Banking on Islam
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There are few principles more central to modern economics than interest, the fee charged for the opportunity of borrowing money. Interest spurs economic efficiency and creates wealth by helping borrowers and lenders make exchanges to their mutual advantage. Islamic law, or sharia, forbids either paying or charging interest. For decades this theological ban has had limited effect on international economics, given the feathery relative weight of Middle Eastern investors and businesses in global markets. But now, an influx of oil money is bulking up Middle Eastern financial influence and giving rise to a new boom industry: sharia-compliant financial services.
In order to win the “sharia compliant” seal of approval, businesses must adhere to all theological requirements of the Quran. Jawad Ali, a partner at King & Spalding, a law firm that assists businesses in structuring sharia-compliant deals, explains in an interview that this means not only shunning interest but also adhering to a host of other requirements. A real estate firm, for instance, cannot rent property to banks, casinos, businesses that deal in pork or pork products, or any other business that itself doesn’t follow sharia.
Still, Ali says, the most complicated compliance standard is commonly the interest ban. Businesses work around this restriction by developing creative ways to substitute fees for interest. Say, for instance, a business is interested in purchasing a property. Instead of borrowing money to make the purchase, the business can structure a transaction such that a bank acquires the property and leases it out for a set fee. This primer by the Institute of Islamic Banking and Insurance outlines other similar sharia-compliant financial arrangements. Yet there is no absolute standard for sharia compliance beyond meeting the subjective demands of would-be investors, and there is no governing body overseeing Islamic banking, so standards vary region-to-region and firm-to-firm.
Banks that help companies perform these kinds of transactions were once a financial backwater, but over the past decade sharia finance has seen steady growth (FT) as a global industry. The Economist cites estimates from the Standard and Poor’s ratings agency placing the global industry for Islamic financial products—which includes banking, mortgages, equity funds, fixed income, insurance, project finance, private equity, and derivatives—at around $400 billion. Ali says King & Spalding’s sharia-compliance services are growing at a clip of 35 percent to 40 percent annually.
Major international investment banks are getting in on the sharia rush. Ali says Citigroup, HSBC, Deutsche Bank, and Lehman Brothers all now offer sharia-compliant investment products. The recent private equity deal for the British automaker Aston Martin, which was arranged by the British investment bank Jefferies, was financed primarily through sharia-compliant bonds (FT). Nor are buyers of sharia-compliant products necessarily Muslim. BusinessWeek notes that when HSBC started offering sharia-friendly mortgages in Malaysia in 2004, more than half the buyers were non-Muslim. This indicates the mechanisms for working around interest are becoming efficient enough that investors may become interested in sharia products simply for their competitive pricing, theology aside. Ownership turnover accelerates the trend toward sharia compliance, particularly as Middle Eastern companies flush with oil cash seek to buy up international corporations. One notable example is the formerly American firm Caribou Coffee, which shifted to sharia compliance after being purchased by a company owned in part by the government of Bahrain.
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