Bankers of God

A growing number of Muslims want to invest their money according to the principles of Sharia. Even Western banks are getting into the Islamic business. Alfred Hackensberger reports

Where does Osama bin Laden invest his assets? As a follower of Sharia, the former building contractor should prefer so-called Islamic banking system. Yet terrorism experts assume that al-Qaeda prefers transportable and fast-selling financial investments like gold or diamonds.

Like the Hawala credit transfer system, Islamic banks are also suspected of having carried out financial transactions for al-Qaeda and other internationally operating terrorist networks. Since September 11, 2001, Islamic banks have been frequent targets of secret-service investigations. Sums running into the millions have been seized, and accounts and fonds frozen. Islamic banking is suffering from an enormous loss of image.

You can also invest Islamic with the Deutsche Bank

But banks can hardly be made responsible for the behavior of their customers, and a strict separation between Islamic and non-Islamic banking no longer exists. Many traditional Arabic banks have opened "Islamic departments." But money can also be invested according to Islamic principles with major Western banks such as HSBC, Citibank and Deutsche Bank.

The branch is growing by 15% a year. "The number of Islamic banks and investment funds has risen to more than 270, with assets of 260 billion dollars and deposits of more than 200 billion dollars," declared Saleh Kamel, chair of the General Council of Islamic Banks and Financial Institutions, last week.

Measured against the net worth of all Muslims – Saudi-Arabian foreign investments alone are estimated at over one trillion dollars – this is not much. But the potential of "Islamic banking" is very high, wrote Trends, a Parisian magazine on the Arabic world: "There are 1.5 billion Muslims in the entire world, and even if you only have two or three percent of them as customers, that is still a large clientele." You only have to offer products that comply with the principles of the "faith."

Investment counts, not interest

"Faith" is of prime importance for the investor, and religious integrity essential. Investments are made on the basis of Islamic law, the Sharia, which prohibits interest and businesses dealing with alcohol, tobacco, gambling and pork.

Sharing profits made by investments takes the place of guaranteed interest. Therefore, the risk to the investor, who cannot be certain that profits will meet his expectations, is higher, particularly with long-term investments. For this reason, short-term investments are preferable.

"Pay like with like"

Ideally, the Islamic bank system is based on "fair exchange," which the Prophet and cross-border trader Mohammed propagated: "Pay like with like, hand in hand, in equal shares."

In practice, however, Islamic banking differs little from Western banking. People look for an acceptable investment with low risk. People want to make money, the religious aspect only throws an ethic-moral veneer over the whole business.

Islamic banks everywhere

Islamic banking is relatively young. The Islamic Development Bank was established in 1974. Today, supported by 55 governments, it promotes Sharia-compliant projects in economically backward member countries. At the end of the 1970s, the first explicitly "Islamic" banks appeared in Kuwait, Dubai and in the Sudan. In the 1980s, the concept expanded to Asia with the founding of the bank Islam Malaysia.

Since the early 1990s, Islamic banks can be found around the world. The new-found prosperity in many Islamic countries and the strong turn toward religion have created a new line of business.

As a rule, Islamic financial institutions are advised by a religious consortium, which interprets the Koran and the Prophet’s sayings (Hadith) and life story (Sunna).

Different interpretations of the sources

The attempt to apply the almost 1,400 year old texts to modern commerce has given rise to different interpretations. Meanwhile an extensive literature exists on the law of the Islamic financial system, but still there are no universally recognized rules.

Since 1999, there have been two Islamic Market Indices, the DJIM, which is aligned with the US-American Dow Jones, and the FTSE. Only companies whose business operations are compliant with the Sharia are included in these indices. Companies which deal with alcohol, tobacco, pork and prohibited entertainment or realize profits from "interest" are not included or, if necessary, are excluded.

Also of interest for non-Muslims

Since Islamic banks theoretically have to pass their losses on to investors, risk avoidance is especially important. Each company must have a low level of debts. Excessive debts led to the exclusion of WorldCom a year before the US company went bankrupt. This measure saved many Islamic investors from losing huge sums. In April 2003, AT&T and Motorola were excluded on the same grounds.

This conservative investment policy and its similarities with "ethic investment," which refuses to invest in the production of goods that are detrimental to health, could make Islamic banking attractive for non-believers and believers from other religions. "The indices have aroused great interest outside the Islamic community," advertises the Dow Jones.

The prohibition against interest also meets with the approval of many non-Muslims. In the view of the British finance expert Warren Sofies, "interest can put a drag on job growth, create money crises and intensify trade problems."

The branch anticipates more growth

But, above all, the Islamic business sector is expanding because it is considered part of the defensive action against Western policies viewed as "anti-Islamic." Islam is seen as a vehicle for individual and national self-assertion. According to a study by the Institute for Islamic Banking & Insurance, 55 percent of Muslims surveyed preferred Islamic banks.

Only 21 percent, however, actually had an account with an Islamic bank. This share should reach 50 percent in the next eight to ten years.

"The most important factor at present," says Tarik al-Rafai, vice-president of the Islamic department of the US-American HSBC, "is to offer as many products as the market demands." For him, Islamic banking is first and foremost a way to appeal to a new clientele: "From the marketing perspective, compatibility with the Sharia brings customers into the bank. Religious principles pay off."

Alfred Hackensberger

Translation from German: Nancy Joyce