Friday, October 13, 2006
Muslim-friendly firms follow the code
Profiting from interest, alcohol isn’t allowed
MINNEAPOLIS — When Caribou Coffee went public last year, sharp-eyed investors noticed some unusual promises in its prospectus. Caribou, the nation’s second-largest coffeehouse chain, said it would never sell pork or porn. It wouldn’t charge or receive interest, either.
By following financial rules that are part of the Islamic code called Shariah, Caribou is among a small but growing list of Western businesses looking to make themselves as attractive as possible to Muslim investors. Some, like Caribou, are motivated by principle, while others see Muslim investors as an attractive new source of money.
Middle Eastern investors flush with oil profits are looking for new places to invest, and American Muslims are looking to invest in a way that doesn’t conflict with their faith.
“There’s a bunch of Islamic investors who are prohibited from a lot of regular investments, so a lot of money is sitting in cash not earning anything at all,” said Khalid Howladar, a vice president for Middle Eastern and Islamic Structured Finance with Moody’s Investors Service in London.
Companies and governments who need to raise money are saying, “There’s a bunch of people out there with money they can’t spend — how about I create something for them?” he said.
Dow Jones has created an Islamic investing index. A Texas company issued almost $166 million in Shariah-compliant bonds to finance natural gas operations in the Gulf of Mexico. And the German state of Saxony-Anhalt issued a floating-rate 100 million-euro note — managed by Citigroup — that followed Shariah rules.
Assets invested at two Shariah-compliant funds run by Saturna Capital in Bellingham have swelled nearly 10-fold, from $34 million in 2002 to $331 million now — though that’s still tiny by mutual fund standards. The funds invest only in companies that are Shariah-compliant.
Islamic financial rules come from passages in the Quran that prohibit riba — making money from money. Generally, that means not paying or collecting interest, though some scholars say only abusively high interest rates are prohibited. Other prohibitions are more moral than financial, such as a ban on selling pork.
While many Muslims have invested conventionally in the West for years, some did so because they had few alternatives.
Moazzam Ahmed, a software engineer from Carrollton, Texas, has no car loans. Credit-card charges go on a zero-percent card or get paid off at the end of every month. And he’s got a home mortgage that is a lease-buyback arrangement, rather than an interest-bearing loan, a frequent arrangement among Muslims looking to buy homes while obeying Shariah.
But he fretted about his conventional retirement investments until four years ago, when he discovered the Saturna funds. “As soon as I found out about it I switched everything to it,” he said.
Estimates of the number of Muslims in the United States vary from 2 million to 6 million.
Eric Meyer, who runs a Connecticut-based hedge fund called Shariah Capital, says Western banks and financial institutions need to have Shariah-compliant products or risk losing market share.
“There is a younger generation of Muslims who grew up during the last 20 to 30 years that have a reawakened sense of nationalism and religious pride that motivates them to invest according to their faith,” he said.
But in Western finance, it takes some creativity to avoid earning or paying interest.
To borrow money, Shariah-compliant companies often pledge the lender a share of the profits from an asset instead of interest. Investors who need to earn a shorter-term return can contract to buy, say, $100 of copper today, and simultaneously pledge to sell copper in 90 days for, say, $103.
Caribou Coffee Co. Inc., for instance, has a revolving line of credit. But instead of paying interest, it sells assets and then pays to lease them back.
“It’s fair to say we do things a little differently,” said Charles Ogburn, global head of corporate investment at the firm that controls a majority of Caribou stock, Bahrain-based Arcapita Bank B.S.C.
Ogburn said that when he joined Arcapita five years ago, there were perhaps two or three U.S. banks that had done those kinds of loans. Now it’s more like 25 or 30.
Many companies follow Shariah without even trying.
To build its index, Dow Jones in 1999 hired six Shariah scholars to set standards to screen companies. Out of 5,000, Dow Jones found 1,800 that met its standards, including drug makers Merck & Co. and Pfizer Inc., BP PLC, Microsoft Corp., Hewlett-Packard Co. and IBM Corp.
“I don’t think that many of them know about Shariah-compliant investing, frankly speaking,” said Rushdi Siddiqui, Dow Jones’ director of Islamic market indexes.
Dow Jones now has more than 60 Islamic indexes that track Shariah-compliant stocks and bonds. Siddiqui said about 30 firms have licensed the indexes, and about $5.5 billion in investments are managed in line with the indexes.
A SHARIAH PRIMER
Islamic rules known as Shariah generally prohibit making money from money. They also forbid profiting by some things seen as immoral. To work within these rules, the Islamic financial world has come up with some alternatives:
Such arrangements can be bundled together in bondlike securities called Sukuk, and, theoretically, traded. But the market for Sukuk isn’t very liquid — holders have few acceptable alternatives so they tend to hang on to Sukuk rather than sell it.
Sources: Moody’s Investors Service, interviews
