At Islamic Banks, a Different Kind of Interest

NJBIZ, Dec 8, 2008 by Daks, Martin C

Growing Muslim population necessitates alternative lending practices, business models

BANKING

ROMA 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 Iersey 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 Iselinbased 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 die 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 die waters of ethnic banking in lune with the launch of RomAsia Bank in the Monmouth Junction section of South Brunswick.

Located near the Islamic Society of Central fersey, RomAsia was designed to appeal to New lersey'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 Iersey," 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 PattonBoggs, 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 Üiat 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 Newfersey 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 thirdparty investors violates the Muslim prohibition of making money on money, instead of making money on the underlying asset," Strum said. "Consequenuy, Sharia-complaint institutions have basically escaped die 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."

E-mail to mdaks@njbiz.com