Reference no: EM131372013

Why do you think banks in the U.S. have been slow to offer financing expressly for Muslims?

Do you think it is fair to offer one minority group a special banking opportunity?

How does ethnocentrism come into play in this case?

How does in-group collectivism relate to Central Bank's finance plan?

How do you think the other banks in the community will react to Central Banks?

Case 16.2

Central Bank is a small Midwestern savings and loan insitution that manages $3 billion in assests. It competes with 16 other financial insitiutions for customers; most of those other instiutions have substantially larger holdings. To better serve its customers & attract a lager customer base, Central Bank conducted a financial need survey of the people who lived in the area.

The survey revealed some interesting & culturally relevant information. Muslims represented a sizable minority in the community, making up about 8% of the overall population. However, a review of the bank registry revealed that few Muslims, if any, banked at Central Bank. The results of the survey were puzzling. Given the large numbers of Muslims in the community, the management wondered why there were no Muslims customers at Central Bank.

To answer this question, Central Bank invited a group of local Muslims to meet & discuss their thoughts about financing & how their ideas related to the financial services offered by the bank. The meeting was real eye opener for the bank management. The Muslims' ideas about banking were very different form the traditional Western beliefs about banking.

During the discussion, the management learned that the principles of Islam strongly influence the banking attitudes & behaviors of Muslims. The principles of Islamic finance were set forth in the Koran more than 14 centuries ago. For instance, Koranic law forbids paying or receiving interest. These principles stress that money is only medium of exchange interest. These principles stress that money is only a medium of exchange & should not be used to make more money. From the Islamic point of view, the human element in a business venture is more important than the money used to finance the venture. Futhermore, according to Islamic finance, the provider of capital & the user of capital should share equally in the risk of business venture.

These ideas about finance were different from the way Central Bank thought about them. Central Bank was not accustomed to the way Muslims viewed money as a medium of exchange. Havin been enlightened through these discussions, the management at Central bank felt challenged to develop a financing program that was more in line with the attitudes & values of Islamic finance principles.

In order to attract the business of Muslim customers, Central Bank create & began offering 2 new types of mortgage financing, called ijara & murabaha.Ijara is a finance plan in which the bank buys a home for a customer & leases it ot the customer, who pays rent plus aportion of the property purchase. Murabaha is transaction in whick th bank buys the home & sells it to the customer at an agreed upon markup & the customer pays for the home in installments over 15-30 years. Both Ijara & Murabaha are consistent with Islamic beliefs that prohibit Muslims from paying or receiving interest. In these 2 types of transactions money is used to purchase something tangible, but money is not used to make money.Central Bank recived favorable legal rulings (fatwa) form some of the leading Islamic legal scholars in the US & the world to vaildate these types of financing.

Central Bank's Islamic finance plans have become quite popular. Although Central Bank has been successful with these plans, it has all so or met resistance. Some people have expressed strong disapproval of special finance programs specifically geared to the Muslims population. Others are aginst it because it mixes issues of faith & public finance. However, the resistance has not stopped Central Bank. Central Bank is very proud to be the only bank in the country to serve the needs of the Muslim community in this way.