Creating Capital: Ensuring Financial Inclusion for Muslims in America
By Aamash Mussa / Propel Democracy Fellow
When immigrant groups arrive and the first-generation is born in America, there are certain norms that we must accustom ourselves to. For many, including myself, this transition to a new way of life has not required much sacrifice. Even when it comes to religion, my family has been able to effectively practice most aspects of our faith in this country. However, as Muslims in America, one significant problem remains: accessing capital in accordance with Islamic principles. When a large part of success in America is measured by wealth and capital, what does one do when the method of obtaining this goes against what Islam tells us to do?
In the United States, owning a home is viewed by many as a means of security for oneself and one’s family — not having to worry about landlords or rent increases and other circumstances out of a person’s control and potentially building wealth for future generations. However, buying a house requires a mortgage, meaning a loan with interest.
In Islam, interest is forbidden by making unjust and unequal exchanges illegal. Eliminating unjust and unequal exchanges removes sentiments of selfishness and self-centeredness, which can create social antipathy, distrust, and resentment.
However, this practice of being forbidden from taking loans with interest leaves Muslims in the United States with limited options for accessing capital. For those without significant financial assets, this creates a difficult choice: either seek a loan in order to buy a house and go against what your religion tells you to do, or follow the requirements of Islam and sacrifice a large component of becoming financially secure. This same challenge applies to businesses. Many Muslims are often stuck in managerial roles (especially with franchises) as opposed to owning and running their own businesses. For Muslims who immigrate to the U.S. seeking economic opportunity, limitations on ownership can undermine their goal of financial success.
As a Democracy Fellow at Propel this summer, I have had the opportunity to explore the field of impact investing and use this learning to consider possible solutions to this challenge faced by many Muslims. Impact investing calls for two measures to be accounted for: the social good that is derived from the investment and the traditional financial return on the investment, which is generally the reason why investors risk their money in the first place. At Propel, not only have I spent time analyzing how financial returns are measured, but also the social impact portfolio companies have on their users and society. This highlights a virtue that does not exist in the mainstream capitalism that dominates our society. Propel invests for impact and financial returns, understanding that in many cases financial concessions are necessary to achieve the depth or breadth of impact required to tackle social, environmental, and political issues.
One of Propel’s investments is in MicroVest, an asset manager that specializes in allocating private debt capital to Responsible Financial Institutions or “RFIs” in emerging and frontier markets. RFIs invest to advance economic development and facilitate financial inclusion among groups that traditionally would not have access to capital. However, there are limitations to the reach of RFIs given expectations to mitigate risk and return capital to investors. This unfortunately means that some lenders may not be able to access the necessary funding if they do not have high enough credit scores or a business model that looks promising to investors. Despite efforts to close the gap between those who are and are not served by mainstream financial institutions, without large infusions of highly concessionary capital — a significant disparity still exists in access to capital.
This same problem exists in Islamic finance. While Islamic banks exist and are able to provide capital to some, the existing reach and structure of Islamic banks is insufficient to meet the needs of Muslim Americans. Few Islamic banks operate in the United States and, those that do, require higher credit scores and larger down payments on loans compared to most banks, limiting access to capital for those without significant credit history or savings. To avoid using interest, Islamic banks instead purchase the product or service (e.g., a house or a business) upfront with cash and then charge the borrower a premium over the amount paid that the borrower pays off over time. Many of my friends with no credit history have been denied student loans because they presented too great of a risk. Since Islamic banks in the U.S. already have less money to work with, these institutions are unable to provide funds to a large segment of our community in the most dire need of access to financial capital.
If Islamic financial institutions existed that had a mission of expanding access to capital and were able to take on greater risk than existing Islamic banks, then more Muslims could be served.
Many parallels exist between impact investing and Islamic finance and both have core values that define them, but where impact investing has shown to work better is that the end-goal is clear: using capital to lift up communities. However, there is real potential in combining some of these values to developIslamic financial institutions that have a clear goal of using capital to bring more opportunities to our communities. How would we do this? What are those financing strategies used in traditional lending institutions that can merge with the heart that impact investing has shown to have and put more capital to use in the Muslim community? What can Islamic banks learn from impact investing models in order to accelerate growth? And how can we ensure both the religious and economic liberty that many have searched for upon arriving in America?
