Shariah Mortgages Left to Guidance, Lariba in U.S. Market: Islamic Finance

American Finance House Lariba and Guidance Residential LLC have become the biggest providers of Islamic financial services to the 7 million Muslims in the U.S., a market Citigroup Inc. and HSBC Holdings Plc aren’t developing.

Home loans that comply with the religion’s ban on interest rose to about $2.5 billion last year, from $2 billion in 2006, Yahia Abdul-Rahman, founder of Lariba in Pasadena, California, said in an interview this month. Reston, Virginia-based Guidance had provided more than $2 billion as of October, according to an e-mail from the company on Oct. 6.

While Islamic mortgages are dwarfed by the total home-loan market, Shariah-compliant services are among the fastest-growing in the global banking industry, the Islamic Financial Services Board, a standard-setting body, said in an April report. HSBC, based in London, said it would focus on the Middle East, Asia and the U.K., where the industry is expanding. New York-based Citigroup is seeking to arrange more sukuk issuance for U.S. companies, according to James Griffiths, a bank spokesman.

“Many of the mega banks are retreating away from community-based financing,” said Abdul-Rahman, whose company has $300 million in assets. The biggest lenders in the U.S. are turning more to “large” corporate deals, he said.

Islamic home loans may increase to $5 billion by the end of 2010, Abdul-Rahman forecast. Non-Muslims will also be attracted to this type of financing because the investment risk is shared by the banks and borrowers, he said. Lariba and Lariba Bank of Whittier N.A., owned by the same shareholders, lent $135 million last year, almost double the amount in 2007, he added.

‘Sustain Growth’

Guidance Residential saw Islamic mortgages rise 10 percent in August and September, compared with the same period last year, Hussam Qutub, vice president of corporate communications, said in an e-mailed response to questions.

“Guidance has been able to sustain its growth over the last several years and has now set the bar higher for the Islamic home-finance industry,” according to a press release on Oct. 4.

HSBC Amanah, the Shariah unit of Europe’s largest bank, started Islamic banking in the U.K. in 1998. HSBC is the second- biggest global arranger for sukuk sales this year, while Citigroup, the third-largest U.S. lender, ranks 13th among issuers tracked by Bloomberg.

HSBC, Citigroup

“Islamic finance continues to be a consumer-led industry and is firmly rooted in the emerging markets of the Middle East and Asia,” Razi Fakih, deputy chief executive officer of HSBC Amanah, said in an e-mailed response to questions on Sept. 29.

Griffiths, the Hong Kong-based spokesman for Citigroup in the Asia Pacific, said the bank is “speaking to many U.S issuers about the attractions of the sukuk market” after arranging a $500 million Islamic bond for Fairfield, Connecticut-based General Electric Capital Corp. last year.

“The bank expects more U.S. issuers to tap the market in the coming months,” Griffiths said in an e-mail Sept. 30.

Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, fell 22 percent to $11.8 billion this year from the same period in 2009, according to data compiled by Bloomberg. Issuance totaled $20.2 billion in 2009, up from $14.1 billion in 2008.

GE Capital

The yield on GE Capital’s 3.875 percent sukuk due in November 2014 rose one basis point to 3.32 percent yesterday, according to data compiled by Bloomberg. The difference in yield with similar-maturity U.S. Treasuries widened to 246 basis points from 175 at the time of issue in November last year.

Shariah-compliant debt returned 12.3 percent so far this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in developing markets gained 17 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate has narrowed 17 basis points this month to 355, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The spread shrank 112 basis points this year.

The yield on Malaysia’s 3.928 percent note due in June 2015 has dropped 20 basis points to 2.51 percent since the end of September, according to Bloomberg data. Its yield gap with the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 narrowed 22 basis points this month to 350.

U.S. Muslims

Muslims in the U.S. “enjoy incomes and educational levels that are higher than the American average,” President Barack Obama, who estimated the Muslim population at “nearly” seven million, said during a speech in Cairo last year. Households earned $52,029 annually in 2008, according to the U.S. Census Bureau, while the Central Intelligence Agency forecast in a 2007 report that Muslims accounted for less than one percent of the 307 million population.

Lariba helped the Federal National Mortgage Association, known as Fannie Mae, issue $2.3 million of sukuk in 2003, in what Abdul-Rahman said was the first Islamic bond in the U.S.

To comply with the religion’s ban on interest, banks typically buy property on behalf of the borrower in Shariah- compliant home financing and resell it back at a profit, with repayments made in installments. The Federal Reserve said total mortgage lending stood at $14 trillion in the second quarter.

The Islamic finance industry has been growing 20 percent annually since 2000, led by the Middle East and Southeast Asia, according to the IFSB report issued in April. Malaysia’s $93 billion of Shariah-compliant assets account for 19.6 percent of the total industry, according to Bank Negara Malaysia’s website.

Debt Burden

The only institutions in the U.S. offering retail Islamic banking services are Lariba, Guidance Residential, a unit of Guidance Financial Group LLC, Devon Bank in Chicago, and Michigan-based University Bank, said Abdul-Rahman, who visited Kuala Lumpur in September as a member of a seven-jury panel for the Royal Award for Islamic Finance.

Islamic banks need to appreciate the “sensitivity” of the U.S. market, said Abdul-Rahman. “The U.S. is a very difficult market as there is a separation of church and state and to claim that you are Islamic you are working yourself up for potential issues. We need to make it global to all people,” he said.

Abdul-Rahman founded Lariba in 1987 to attract American Muslims who had shunned conventional banking for religious reasons. Lariba started promoting itself as an interest-free financing company as opposed to an Islamic bank in 2001 to promote the business beyond the Muslim community, he said. Currently 90 percent of its customers are non-Muslims.

Islamic banks will attract customers in the U.S. because they offer “a new style of life that is free of a heavy debt burden,” said Abdul-Rahman.

To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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