How Muslims in the U.S. Follow the Islamic Financial System

Devon Bank
The Devon Bank offers Islamic home financing alternatives to its customers (Nikita Mandhani/Medill)

By Nikita Mandhani

At the entrance of the Devon Bank in Chicago is a small pathway with a billboard that includes “Faith-Based Financing” as one of its options to direct customers toward Islamic alternatives for buying a home.

The Islamic financial system, which is based on the principle of interest-free transactions, risk-sharing partnerships and altruistic donations, is central to the financial practices of several million Muslims throughout the world.

Thousands of Muslims in Chicago use the Islamic finance system, based on Shariah or Islamic law, while also using traditional banks and conventional financing structures.

According to the Institute of Islamic Banking and Insurance (IIBI) based in London, “the Islamic system places equal emphasis on the ethical, moral, social and religious dimensions, to enhance equality and fairness.” It says that the conventional financial system, by contrast, focuses principally on “the economic and financial aspects of transactions.”

Cynthia Shawamareh, Islamic law and finance lecturer at the University of Chicago, described how Muslims in the U.S. find it more challenging to follow faith-based financing.

“I think it is the toughest when you are working in two different systems at the same time,” she said. “If all of the shops shut down at prayer time in a particular city, you’re likely to go and pray. But in the western world, it seems more difficult.”

Some Muslims in the U.S. obey the Shariah-based financial system with different workarounds to process their economic operations under the purview of Islamic finance while still operating in mainstream American financial systems.

“We are not supposed to use the money that comes out of interest,” said Bina Habibi, an Indian-American Muslim living in Oak Park.

Habibi doesn’t follow Islamic finance stringently but ensures that a fixed percentage of her family income goes for charity as it “distributes wealth.”

For Seyed Fowad Motahari, a 24-year-old Iranian student at Washington University in St. Louis, the validity of the Islamic financial system is a looming question particularly when people in America have the freedom to defy it.

“As an individual, I put my money in the checking account so that I don’t get any interest on my deposit,” said Motahari.

The Devon Bank initiated a Shariah-based financing alternative for its Chicago customers in 2003, creating a system of residential mortgage and commercial leasing options that are Shariah-compliant.

There has been an exponential growth in the Islamic finance branch of the bank since then, according to Badih Alkhatib, senior loan officer of Devon Bank’s Islamic finance division.

“Home financing is one of our major components,” he said. “We have murabaha, which in Arabic means ‘sales with deferred payment.’ ”

Under this system, the bank purchases the property and then signs a “sales contract” with the client wherein the amount is a sum of the bank’s expenditure and its profit.

“In conventional banks, they sign a debt contract which is not allowed in Islamic finance,” Alkhatib explained.

A private Islamic Home Finance firm in Chicago (Nikita Mandhani/Medill)
A private Islamic home financing firm in Chicago (Nikita Mandhani/Medill)

According to the World Bank website, worldwide Islamic finance has a 10 to 12 percent annual growth rate. Currently, Shariah-compliant financial assets worldwide are estimated at roughly $2 trillion, covering “bank and non-bank financial institutions, capital markets, money markets and insurance.”

The key industry players in the modern Islamic finance industry are the practitioners of this system, Shariah scholars who determine whether a structure is actually Shariah-complaint, lawyers and government regulators, explained Shawamareh in a lecture on the subject at the American Islamic College on Nov. 10.

Whether a product is Shariah-compliant or not depends on the different schools of thought based on a variety of “human interpretations” of the Shariah, as noted on the Institute of Islamic Banking and Insurance website.

“Islamic finance falls under what’s also known as affinity marketing,” said Rizwan Kadir, president of the Pakistan Club at the University of Chicago, asserting that a lot of Shariah-based instruments are offered with the goal of attracting more customers. “There is nothing un-Islamic about it but there’s nothing Islamic about it either.”

Shawamareh pointed out that it is “a question for consumers” and including practicing Muslims to decide for themselves. “If they think that a product accords with Islam, they will buy it.”

Photo at top: Devon Bank offers Islamic home financing alternatives to its customers (Nikita Mandhani/Medill)