 'threat' to America's values and American freedom itself (the Economist deals with this issue in a good recent article). However, just as the "Catholic threat" was unjustified as a reason to suspect all Catholics, the "Muslim threat" is equally as unjustifiable. And Islamic finance is being lumped into this broader narrative in an equally unjustifiable way.

Now then, what can be done to counter this suspicion of Islamic finance and help the industry to thrive in America? Can there be a way to demonstrate that Islamic finance is no more foreign than the growing popularity of socially responsible investing, or even other forms of religious-based financial products like the Timothy Plan, a Christian mutual fund.

In some areas, there may not be a need at all. The Amana Funds, a series of three Islamic mutual funds, has already moved well beyond being a 'niche' product for Muslims and has attracted significant investments by non-Muslims who are generally drawn to the fund by its good performance. However, other financial products that are Shari'ah-compliant, from mortgages to insurance, have not attracted as large interest from non-Muslims.

In these areas, it will be imperative for the Islamic finance industry to continue to reach out not only to their mainly Muslim consumers to explain how they work and also highlight that they are not much different from conventional financial products. They have a different structure and follow certain rules that other mortgage providers do not have to, but besides these differences, they are just another flavor of mortgage available to all consumers.

In areas like takaful--which is less well known than even Islamic finance--there are other ways in which they could be marketed to attract non-Muslims. Unlike conventional insurers, the funds of the takaful provider are owned by the members, rather than being run through a corporate structure where the liabilities (claims) are obligations of the corporation. In an era where many insurers have been 'demutualized', this return to a 'mutualization' may attract non-Muslim consumers in a similar way that credit unions have been able to differentiate themselves from the much maligned conventional banks on the difference that their depositors are also their owners (rather than external shareholders).

There are substantive differences in Islamic finance and there will continue to be 'anti-Islamic' sentiment stirred up by opportunistic, nativist politicians. These are the givens. It is up to the industry to decide whether the political sentiment will be a hinderance to the industry or will spur it towards better explaining its competitive advantages to its conventional competitors. For what has become an emotional and reflexive issue, it will be more likely that Islamic finance can break through on its business merits, rather than by appealing to other arguments.