Bloomberg/Kuala Lumpur

The top US Islamic finance providers say Shariah loan growth will slow next year, as consultants predict global banks will stay out of the market due to concerns over logistics and public controversy.

American Finance House Lariba and Lariba Bank of Whittier NA’s combined lending expansion will cool to 12.5% in 2013 from 15% this year, Whittier chief executive Yahia Abdul-Rahman, said in an interview this month. Guidance Residential, an Islamic mortgage provider based in Reston, Virginia, sees housing-loan growth easing to 20% in 2013 from 67% this year, Hussam Qutub, vice president for marketing and communications, said in an e-mail.

The market provided by the 1.9mn Muslims who live in the US may be too small and geographically dispersed to justify a significant investment by large American lenders, said Isam Salah, a partner specialising in Islamic finance at New York-based law firm King & Spalding.

The current “players are probably not capable of generating the momentum needed to capture the imagination of the general public,” Salah wrote in a November 14 e-mail. “This ought to provide fertile ground for a Gulf-based Islamic bank, but the lenders that have looked at the market so far have not demonstrated the sophistication or determination needed.”

Islamic financial services providers in the US face a challenge in marketing their products without offending religious sensitivities, according to Whittier’s Abdul-Rahman, who is also the founder of Pasadena, California-based American Finance House Lariba. The two companies have common shareholders and provide personal and business Shariah-compliant loans. Their combined lending expanded 6% in 2010 and 10% in 2011.

Guidance, a subsidiary of Guidance Financial Group, predicts new loans will total $360mn this year as record-low interest rates encourage refinancing, Qutub said. Islamic mortgage companies in the US have lent $3bn to $4bn over the last decade, less than 5% of the potential annual market of $8bn to $10bn, he estimated.

“We see the outlook to be promising, especially now that the US housing market is beginning to show improvement,” Qutub said. Still, “Islamic home-financing providers face heavy regulation on the federal and state fronts,” he said.

Worldwide sales of bonds that comply with Islam’s ban on interest rose 71% this year to a record $43.4bn, beating the previous high of $36.7bn for the whole of 2011, according to data compiled by Bloomberg.

Islamic securities returned 8.8% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 16.3%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

Muslims make up 0.6% of the US population of 314mn, according to the CIA World Factbook. There are only a handful of Shariah-compliant financial services companies in the country, such as Chicago-based Devon Bank and University Islamic Financial Corp, located in Michigan.

Obstacles to the growth of the Islamic finance industry in the US include the lack of a regulatory framework and basic infrastructure, Syed Abdull Aziz Jailani Syed Kechik, chief executive officer at OCBC Al-Amin Bank Bhd, the Kuala Lumpur-based Shariah-compliant unit of Oversea-Chinese Banking Corp, said in a November 19 e-mail.