Islamic Finance ( Islamic Banking ) | My First Million Podcast

Halal Financing, Challenger Banks, and an Underserved Market - March 17, 2020 (about 5 years ago) • 12:16

This My First Million podcast episode features Shaan Puri discussing Manzil, a startup offering halal financing options for Muslims. Shaan explains the concept of Islamic financing, where traditional interest-based loans are not permissible, and how Manzil provides compliant mortgage solutions. He expresses enthusiasm for the business model, noting its success in other countries and the potential within the underserved Muslim market in North America.

  • Islamic Financing and Challenger Banks: Shaan describes Islamic finance, where interest (riba) is prohibited. He draws parallels with challenger banks disrupting traditional banking and highlights Manzil as a faith-based challenger bank.
  • Manzil's Business Model: Manzil connects investors with Muslim borrowers seeking halal financing options for mortgages. They operate as a broker, facilitating compliant loans and collecting a transaction fee.
  • Market Opportunity: Shaan emphasizes the large, underserved Muslim market in the US and Canada, where convenient and compliant financing options are lacking. He notes Manzil's existing pool of investors and applicants as indicators of strong demand.
  • Challenges and Validation: Shaan acknowledges the difficulty of raising venture capital for this niche market, requiring education about Islamic finance. He mentions Furkan, a Muslim investor and technologist, who validated the market need and potential of Manzil.
  • Building on Existing Banks: Sam and Shaan discuss the model of building financial services on top of existing banks, referencing Simple and Brex as examples. They highlight the value of creating user-friendly interfaces and experiences while leveraging existing banking infrastructure.

Transcript:

Start TimeSpeakerText
Shaan Puri
Mansell, so this is cool. This is one of my favorite reasons to do the podcast: interesting people just reach out and tell me about their business. So, Mansell is this... so this guy, Sam, reached out. He listens to the podcast.
Sam Parr
what's his last name
Shaan Puri
sam mulaco yeah I'm talking to you
Sam Parr
tweeting at me too
Shaan Puri
And so he was like, "Hey, I got this business. You know, would love some help with it or just would love to chat." So I said, "Okay, let's chat." I get on the phone and I end up blown away by what these guys are doing. They teach me about something I've never heard of and is now very fascinating to me. So what they do is... Mansell does Islamic financing.
Sam Parr
oh we've talked about that
Shaan Puri
"What's that mean?" We talked about it, not on the podcast, but we talked about it offline because I was pretty interested in it. So Henry, do you know what Islamic financing is? If you didn't know lead gen, I don't think you'll know this one.
Sam Parr
so are you are you muslim
Shaan Puri
I'm not... I'm Hindu. Well, I'm neither, but my family is Hindu, so I didn't know about this. Basically, in the Muslim faith, there's actually advice against traditional loans. Interest, which is known as "riba," I think in their faith, is frowned upon. So, a traditional mortgage, where you go to the bank, have your down payment, take out a loan, and pay interest, is actually not compliant with their faith and their law.
Sam Parr
and which is actually common in a lot of other different religions
Shaan Puri
is that true
Sam Parr
Yeah, so I'm Catholic Christian, and I was raised that way. There are definitely rules regarding handling money and interest and things like that.
Shaan Puri
And I think the fundamental basis... I'm gonna kinda butcher this, so I apologize, but I'll try to explain it as best as I understand it. So, apparently, you know, money—sort of fiat currency—which is just not pegged to anything, is just a made-up concept. The belief system is that money has no inherent value in itself. Therefore, you should not be charged interest for borrowing money, which is this sort of abstract concept. So, they have loans or agreements that can work as long as both sides are taking shared risk and getting some sort of shared upside or return in some way. This is, I believe, Islamic finance. His partner, Mohammed, is also involved in this. They were explaining to me that there’s this big thing called Islamic financing and these Islamic challenger banks. If you’ve ever heard the term "challenger bank," check this out; it’s pretty cool. We know that banking has been around forever. There are these big bank brands that are in every country, and there are big banks that are worth billions of dollars. Recently, over the last let's say 5 to 7 years, there have been these things called challenger banks or neobanks. In Brazil, there’s a bank called Nubank (N-U Bank), and Nubank is worth $10 billion. It’s one of the most valuable startups in Brazil. In the UK, there are challenger banks... oh my god, I'm gonna forget the name of...
Sam Parr
the challenger just means a new one
Shaan Puri
That's a startup bank, and they offer different services. What these guys did was improve digital access, so they have mobile apps and a quicker ability to get credit and debit cards set up. There are a couple of them that are huge now—several different multibillion-dollar startups in this space. What these guys have done is create a faith-based bank, which essentially serves a set of customers—in this case, Muslims—who are not being served well by generic banks. We can make a bank that serves them better. The way we're going to do it is by offering a mortgage option. You can either take out a traditional mortgage, which is not compliant with your faith, or you can take one out that is compliant. We've come up with a mechanism that is blessed by the village elders, the leaders in the community, that says, "Yes, this is compliant with Sharia law." This means it works as a mortgage, allowing you to actually buy your home. These guys have this concept, and in other countries, this is apparently really big. In Africa, Indonesia, and places where the Muslim population is dominant, they've already solved this problem. However, in places like the U.S. and Canada, where the Muslim population is just a minority, they don't have these banks yet. I love this startup idea because...
Sam Parr
how are they doing
Shaan Puri
So, how are they doing? They have spent a lot of time making sure that they can actually get it to be compliant and get the financial mechanism to work. That took them a while—over a year, maybe two years. Now they've gotten that to work. They have basically two sides of a marketplace. On one side, they have people who are investors. Because, you know, if you're going to issue mortgages, their average mortgage is like $500,000. It takes a lot of capital to start this business. They don't want to be the ones to raise $1,000,000,000 and then start issuing these loans. They want, on one side, to have investors who will put in the capital to fund these loans. On the other side, they want to have the borrowers who are trying to buy a home and can pull from this pool of halal financing—this financing that's compliant. So, they have $10,000,000 committed on the investor side, $1,200,000 in their bank, totaling $10,000,000. And they're just, every week, trying to close more.
Sam Parr
of those checks I think we
Shaan Puri
Which is a small amount, but this is just inbound interest. They haven't really done anything yet. But $10,000,000 will let you do... if you just do half $1,000,000 loans, that means they can do about 20 mortgages right now. Every mortgage has a certain value, so it's worth about, I don't know, $20,000 a year to them just in their fee that they get on top of it. On the other side, they have all these applicants. I think there are about 1,000 applicants, and these are what they call "super prime" applicants. These are people who are doctors, lawyers; they have good jobs. They have the money and the means to afford their homes. They're just looking for a solution that doesn't force them to compromise their faith. So, I really like this business. There's a working model in the UK, there's a working model in Africa, and there's a working model in Indonesia. However, there's nothing in Canada where these guys are, and there's nothing really in the US.
Sam Parr
many muslims do you think there are in america
Shaan Puri
I think there's... look this up. I think there's like a couple million, only 22,000,000. I want to say roughly.
Sam Parr
That's pretty interesting. I like that. I think that there's a bunch of weird rules around banking. I mean, they're not weird, they *should* be there, but... Starting a bank, I think, is almost nearly impossible.
Shaan Puri
it's very difficult so what all the neobanks do all the charter banks do they're
Sam Parr
not real banks
Shaan Puri
They're not real banks. They sit on top of BBVA or they sit on top of these other banks, and they're just the app. They're the consumer-facing layer, but the banking happens with their underlying partner. It's sort of like the lead generation model that you're talking about. They go to these banks and say, "Hey, I can get you a whole bunch more customers. I'm going to spend all the money doing the marketing. They'll be banking with you, but we own this sort of relationship."
Sam Parr
Yeah, yeah, and that's actually pretty common. I use this thing... my debit card is Simple. "You're as Simple?" "I've heard of it." Yeah, this is my debit card. It's pretty cool. I like it because the customer service... I can just text and they're like easy. These like young guys in Portland, and they're easy to chat with. They answer 24 hours a day. They were acquired for $100 million, and I was like, "This is like a freaking bank!" That's it.
Shaan Puri
yeah
Sam Parr
and I didn't it's not
Shaan Puri
a bank yeah
Sam Parr
and it was what's it called bbva yeah that's who they use bbva compass I think
Shaan Puri
Exactly. They're under... they're under... there's a few that are underneath all these. Now, the very first... there's now one of the challenger banks that got their very first banking charter, banking license, which is very rare. I forgot their name, but they just announced a couple of weeks ago, or in the last two weeks. So now it's very interesting. Once that seal broke, because it was so hard to apply for this.
Sam Parr
yeah
Shaan Puri
I think we all want it. Robinhood wants their license, Brex wants their license. It's just very hard for them to get this.
Sam Parr
I think you need 5 per or what is the number I think you need 10%
Shaan Puri
in reserve
Sam Parr
yeah you need a certain amount of reserve
Shaan Puri
that's not
Sam Parr
even the problem out
Shaan Puri
It's just that there's no incentive for the government to give these out. They're like, "You... you kinda highfalutin', you know, tech startups. Do I really wanna give this to you? You've only been around for so long. I don't know if I have the trust in you." So now the seal is broken. The first one got it. We'll see what that means. But what I like about these guys is they're not a bank. They're not taking your deposits. They're just doing loan issuance. So on one side, they have the reserve cap, the investment fund.
Sam Parr
but they're using other people's money
Shaan Puri
OPM [Other People's Money] on one side, yeah. They use other people's money to make the loans, and they're the broker. They take 1 to 2% of the transaction fee, and people are willing to pay a premium to have halal financing. Just like people are willing to pay a premium for halal meat, or for vegan or kosher meat, you know? Whatever... People are willing to pay a premium for things that are compliant with their faith. So I think this could be big, and what's interesting is that I think they've had a hard time raising money from traditional VCs because this is... [sentence trails off]
Sam Parr
didn't understand it
Shaan Puri
Hard to understand, yeah. You have to... you know, most VCs are old white guys, and it's sort of the cliche. I know they do look into it, but I think there are the natural challenges of any high-aspiration startup. They have those problems that any really ambitious startup has, but then they also have the problem of... like, first they need to educate you about this problem. You saw how I stumbled through this explanation, and I talked to these guys for an hour, you know? And that's where I am after an hour of really trying to understand it.
Sam Parr
but you and you read this by furkan your your best
Shaan Puri
So, I ran it by him. I introduced him yesterday. I said, "Hey, Furkan understands this. He's Muslim, he's an investor, he's a technologist, and he's an entrepreneur. If he doesn't like this, I don't like this."
Sam Parr
what did he say
Shaan Puri
And so he's like, "I've looked into this." He's like, "A lot of my friends really wanted this. I tried to look at what options are available in the US. They suck. They're really super high premiums." Is he practicing? Yeah, like... to an extent, yeah.
Sam Parr
like what I wanna know is do really like
Shaan Puri
call for times a day but he doesn't eat pork right
Sam Parr
so he's like culturally
Shaan Puri
he drinks but like his dad runs the mosque in san jose and you know like the it's
Sam Parr
so even people who are like culture who aren't incredibly devout are into this
Shaan Puri
If he had the option, he would prefer halal financing over [conventional financing] if it was convenient. He's like, "The problem with all the existing options is they're not convenient, they're not easy to use, and they have very high premiums." He's like, "If these guys did it conveniently, I think this could be big." So he's going to talk to him. We'll see.
Sam Parr
like I'm I'm not a practicing catholic anymore are you are you guys catholic you're catholic for sure right
Shaan Puri
do you
Sam Parr
Eat meat on Friday during Lent? Yeah, I've been bad about it honestly. I went to like an all-boys Catholic high school. "Me too, I went to an all-boys Catholic high school. I don't practice anymore, but that's another thing... I don't eat meat during Lent on Fridays. So I try not to." So it's kinda like... it sounds like that's what it is. It's kinda like where it's like...
Shaan Puri
people it's a spectrum
Sam Parr
it's a you prefer it but not yeah
Shaan Puri
You prefer it, especially if it's convenient for you. You'd... you know, the way Henry just said that, there's a lot of guilt there. Like, "Yeah, I should, but I don't." So, you know, if you can make it where people do what they want to do without lifting a finger, then they'll do it. You know, it's great.
Sam Parr
that's pretty cool
Shaan Puri
it's an opportunity
Sam Parr
I like that. I like that thing, or I like that angle of finding... because I don't know anything about Muslim culture, I don't know anything about Hindu culture, which is where you're from. You probably don't know too much about Catholic [culture] either. It's kind of an interesting way to look at how other religions do things, right? Another thing that we should talk about, not today because I don't think we know what we're talking about (we definitely don't yet), is building things on top of banks. I think that's super interesting.
Shaan Puri
what do you mean by that
Sam Parr
so like what simple did and like what the what what's the name of this company
Shaan Puri
manzo
Sam Parr
man spell it
Shaan Puri
m a n z I l
Sam Parr
Manzo, okay. Kind of like what Manzo did: building a front end on top of someone else's back end.
Shaan Puri
right
Sam Parr
Which is the bank? I think that that's really interesting. Simple.com is my card. I didn't know they did this at first.
Shaan Puri
This is kind of what drop shipping is. You build the layer that says, "I'm going to get the customer to a landing page and they buy." Yep, but it's just going to place an order with this other manufacturer, and they'll ship it directly.
Sam Parr
To them, super effective. I like that with banks because, like Simple, they did this. I mean, it's a little different. The card is all white and it's just slick looking. Their app is really good, and so it's kind of interesting. I think this is kind of what Brex is doing. It's a...
Shaan Puri
corporate totally what
Sam Parr
Brex card, yeah, they're layered on top of Mastercard. I love these things. I really like that.