Growing Muslim population necessitates alternative lending practices, business modelsRoma Financial Corp., a banking organization started by a group of Italian-Americans in 1920, is looking to grow by setting up a new program targeting another ethnic group: religious Muslims. One big challenge is that a Sharia-compliant institution — one that conforms to Islamic principles — cannot charge interest on commercial and residential loans.
“The Islamic community in New Jersey is growing, and we believe this is an untapped niche,” said Peter A. Inverso, Roma Financial chief executive officer and a former state senator. “We’re excited about the potential of this program,” which is scheduled to launch by early 2009.
It is not unusual for banks to pursue a particular ethnic group. City National Bank in Newark, for example, services the black and Hispanic communities, while Iselin-based Indus American Bank focuses on the Indian population.
Most ethnic banks reach out to the community by hiring employees who speak the home country’s language and know the customs, and by participating in festivals and street fairs that engage the community.
But a Sharia-compliant banking program goes far beyond that. Besides the prohibition on charging interest, an Islamic financial institution may not loan money for certain prohibited purposes, including those related to alcohol, tobacco, gambling, pork or sex.
To structure a loan that meets these conditions — particularly the ban on interest charges — while still turning a profit often means calling in expert help.
Roma Financial is the Robbinsville-based parent company of Roma Bank, an institution with $955.1 million in assets. Roma Financial already dipped its toes into the waters of ethnic banking in June with the launch of RomAsia Bank in the Monmouth Junction section of South Brunswick.
Located near the Islamic Society of Central Jersey, RomAsia was designed to appeal to New Jersey’s growing Asian population. But from the start, Inverso said, the bank’s board wanted to add a Sharia-compliant segment.
“As far as we know, this will be the first Sharia-compliant institution based in New Jersey,” Inverso said. “There are complexities, of course. The biggest is that the program has to be sanctioned by an imam [an Islamic scholar or leader] as well as by the appropriate regulatory agencies. But we believe the demand is there.”
RomAsia has engaged a New York-based company, which Inverso declined to identify, to walk it through the regulatory and religious process.
Jonathan Strum is familiar with the ins and outs of the process. He is of counsel at the Washington, D.C., office of Patton Boggs, an international law firm, and he is an expert in Sharia-compliant programs.
“The demand in the U.S. is not huge, but it is growing,” Strum said. “Let’s say the bank lends a company $100,000 to buy a building. Technically, the bank will own the building, and each month the buyer will remit money to purchase a share of the structure. At the end of the loan, the buyer owns the building, but has not paid any ‘interest,’ and so has not violated a religious prohibition.”
That may be the kind of distinction that only a lawyer can appreciate, but for the most part, it satisfies Islamic authorities.
Sharia-compliant programs are growing in the United States and overseas, said Strum, who has advised banks and other financial institutions in New Jersey and elsewhere on structuring such financing deals.
For a lender, a Sharia-compliant loan may be safer than a traditional one, he adds.
“For example, slicing and dicing loans and then securitizing [packaging] them to third-party investors violates the Muslim prohibition of making money on money, instead of making money on the underlying asset,” Strum said. “Consequently, Sharia-compliant institutions have basically escaped the subprime mess.”
A Sharia-compliant loan may involve “a few more hoops to jump through with regulators,” he said. "But as demand grows, more regulators will be familiar with the products, and the process will be even smoother.”
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Sharia-Compliant Programs at a Glance
About 19 years ago, Belle Meade resident Aly Aziz ran a Sharia-compliant lending program for the Princeton office of American Finance House, a Pasadena, Calif.-based financing company. In its heyday, he said, the company was closing 20 to 30 commercial and personal loans a month, for items ranging from cars to buildings.
“We started with Sharia-compliant auto financing,” Aziz said, a shareholder of American Finance House who also serves as president of the Islamic Society of Central Jersey. “As a short-term product for relatively low sums, it limited our risk. As demand increased and we raised more capital, we added residential mortgage products and finally branched out to commercial financing. But residential mortgages were always our strong point.”
He says there are a significant number of Muslims across the state, including in places like Edison, Piscataway, South Brunswick, Jersey City, Hoboken and Passaic.
“We shut down the Princeton office about two years ago, when American Finance acquired the Bank of Whittier in California,” Aziz said.
Through the Sharia-compliant bank, American Finance is trying to extend its lending capabilities on a national basis, he said.
“People hear about us through the Internet and by word of mouth,” Aziz said. “Demand for Sharia-compliant banking continues to grow.”
Ali Chaudry, 65, is a real estate agent with Re/Max of Princeton, and he’s been working on Sharia-compliant mortgages for about 10 years.
“Without a Sharia-based loan, a religious Muslim may have to spend his or her life as a renter,” he said. “But a mortgage that complies with Islamic rules can enable them to become a homeowner.
“Years ago, it was very difficult to find a Sharia-compliant lender,” he said. “In Islamic countries, Sharia-based lending is the rule of the land. But here it is tougher, since you have to work with Islamic concepts and rules, and merge them with U.S. rules and regulations. So the process takes longer and there may be less capital, compared to traditional loans. But as more [religious Muslims] move here, it gets easier.”
— Martin C. Daks