In 2004, a technology startup looking to raise capital through an Initial Public Offering (IPO) decided to forgo the traditional route, instead using a novel method colloquially known as the “Dutch auction”. Here, investors bid for the stock to dictate the price of the initial offering. The company priced at $85 per share, well shy of the $135 share price the tech giant desired—raising a mere $1.67 billion with a $23 billion valuation.

Today, that company—Google—is worth well over $700 billion.

Startup founders look toward the widely-regarded failure of Google’s unconventional IPO route as affirmation to not challenge the system. A “conventional” IPO takes place when companies wish to raise money from the market. A “lock up”’ period of 90 to 180 days prevents principle shareholders from selling stock into the market initially. Underwriters from investment banks set the price and support it in case the stock begins to crash. This traditional method reduces volatility in the price and allows for a company to raise capital for future investments and expansion.

However, Spotify, which went public in April 2018, made waves as the largest company to ever pursue a Direct Public Offering (DPO). A more decentralized process, this kind of listing allows existing investors or employees to directly sell shares to the public. The company being listed also does not issue any new shares. The most widely reported difference between the DPO and IPO was the elimination of the middle man, the underwriter. Headlines across the country surmised the doom of the investment banks as more technology companies would pursue direct listing to save on underwriting fees. In reality, Spotify’s choice to pursue a DPO was nuanced and done with advice from some of the world’s best financial advisors.

The ensuing concerns about what this would mean for the investment banking industry is understandable–IPOs are incredibly important to the entire industry. Equity underwriting is one of the most lucrative fields on Wall Street. This is especially apparent during the underwriting of an IPO, when banks receive roughly seven percent of capital raised. In 2017, the United States’ five largest investment banks made over $20 billion in equity underwriting. Large companies vying for the largest pool of expertise and research often employ five to seven different underwriters. For this reason, the elimination of IPO underwriting could easily have drastic effects on the industry as a whole.

Had Spotify pursued a traditional IPO, each of their Wall Street underwriters would have earned tens of millions of dollars in fees. In reality, the banks were not entirely removed from the equation. In the company prospectus, Spotify disclosed that advisory fees of $35 million would be shared between Allen & Co, Goldman Sachs, and Morgan Stanley. This price did not include the underwriting fees that total 13 to 15 percent of bank revenue.

Many concerns over Spotify’s use of direct listing came from beliefs that the technology sector would follow suit. Over the next two years, a new wave of some of the decade’s most notable startups will go public, raising billions of dollars for their businesses. According to Dealogic, 2018 tech public offerings have already raised more than all of 2016 and 2017, combined.

Investor consensus is on pace to make a sharp turn in 2018 with both Spotify and Dropbox holding their prices after going public, while Snap and Blue Apron’s 2017 IPOs saw price collapses. This bullish attitude towards the market is urging big names to go public. Uber’s CEO has made clear plans to go public in 2019. Lyft began posturing for a public offering after speaking with investment banks. In what is likely preparation for a future IPO, Airbnb executives began adding independent directors to their board.

Technology IPOs are critical for the innovation landscape. Money raised upon floating shares to the public can be returned to employees who start new companies. Some capital is returned to venture capitalists, who use it to invest in the companies formed by ex-employees. Public offerings in the technology sector are so critical for this very reason.

Given the critical nature of tech IPOs, companies within the sector spend a significant amount of time preparing for their listings. Spotify’s choice to pursue a direct listing was a calculated move tailored to the company’s strengths. Most companies listing shares publicly do so in an effort to raise interest-free capital for future investments and acquisitions. Spotify, on the other hand, did not issue shares and raise new funds in an effort to keep existing stakes at their value. The company, instead, allowed existing shares to be traded. This situation is impossible under an IPO, where companies float new shares on the market. Raising capital is the principal reason for the vast majority of companies going public, a barrier to the direct listing process.

While Spotify’s DPO circumvented underwriters and reduced cost, it also removed many of the tasks that are key for soon-to-be-public companies. During an IPO, bankers and executives travel around the country visiting institutional investors and advertising the company they represent. Underwriters also speak with their firms’ largest trading partners, agreeing to buy and sell the shares at a price that earns these partners profits. These services don’t occur for a DPO. Spotify was able to eliminate this process due to publicity. Spotify is unique in its incredible brand recognition across the world. The company had no need to gather the support and guarantee of institutional investors to pick up the stock price due to its prominence throughout households. Other companies potentially going public in 2019—including Slack and WeWork—simply lack the appeal and prominence of Spotify, giving value to the underwriters in their public listings. Spotify’s ability to eliminate underwriters was unique given its incredible brand recognition.

Spotify’s unconventional motivation was another factor that distinguishes it from other technology companies. As previously mentioned, the company did not intend to raise capital from this round. Instead, Spotify wished to increase liquidity and reduce volatility for its investors.  As a result, the DPO investors and employees alike had the opportunity to immediately sell their shares. On the first day of trading, there were few sellers and buyers. Over time, groups became more comfortable with the listing, and the initial volatility of the stock price fell dramatically as more investors and employees sold. In the scope of a traditional IPO, this would appear to be a failure: large blocks of shares were not moved to institutional investors, and the price was volatile in early hours of trading. Yet, in Spotify’s scope, this IPO was ideal. The company’s share price increased from $48.93 to $132.50 privately to between $136.51 and $169 publicly. In just two days of public trading, over 600 percent more Spotify shares traded hands than after ten weeks of private trading.  Spotify increased investor and employee liquidity through this move, which was in line with the company’s motivation for the public offering.

Since the birth of the IPO, companies have been characterized as successful based on whether they ticked a series of checkboxes—none of which Spotify touted during its public listing. Within the technology and banking sectors, IPOs play a critical role. The introduction and success of Spotify’s DPO resulted in some reactions that the tech industry would shift to this new model, cutting out the underwriters. The reality is that the number of private companies with name recognition, no need to raise money, and a desire to give investors liquidity can be counted on one hand. Spotify’s path to public trading was a unique event tailor-made for its situation. Those worried about the downfall of Wall Street equity underwriting should not fear–Dropbox’s pursuit of a traditional IPO in March of 2018 resulted in shares trading up 40 percent. Evidence of a resurgence of tech public offerings is abound, and–thankfully for the banking industry–the DPO is no substitute for an IPO.

This article was co-published by Seeking Alpha on Jan. 7, 2015.

Bankers at the world’s top investment banks closely monitor “league tables” with the same dedication as avid Premier League soccer fans.  The usual suspects lead the pack. At the top of the mergers and acquisitions (M&A) table are storied franchises such as Morgan Stanley, Goldman Sachs, JP Morgan, and Bank of America. Colloquially known as “bulge brackets,” these public financial institutions offer a full suite of financial services ranging from capital raises and asset management to advisory and market-making.

Closely on their heels, however, are drastically smaller, “boutique” firms. These specialized practices, known to few outside of Wall Street, offer a much more narrow range of services and often specialize in M&A advisory. This new crop of banks with streamlined business models, deep rolodexes, and niche focuses are giving traditional industry players a run for their money.

The Wall Street landscape, as we knew it a few years ago, has changed. In the aftermath of the recent financial crisis, new regulations, overall risk aversion, and operational inefficiencies are reining in once highly profitable practices such as fixed income and proprietary trading. The age-old model of being a financial jack-of-all-trades has proven to be a burden. If prominent banks are to regain their competitiveness, they will have to focus on their core strengths instead of striving to mimic market leaders. Market dynamics will force bulge brackets to shift resources away from low-margin, weak-demand services and product offerings and will ultimately lead to a more diverse industry landscape.

Boutique banking on the rise

Managing directors at leading boutiques such as Evercore, Centerview, Greenhill, and Moelis & Company are overwhelming ex-bulge bracket veterans who have chosen to set up their own shops in pursuit of higher compensation and career independence, among other factors. Given their wealth of experience and industry expertise, heads of elite boutiques have been well-positioned to capitalize on the wild ride in M&A over the past decade. According to the Financial Times, M&A volume tripled between 2003 and 2007, plummeted during the crisis, and has since strongly rebounded. During this volatile period, several boutiques went public and since then have seen sky-rocketing returns on their stock (see index). Wall Street has not been so fortunate. Over the past year, shares of bulge brackets experienced returns that can only be described as anemic, 4% year-over-year versus 17% for the leading boutiques. In the first quarter of 2014, boutiques advised on roughly a third of all announced M&A deals according to Dealogic estimates.

The beauty of these independent advisory firms lies in their simplicity. They typically earn their bread by closing deals and receiving a commission-based advisory fee. About half of the revenue goes towards employee compensation and a quarter towards overhead, leaving a wide operating margin. There’s no need to worry about Basel III, FASB 157, risk-weighted assets, or a long string of expensive lawsuits.

And boutiques will certainly have no problem competing with bulge brackets for the newest crop of young talent. According to Glassdoor figures, the leading boutique investment banks offer analysts compensation that’s on par with bulge brackets, and in certain cases are even higher. Though analysts may give up the opportunity to develop a broad network of industry professionals in a more structured work environment, they often play a more integral role in the actual transaction process than they would at a larger institution. With firms such as Centerview and Evercore directly competing with the likes of Goldman and Morgan Stanley for big name clients, top college graduates are increasingly making the switch to boutique banking.

Wall Street’s dilemma

The post-financial crisis economy has not been kind to big banks. On May 19th, Swiss bank Credit Suisse pleaded guilty to tax evasion in the United States and will incur a fine of $2.6 billion, in addition to increased regulatory oversight. These costly criminal charges come only a month after Bank of America reported critical accounting errors that led to a delay in a highly anticipated share buyback program, much to the dismay of shareholders and BoA employees.  Around the same time, Barclays, a British bank, saw several of its top rainmakers leave amidst poor compensation. It effectively renounced its ambitions of becoming a top global investment bank, announcing sweeping layoffs in its U.S. investment banking operations. Deutsche Bank, long recognized as an industry leader in fixed-income trading, stubbornly clings on to its foothold in fixed-income and currencies despite a sharp cyclical downturn, cumbersome regulations, and general risk aversion towards exotic, but profitable investments. The recent spate of negative press has not only sent share prices tumbling but has also battered credibility just as banks were beginning to rebuild confidence with clients.

However, the strong recovery in corporate finance has Wall Street excited. M&A revenue for 2014 is forecasted to reach $16 billion, up 5-10% from the previous year. Several factors are at play here. After years of hoarding cash, large corporations are ready to take advantage of the restabilization in the economy, strong equity markets, and relatively low interests rates to make strategic acquisitions. Private equity firms also have a record amount of “dry powder,” funds they raised but have yet to deploy, and are ready to take on unprecedented levels of leverage in the hunt for attractive acquisition targets. According to proprietary interviews with C-suite executives, banks are readily offering cheap credit lines and a host of amenities to solidify existing relationships with clients. With multiple banks lined up in the hopes of landing the next mega-merger, corporations will have plenty of advisors to choose from.

Despite the optimism, the latest research from strategy consultancy Oliver Wyman and Morgan Stanley suggests big banks will need to work more smartly to win a spot at the table. Bulge brackets are smothering their clients with excessive and ineffective coverage. Corporate executives have noted that most of these outreaches amounted to nothing more than generic pitches and product peddling. This inefficiency can be traced back to the siloed nature of many financial institutions. The research departments, product groups, and deal teams often operate independently with limited communication across the various functions. In order to provide truly effective client coverage, banks will need to internally employ multilateral efforts to gain a deeper understanding of client needs.

A more level playing field

Banking is ultimately an information-based profession. M&A advisors, therefore, are paid based on who they know, what they know, and how well they negotiate. The emergence of innovative technologies that effectively use the wealth of available online data have begun to chip away at the first two ways investment bankers add value. First, who you know does not really matter anymore. Simple LinkedIn searches and a few minutes on Google can get you the contact information of virtually any influential corporate decision-maker. Second, the infamous “pitch-book,” one of the first sets of presentation materials prepared in a transaction process, has become commoditized as financial analyses have become cheaper and the preparation process easily outsourced. While it does indeed take years of hard work to become an industry expert and a menace at the negotiation table, technology has undoubtedly leveled the playing field for bulge brackets and ambitious up-and-comers.

Where Wall Street still excels and will continue to dominate is actual financing. Regardless of how prestigious or talented the new crop of boutique firms become, they will not have the same level of access to capital markets or have such an enormous balance sheet to leverage. This is Wall Street’s value proposition. Bulge brackets will continue to excel at complex transactions that require access to significant financing or capital markets. However, it is difficult, though not impossible, to demonstrate that complex financial institutions with many moving parts and regulatory obligations can necessarily provide better advice than a lean boutique shop staffed with industry veterans. To borrow a concept frequently used in management consulting, banking incumbents must adopt an 80/20 mentality towards their offerings.

But perhaps we are only scratching the surface of a more fundamental issue with how investment banking is done today, one that is more philosophical than operational. What was once a straight-laced, buttoned-up industry has transformed into a high-flying, glamorous profession. While there are certainly many bankers on the Street who truly have the interests of the client at heart, it appears that the urge to one-up rivals in prestige and earnings has led to poor decision-making, irrational deal-making, and risky trades. This begs the question of who bankers really serve today: shareholders or clients? When J.P. Morgan stood before a U.S. Senate hearing, he spoke these famous words:

I should state that at all times the idea of doing only first-class business, and that in a first-class way, has been before our minds…The banker must be ready and willing at all times to give advice to his clients to the best of his ability. If he feels unable to give this advice without reference to his own interest he must frankly say so. The belief in the integrity of his advice is a great part of the credit of which I have spoken above, as being the best possession of any firm.

Though spoken nearly a century ago, J.P. Morgan’s words get at the heart of why independent advisory firms are beating out bulge brackets. Decades of consolidation, keeping-up-with-the-Joneses, and profit chasing has left many firms bloated and unable to live up to the mandate of “doing first class business in a first class way.” Unless broad structural changes are made, Wall Street will continue to lose market share to smaller, more nimble boutique shops.

 

Federal Reserve Board Building

Since the beginning of the great recession, the Federal Reserve has increased its transparency of monetary policy, created new tools for controlling short-term interest rates, and has maintained its dual mandate of fostering maximum sustainable output and employment with stable prices. The recent rise in the monetary supply and the increased size of the Fed’s balance sheet has been alarming for inflationary hawks. With an enlarged balance sheet, the federal funds rate may no longer be the most effective method for the Fed to control short-term interest rates. Two new tools: the interest on excess reserves held at the Fed, and the overnight reverse repurchase program could serve as a way for the Fed to directly control short-term interest rates and affect a larger number of market participants.

Traditionally, the Fed indirectly manages the federal funds rate in order to control short-term interest rates. The federal funds rate is the rate at which banks lend to each other for overnight loans in order to secure the amount of reserves required by the Fed. Since 2007, the Fed slashed the federal funds rate target from 5.25 percent to below ¼ of a percent in order to encourage lending and business investment during the recession.

After reaching the lower bound on the yield curve, the Fed created new tools in order to continue its expansionary stance on monetary policy. The Fed introduced three rounds of quantitative easing, consisting of purchasing millions of long-term treasury bills and mortgage-backed securities every month, in order to decrease medium- and long-term interest rates. The result of these purchases is a drastic increase in the size of the Fed’s balance sheet, which recently crossed $4 trillion and will likely continue to rise to a peak of about $4.5 trillion.

Former Fed economists, Brian Sack and Joseph Gagnon, recently published a paper proposing that the Federal Open Market Committee should stop targeting the federal funds rate as its benchmark interest rate, and instead use the reverse repurchase program in conjunction with setting interest on excess reserves at the same level.  Since 2008, the Fed has pumped $2.5 trillion into the economy by purchasing bonds on the open market. However, the traditional system will not work unless the central bank pulls out most of this money. This liquidity in the system will present a major challenge when the time comes to raise short-term interest rates. There is also economic evidence that a greater amount of liquidity in the financial system allows it to operate with less risk and greater efficiency, and therefore the Fed might not want to decrease its balance sheet even in the long run.

For monetary policy in the future, Sack and Gagnon have proposed that the Fed set short-term rates by directly controlling the interest on excess reserves rate and the reverse repurchase agreement rate. The interest on reserves (IOR) is a rate the Fed directly controls, where the Fed pays interest to banks that keep excess reserves at the Fed. The Fed’s control of interest on excess reserves gives the Fed ability to control interest rates even if there are abundant reserves in the market. By raising the interest on reserves rate, the Fed could counter inflationary pressures by increasing the opportunity cost of lending, which would incentivize financial institutions to keep their excess reserves risk free at the Fed.

Another short-term interest rate setting program is the reverse repurchase facility (RRP), which is an open market operation where the Fed sells a security with an agreement to repurchase the security at a specific time in the future at a certain price. The difference between the repurchase price and the sale price, including the length of time between the transactions, implies a rate of interest paid by the Fed on the cash invested by the counterparty institution. The RRP “interest rate” basically sets a floor on the short-term interest rate, since no market participant would be willing to lend under the risk-free rate provided by the Fed. In order to counter inflationary pressures, the Fed could increase the price of the repurchase, which would increase the opportunity cost of lending with an interest rate near or at the RRP interest rate.

Unlike the federal funds rate, the Fed can do reverse repurchase agreements with non-banks, which extends the Fed’s control to a broader set of market participants.  Therefore, the Fed will have access to over 140 financial institution and counterparties including corporations like Fannie Mae and Freddie Mac. One positive implication of this plan is that the Federal Open Markets Commission would have the ability to control financial conditions by directly setting the short-term interest rates. This would increase the Fed’s flexibility, since it could adjust its balance sheet to achieve its own economic objectives without having to be as concerned about the consequences of liquidity and indirect interest rate impacts like the Federal Funds Rate.

The Fed should use the reverse repurchase facility as its policy instrument and it should maintain the interest rate paid on bank reserves at the same level of interest. The Fed would be able to leave a large amount of liquidity in the system on a permanent basis, which should reduce risk and increase the market’s financial efficiency. Sack and Gagnon believe that the optimal solution would be achieved by setting the RRP rate in concomitance with the IOR rate. This would hopefully give the Fed sufficient control over short-term interest rates and also allow the Fed to influence broader market conditions in order to foster maximum sustainable output and stable prices.

The research on this policy is very new, and the Fed will need to complete more research on the effectiveness of using these two new tools in synchrony with each other. In the future, the Fed might no longer use the federal funds rate as its main policy tool, and the interest on excess reserves and reverse repurchase facilities could be the future determinants of United States monetary policy.

Out of the frying pan and into the fire.  Last month Russell Wasendorf, Sr. attempted to commit suicide via asphyxiation by using a hose to funnel the exhaust from his Chevy into the car. A Good Samaritan thwarted his attempt and saved his life.  He is currently in jail awaiting trail where he will be charged with stealing around $200 million dollars from his own clients for the past twenty years.

Within the financial world $200 million is not a particularly large amount of money.  A scandal of this magnitude, although terrible, would not normally ring many alarms, but following the Madoff Ponzi scheme and the collapse of MF Global, it has done so, and with good reason.  This outright theft, along with the more recent LIBOR fixing scandal, has, to a certain extent, confirmed the public fear that the financial industry cannot always be trusted to keep investors’ money safe. This fear is helping to fuel the current economic downturn as investors continue to lose faith and withdraw money from financial markets.  Although this doubt in the system is certainly justified and is clearly an important issue, these recent scandals also beg a more fundamental question:  Can regulators be trusted to regulate?

It is almost laughable how simply Wasendorf was able to fool U.S. regulators as he stole hundreds of millions of dollars through his futures firm Peregrine Financial Group.  The ultimate authority for regulating firms such as Peregrine resides with the U.S. Commodity Futures Trading Commission (CFTC), which, because of its limited resources, delegates most of the oversight, such as regular auditing, to the National Futures Association (NFA).  The NFA, an internal self-regulatory organization, had audited Peregrine three times since 2010 and failed to pick up on the fraud.  Even more shocking is the fact that Wasendorf was able to frustrate the NFA’s attempts to verify Peregrine’s bank statements simply by sending them forgeries.  Instead of picking up the phone or contacting the bank electronically, the NFA relied on written mail to reach Peregrine’s bank.  The only problem was that Wasendorf had provided his own P.O. box as the bank’s address.  Receiving these letters himself, Wasendorf was easily able to falsify records.  He wrote, “Using a combination of Photoshop, Excel, scanners, and both laser and ink jet printers I was able to make very convincing forgeries of nearly every document that came from the Bank.”  When the NFA finally gained enough sense to contact the bank for electronic records, they stumbled upon nearly twenty years of fraud.

Although it is clear that regulators at the CFTC and NFA cannot be blamed for this scandal, it is rather astounding just how incompetent they were at detecting it.  When this failure is seen in aggregate with the several other scandals around the financial world, doubts quickly begin to arise about nearly all regulators’ abilities to provide oversight.  They are clearly struggling to do their jobs effectively.  Blame, however, should not fall solely on their shoulders, for they are playing at a natural disadvantage, which can be seen if we consider the massive disparity in resources between the financial services industry and those organizations that regulate them.  The CFTC for example, which is one of the largest regulatory agencies in the United States, employs roughly 700 people and has a budget of about $200 million.  Goldman Sachs, on the other hand—a single bank that participates in the futures trading regulated by the CFTC—employs about 47 times as many people and has about 22 times as much spending money, with 33,000 workers and $ 4.4 billion in net income for 2011.  With this absurd discrepancy of resources in mind, it should come as no shock that regulators struggle to keep up with financial firms’ attempts to skirt regulations (both legally and illegally).

The problem is exacerbated by the fact that there is no clear solution.   Adding more resources does not seem to be a possible remedy, because of the government’s limited funds.  The U.S. cannot afford to simply throw money at this problem. Attempts to find and incentivize better regulators also run into problems because of the nature of the job.  In addition to being understaffed, regulators are also underpaid compared to those working in the financial sector. Considering this, it is not surprising that the financial industry attracts a much larger array of talented people who can do their work at a much higher level.  Even when people are at their jobs on these opposite sides of the industry, their incentives are vastly different.  A banker who exploits some sort of regulatory loophole or flat-out breaks the law stands to make millions of dollars, while a regulator who manages to do his or her work exceptionally well and stops the banker merely gets a “job well done.”

It seems obvious that regulators are struggling to do their job and provide the policing that the financial industry needs, even if it is not entirely their fault.  Although this may not be the main problem behind financial scandals, it is certainly present and fueling the flames of fraud.  If we wish to change the industry that has caused so much grief though its greed, changing the organizations that are meant to prevent this fraud may be a good place to start.

Due to high gas prices, consumers have paid more attention to the price per barrel of crude oil, as well as the Islamic communities that are reaping the benefits. The massive amounts of wealth stemming from the high price of oil have tremendously impacted Islamic communities. Places like Dubai and Abu Dhabi have come to epitomize the explosion of available capital within the Middle East. As Islamic communities begin to use their capital to invest with other non‐Islamic communities, principles of Islamic law come into play and issues become much more complicated.

In 2007, estimations reported that the American Islamic community, the Muslims living in the U.S. who govern their investments according to the laws of the Sharia and the Quran, had over $170 billion in purchasing power. This niche in American society has recently become a major player in the world of banking and finance due to this enormous wealth.

While firms are scrambling to access this largely untapped resource, they must first overcome Islamic laws that restrict the usage of their capital. Islamic banking operates with the same intentions as standard Western banking, except for one caveat: finance must follow
the rules set forth by the Quran. Under the
laws of the Quran, Muslims are prohibited
from collecting any form of interest. The
problem this created for the traditional
banking world has led to the introduction
of Islamic banking techniques into the
Western world. The following is an
examination of three techniques used
today to help avoid the zero‐interest‐payments rules of the Quran.

The first of these techniques is called Mudharabah. This technique utilizes the principle of profit sharing. While the lender does not charge interest, they do share in the profits and successes of the entrepreneur, similar to venture capital. The second technique is called Wadiah. With this technique, Islamic banks utilize depositors’ funds at their own discretion, and will often reward the depositor with gifts of cash payments for allowing the bank to use the funds. These cash gifts are similar to interest payments, but are not always guaranteed and do not have a set rate of payment. Recently, there has been some controversy in the Islamic community over the issuance of these Sharia‐compliant Islamic bonds, as some religious scholars question whether these bonds adhere to the religious laws outlined by the Sharia. Consequently, the issuance of Islamic compliant bonds has plummeted recently, falling to $14 billion this year from up to $50 billion last year. The third technique is called Ijarah. This practice essentially rents an asset that corresponds to the principal and interest that conventional Western financing would use. In other words, Ijarah is a sale‐leaseback, where the seller begins leasing the asset back and makes rental payments that correspond to the Western concepts of interest payments.

Islamic banking is still in its infancy and has yet to be fully refined. The vast amount of available capital throughout the Islamic communities has created a niche in the banking world that will continue. Large banking firms and even countries like Japan, England, and Malaysia, are catering to these communities by pledging Islamic‐ compliant‐banking‐services. Banks will certainly not forego the opportunity to enter into this competitive market, as the wealth held by oil‐rich American Islamic communities is a perfect target for Western banks looking to utilize their available capital. Islamic banking should continue to be a major factor in the world economy in the future.