Islamic finance: Where beliefs trump bottom lines

Jin-ah Kim

It’s an estimated $350 billion business, and given the state of world affairs, it’s little surprise that very few know about it.

But failure to grasp Islamic finance, known as Shariah, could mean losing out on a lucrative business, financial experts say.

Subscribers to the ideology are forbidden from investing in businesses related to illicit drugs, weapons, alcohol, pornography, terrorism and other ventures considered contrary to Islamic values.

That includes usury — the collection and payment of interest — as well as gambling and other forms of trading financial risk forbidden by Islamic laws.
As Harvard Business School professor Samuel L. Hayes III explains, the philosophical underpinnings of Islamic financing closely resembles the Western idea of “socially responsible investing.”

Hayes should know. He was a main contributor to the Harvard Islamic Investment Study that was begun in 1994 as a way to increase western understanding about Islamic banking.

Modern Islamic finance began in the early 1970s in the wake of the political movement advocating the unity of Muslims under one Islamic state and the quadrupling of oil prices. According to Ibrahim Ward, an international consultant specializing in global finance, Islamic finance has exploded over the past decade, with Islamic financial institutions growing nearly 20 percent per year since the 1970s.

Ironically, Ward noted, the events of Sept. 11, 2001, had a positive influence on Islamic finance, as American Muslims who had previously invested abroad in Middle Eastern markets stopped doing so after those funds were frozen post-9/11. Seeking alternative domestic investment opportunities, many began to ask American financial institutions to create products, such as no-interest accounts, in line with their beliefs.

“The boom of Islamic finance … was driven by both microeconomic factors and political [and] religious factors,” Ward said.

The net result: An estimated $350 billion in combined assets for Islamic financial institutions across the world.

But in North America, Islamic finance is still a fledgling venture. Only a few American institutions offer Islamic financial products.

Michigan-based University Bank, the first bank devoted solely to Islamic finance, started its business just four years ago.

As Islam-compatible financial tools continue to grow in the marketplace, professionals who have an understanding of finance and Islamic laws are in high demand, according to Aamir A. Rehman, who led the development of HSBC Amanah, the global Islamic banking division of London-based financial titan HSBC Group.

Ahmad Bassam, a 28-year-old American Muslim, is one of those coveted professionals.

Bassam has worked as a financial advisor for Morgan Stanley Global Wealth Management Group for four years, and he now manages multimillion-dollar portfolios for various clients. He specializes in the rules and regulations of Islamic finance.

He said that only 5 percent of his clients asked him to manage their money in a form of Islamic finance, but those clients account for 35 percent of the revenue he makes in management fees.

“They are my top clients,” said Bassam. “Islamic finance has become such a big deal these days.”

The trend’s increasing prominence led to the creation in 1999 of a Dow Jones Islamic Market Index, which tracks companies that operate in a manner compatible with Islamic laws. Most leading financial institutions, including Citibank and HSBC, are now involved in Islamic finance, supplying financial tools in over 75 countries around the world, according to Ward.

Bassam said that the U.S. market for Islamic finance is not yet big enough to attract domestic financial institutions to Islamic finance divisions or products over traditional finance sectors. This is why of HSBC Amanah’s eight worldwide offices, only one is located in America, and why Citi Islamic Investment Bank, a Citigroup subsidiary, does not have a single office in North America.

Heightened interest in Islamic finance among members of the economic community was on display during a recent panel discussion at the Harvard Business School attended by more than 70 academics and professionals. Speakers introduced the fundamental principles, historical background, industry overview and implications of Islamic finance.

Hayes’s talk, dubbed “Islamic Finance 101,” started with the guiding principles of the Prophet Mohammed, the historical founder of Islam: “Be fair with all others,” and “One party cannot exploit the misfortune of others.”

“Commerce has always been central to Islamic tradition,” said Ward. “Prophet Mohammed, who himself was a merchant, established elaborate business ethics and commercial rules.”

Despite the recent growth of Islamic financial institutions, Hayes said that businesses operating according to Islamic principles do pay a monetary price for their religious devotions.

As a Westerner, Hayes said at first he could not understand why practicing Muslims fervently stuck to Islamic finance. Observing Muslims regularly eating only halal meat, which is prepared according to Islamic dietary law, and praying five times a day helped him to understand that their strong religious devotions applied not only to money and finance, but extended to every aspect of their everyday lives.

Morgan Stanley’s Bassam said that today less than 20 percent of American Muslims invest money within the boundaries of Islamic law. But he believes that if businesses offer enough compatible products — and perhaps equally important, enough promotion of them — that number will significantly escalate.

“I want to be a pioneer, being part of the movement by creating Islamic finance products for the North American market,” said Bassam.