Banks Extend Their Reach to Ethnic Markets

The success of Islam-compliant lending is sparking innovation in mortgage products.

Islam-compliant lending will continue to be a bright spot on the banking landscape. Religious rules forbid charging interest on loans, so firms specializing in such financing escaped the widespread and severe problems that brought down many rival institutions recently.

The average delinquency rate at Virginia based Guidance Residential, which operates in 23 states, is 3.5%, compared with 7.8%, the nationwide industry average at the end of 2008. Chicago based Devon Bank, another institution that engages in Islam compliant, or Sharia lending, has been making these kinds of loans for six years without any losses.

“This piece of our business has grown nicely,” says David Loundy, general counsel at Devon, a bank with $300 million in assets. “We don’t talk about raw numbers, but it has become the bulk of our mortgage business, and we are offering availability in 38 states.”

Executives at Devon and Guidance say success is due to knowing their customers well and working closely with them if restructuring is needed. For instance, Guidance caps late fees at $50 and takes a loss if the sale price of the home falls below the mortgage balance.

In part because of the simplicity of the products, Sharia lending is catching the interest of non-Muslim borrowers. The home mortgage product at Guidance, structured as a co-ownership agreement with monthly fixed payments, has old-fashioned appeal. The product at Devon is structured differently.

A genuine relationship between the lender and the borrower is needed for the product to work. And the nonprincipal portion of the payments is even tax deductible.

“This year our goal is to position ourselves so we can expand our customer base and reach out to customers at large,” says Guidance President and CEO Khaled Elsayed. “When we started, this was a niche market, but now it’s expanded beyond that group.”

Look for mainstream banks to make a run at ethnic markets beyond the Muslim community as they seek new sources of revenue growth to replace securitized lending profits in coming years.

Historically, financial institutions have left the business of serving immigrants’ needs to others. Payday lenders have cashed checks, while Western Union and MoneyGram have been popular for those sending money back to their home countries. Coinstar, Green Dot and Wal-Mart have the reins on the prepaid debit card market.

“In this market, banks would be crazy not to pursue every customer niche everywhere you can,” says Mike Menzies, CEO of Easton Bank in Maryland.

From Kiplinger Business Resource Center