Muslim Investor

Live Coverage: Presidential Address to Congress

Ahmed — Tue, 24 Feb 2009 14:50:31 +0000

This affects the economic future of all investors. Make sure to watch.

Bank of Japan Gives Away Money Interest Free

Ahmed — Thu, 05 Feb 2009 17:51:37 +0000

An interesting opinion piece written back in December by William Pesek. If all central banks start offering zero percent on money loaned, it will raise many new possibilities that didn’t exist before for Islamic Finance. One of the interesting things pointed out in the article is that Islamic assets will be worth $1 Trillion by 2010.

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Fed, BOJ Signal We Are All Islamic Bankers Now: William Pesek

Commentary by William Pesek

Dec. 8 (Bloomberg) — Attending Islamic finance conferences these days, it’s hard not to notice how this investment class is catching on.

: Image by GetHiroshima via Flickr

The world’s roughly 1.5 billion Muslims need a way to bank and invest according to Islamic Sharia law, which bars receiving or paying interest on loans or deposits. A massive market infrastructure is being built to facilitate clients that include wildly rich Persian Gulf oil tycoons.

Yet isn’t this industry being pirated by the Bank of Japan, Federal Reserve and other central banks destined to offer interest-free loans? As U.S. President

Richard Nixon, echoing Milton Friedman, famously quipped in 1971: “We are all Keynesians now.” By 2009, we may all be Islamic bankers, too.

It’s an odd yet apt comparison. Islamic banking is more about the means by which a certain group of people obtains money. Zero interest rates are about getting as much money, in any way possible, to everyone.

There’s still something to be said about the spreading appeal of scrapping interest rates. It’s no longer a unique aspect of certain transactions or a banking novelty. It’s becoming the norm, and it’s quite disorienting.

Japan’s benchmark interest rate is 0.3 percent and headed to zero in the months ahead. The U.S. federal funds rate is 1 percent and headed lower, too. The U.K.’s rate is 2 percent, Canada’s is 2.25 percent and the euro zone’s is 2.5 percent. As the fallout from the global crisis worsens, these and many other benchmark rates will edge toward zero.

Quantitative Easing

According to Islamic law, the charging of interest, or “riba” in Arabic, is unjust and exploitative. That concept bears little resemblance to Japan’s zero-interest-rate policies, or ZIRP. The BOJ never argued it was seeking to foster brotherhood or socio-economic justice.

But that’s exactly what the BOJ did. By eliminating borrowing costs, and going further in recent years with “quantitative easing,” the BOJ was doing its bit for social fairness and stability. It was about protecting the Japanese way of doing business and maintaining the equalitarianism on which the nation’s 127 million people pride themselves.

Now the Fed is heading down a similar road for similar reasons. With an unprecedented array of emergency-loan programs aimed at easing the worst credit crisis in seven decades, the Fed is engaging in Japan-like quantitative easing. The level of rates is one thing. The more fascinating development is the Fed pushing waves of extra liquidity into the financial system.

Bernanke-san

It’s no wonder that economists such as Michael Feroli at JPMorgan Chase & Co. in New York are referring to Fed Chairman Ben Bernanke as “Bernanke-san” these days.

Image by Getty Images via Daylife

Some worry the costs of all this will outweigh the benefits.

“The concern is ZIRP encourages inefficiency, and an inefficient allocation of resources is likely to ensue, as occurred in Japan,” says Benjamin Pedley, Hong Kong-based managing director of LGT Investment Management Ltd.

Pedley thinks it’s more important to pursue the kind of fiscal pump-priming counseled by John Maynard Keynes. It’s also vital that central banks buy their domestic bonds, rather than rely solely on interest rates.

“I don’t think zero percent makes a lot of difference to the real economy rather than, say, 1 percent or 2 percent,” Pedley says. “Better to halt rates near zero and rely on other policy avenues to get things back on track and then normalize rates as soon as possible.”

Great Potential

The BOJ never became sufficiently independent to move rates away from zero. The best it did was raise them to 0.5 percent. Politicians got used to easy money. In that sense, 3 percent growth in Japan isn’t as genuine as it is elsewhere. It’s the product of unhealthy and unsustainably easy monetary and fiscal policies. The Fed needs to avoid those pitfalls.

The point here isn’t to downplay a fast-rising asset class. Globally, Islamic banking assets are estimated at $600 billion to $650 billion and have registered annual growth of 10 percent to 15 percent over the last decade, according to Celent, a Boston- based financial research and consulting firm.

That kind of growth means Islamic assets will top $1 trillion by 2010, Alexa Lam, deputy chief executive officer of the Hong Kong Securities and Futures Commission, said at a EuroMoney conference in Hong Kong last month.

The reason why data from Boston and perspectives from Hong Kong are being highlighted here is to show just how anxious the world is to get a piece of Islamic finance. The figures and growth rates speak for themselves. Islamic bankers are looking to marry that potential with China’s rapid growth.

“The pie is getting bigger and bigger,” says Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic, the Islamic banking arm of Malaysia’s second-largest bank.

Only now, the pie is going to get really, really big as the world’s major central banks offer zero-percent loans.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

New Theme For Muslim Investor

Ahmed — Thu, 05 Feb 2009 01:05:57 +0000

I got tired of how the old theme looked. Formating was a pain. And I think you would agree that this makes a much better reading experience than the old template. Tell me what you think. I want to continue making improvements with your feedback. Thanks for all those people who have been visiting. Just say salam and drop a comment below and I would be most grateful. Have a great day.

The Value of Islamic Finance

Ahmed — Wed, 28 Jan 2009 03:23:39 +0000

I have been very busy. But the frequency that I come across articles praising Islamic finance and the principals that it espouses is intriguing. Many Western countries see Islamic banking as a potential out, not only for the funds that have been unaffected by the crisis, but also the moderation and economic sensibilities that come along with this type of banking. Read below an article that appeared in the International Herald Tribune.

Crisis widens appeal of Islamic finance

The Associated Press
Wednesday, December 24, 2008

PARIS: France is becoming the latest country to woo Islamic banks, which avoided much of the damage from the subprime mortgage crisis by following strict principles laid out in the Quran as the global financial crisis broadens the appeal of Islamic finance.

French Finance Minister Christine Lagarde has promised to make adjustments to the regulatory and legal arsenal to enable Paris to become a major marketplace in Islamic finance.

At a recent forum in Paris, she said Western financiers could learn a thing or two from the Islamic world as global leaders try to establish “new principles for the international financial system, based on transparency, responsibility and, I would like to add, moderation.”

“In this sense, Islamic finance is calling out to us,” she said.

Finance that complies with Shariah, or Islamic law, accounts for around $700 billion of assets and is growing at 10 to 30 percent a year, according to Moody’s Investors Service.

That’s grabbing the attention of governments eager to oil their liquidity-strapped economies with money and deposits from the Islamic world. Islamic finance is concentrated in the Persian Gulf and Muslim parts of Asia such as Indonesia and Malaysia but is spreading into North Africa and Europe.

Islamic banking does not have the scale to replace Western-style finance, but in these cash-strapped times it is seen as offering another alternative for raising money.

London has attracted the largest pool of Shariah-compliant assets in the West and desire to compete with Britain’s ailing financial center is motivating Paris to get in on the act. The country has some 5 million Muslims, but does not offer Islamic-based retail banking, and the country’s secular traditions may present an obstacle to a French version of the Islamic Bank of Britain.

Moody’s ratings agency noted in a November report that Islamic financiers will need to quell fears that France’s official religious neutrality could be put at risk.

But more people are seeing business reasons to attract Islamic funds. A report by economics professors Olivier Pastre and Elyes Jouini claims that France could attract up to 100 billion ($136.9 billion) from Islamic financial institutions.

“We want to make sure that Paris is in a position to be able to welcome this money to finance the French economy,” said Gilles Saint Marc, a Paris-based lawyer who is advising an Islamic institution which plans to make a formal application to start investment banking activities in France.

Anouar Hassoune, a senior credit officer at Moody’s France and co-author of the book ‘Islamic Finance a la francaise,” said that Islamic institutions could initially focus on investing in property and Shariah-compliant businesses, and within three to five years they might also offer retail services. He mentioned Kuwait Finance House and Al-Baraka Islamic Bank as possibilities.

A November report by Moody’s shows that Islamic banks have been fairly resilient. No Islamic financial institution has acknowledged investing in Bernard Madoff’s $50 billion Ponzi scheme, and Saleh Al Tayar, Secretary General of the Franco-Arab Chamber of Commerce, said the $4.9 billion hit taken by Societe Generale SA from what it calls unauthorized trading by Jerome Kerviel couldn’t have happened in an Islamic institution.

“If global banking practices were based on Islamic practices then we wouldn’t be seeing the kind of crisis we are living through now,” he said.

Islamic financial institutions work on a philosophy of prohibiting transactions considered immoral and promoting greater social justice by sharing risk and reward. Investing in casinos, pornography, arm dealers or anything to do with pork is out: long-term investments in projects considered to benefit society are in.

Interest payments, short selling and contracts considered excessively risky are also prohibited. That rules out some of the products that got Western finance into so much trouble such as subprime mortgages, collateralized debt obligations or credit default swaps.

Muslim scholars versed also in the arcane rules of finance have approved instruments that parallel many non-Islamic financial products from loans to insurance to bonds.

Sukuks are the equivalent of bonds, but instead of selling a debt, the issuer sells a portion of an asset which the buyer is allowed to rent.

“Islamic finance does demonstrate good banking behavior that has been perhaps lost over the last 10 years or so,” said Neil Miller, head of Islamic finance at Norton Rose and an adviser to the British government.

“Islamic banking is saying we are close to our clients and we’re only going to do genuine transactions where we can see the asset, we understand the asset, we can make an assessment of that asset: whether it’s financing a ship or an aircraft they will go and have a look at the business. It’s giving guidance as to what banking should be.”

Hassoune says that conventional banks can be as ethical as an Islamic bank but competition and shareholder demands have encouraged excessive risk taking.

“I don’t think conventional banks are dirty, bad, money obsessed,” he said. But “they are pushed to make unreasonable profits.”

Sukuk Issues Down by 50%

Ahmed — Fri, 23 Jan 2009 18:48:59 +0000

CNBC is reporting a drop in Islamic bonds due to the economic downturn. Sukuk is another product that will be discuessed in a later post. There is a great deal of controversy on whether or not it is halal. To be continued…

Sukuk issuance down by over 50 pct in 2008-Moody’s
By: AFX | 22 Jan 2009 | 04:20 AM ET

LONDON, Jan 22 (Reuters) - Issuance of Islamic bonds or sukuk fell by more than 50 percent in 2008, due to the credit crisis and the debate over their compliance to Islamic laws, said rating agency Moody’s on Thursday. In a report, the agency said the sukuk industry and Islamic finance in general had faced “unprecedented challenges” last year. “The Gulf Cooperation Council (GCC) and Malaysia were hardest hit, with Sukuk issuance declining by 55 percent and 59 percent, respectively,” said Faisal Hijazi, Moody’s business development manager for Islamic Finance and author of the report. Moody’s assessment of the sukuk market coincided with a study published by rating agency S&P earlier this month, which said the value of sukuk issued in 2008 dropped by more than 56 percent compared with 2007 to $14.9 billion. The Sukuk market reached $111.9 billion in the eight years to 2008 estimated the International Islamic Financial Market, a body founded by central banks and monetary agencies of Bahrain, Brunei, Indonesia, Malaysia, Sudan and the Islamic Development Bank based in Saudi Arabia.

Michigan Bank Profits from Islamic Products

Ahmed — Fri, 23 Jan 2009 01:36:50 +0000

Interesting article from CNBC. In light of the current economic climate, it seems that there is a great deal to be learned from these alternative models. The bank in question is University Islamic Financial Corp. We’ll learn more about them in a later post. In the meantime, read this while I struggle in research.

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Finance the Islamic way at small US bank
By: The Associated Press | 14 Jan 2009 | 12:05 AM ET

DETROIT - Big financial institutions have been battered by mortgages gone bad. But a tiny Michigan bank is getting attention in the industry by turning a profit on loans without even charging interest.

Its specialty: financial products that comply with Islamic law. That means no collecting interest, no short selling and no contracts that are considered exceedingly risky.

It also rules out some of the activity that got Western finance in trouble — subprime mortgages, credit default swaps and the like.

“When you look at the economic crisis we’re in, if you were to follow Islamic or Sharia financing, you couldn’t have this crisis,” said John Sickler, corporate director for the bank, University Islamic Financial Corp. in Ann Arbor.

Islamic finance operations aren’t prohibited from making a profit. Far from it. Instead, banks that comply with Islamic law, or Sharia, earn money from fees that are part of the cost of the loan, some paid up front and some over time.

University Islamic Financial has two types of financing, one called a marked-up installment sale and the other a lease-to-purchase sale. Fees in both cases are comparable to interest payments in traditional loans, bank officials say.

For example: A seller who bought a house for $100,000 could sell it for $120,000 or even $300,000, provided the buyer agrees it’s a fair deal. The home could be sold on an installment plan negotiated by buyer and seller.

The bank is a subsidiary of Michigan-based University Bank, and its leaders say they have talked recently with executives from two national banks hoping to learn more about the business.

Islamic law says money cannot grow by itself, the way it does with compounding interest. Trade is acceptable as long as the equal amounts of money are traded or two different things are swapped with a fairly negotiated price.

So a dime for an apple would be considered “halal,” or religiously acceptable, while one apple for two apples would be “harem,” or unacceptable.

Even at University, not everyone is on board. Some customers have closed their accounts when they learned it was engaging in Islamic finance. Some employees who objected to the move quit. The bank also stopped having a Christmas party and no longer serves alcohol at after-hours events.

The Michigan bank focuses on contracts that clearly spell out the risk and reward between lender and borrower. University Islamic Financial says it’s the nation’s first to offer Sharia-compliant, federally insured deposits.

Islamic banking is more common overseas, but some U.S. banks and credit card companies are exploring the idea of branching out into Sharia products to reach out to the growing Muslim population.

So Islamic banking is only expected to increase in coming years. Already, Citigroup offers Sharia products and services to clients overseas, and Visa says it has worked with banks around the world to offer Islamic-compliant products.

The conventional banking system could learn a lot from the idea, said Jawad Ali, a finance lawyer based in Dubai and London who specializes in structuring Sharia-compliant deals.

“We haven’t made as much money as the conventional banks because we can’t, for example, sell what we don’t own,” he said. “We have to own it before we sell it. We may have missed out on gains in good times … but we haven’t suffered any losses.”

Of course, there’s no guarantee that banks will find immunity in Islamic finance from a severe global downturn.

“I am not doing banking on Mars,” said Afaq Khan, the head of Saadiq, the Islamic banking arm of Standard Chartered Bank, based in London. “If real economic activity slows down significantly, the Islamic banking industry will also be affected.”

A Sharia-compliant mortgage is like rent-to-own: There is no note, or mortgage, but typically part of each month’s payment is held toward the ultimate purchase. The property is titled to an individual trust, or limited liability corporation.

Deutsche Bank estimates total assets in the Islamic finance market at $1 trillion — a tiny fraction of global financial assets, but the bank said in a recent report that the sector been growing at a clip of 15 to 20 percent per year.

Most big international banks already have Islamic banking arms, and a November report by Moody’s Investors Service shows that Islamic banks have been fairly resilient to the global economic downturn.

The U.S. banking industry has not embraced Sharia banking. Wachovia, Wells Fargo and JPMorgan Chase said they have not adopted Sharia practices and declined to comment about what they may do in the future.

“As far as the future, we are always looking for opportunities to better serve our customers, but our specific strategy is proprietary,” Wells Fargo spokeswoman Lisa Westermann said.

University Bank President Stephen Ranzini declined to name the U.S. banks that University Islamic has talked to. But he said his bank soon plans to offer its services such as residential lending to other banks and credit unions nationwide.

Sharia banking is an idea “that is long overdue in this country,” said Amal Berry-Brown, vice president at Comerica, a Dallas regional bank that has talked with Ranzini. “At the same time, there really is quite a bit of work to be done.”

Comerica has a strong customer base around Detroit, home to the nation’s most concentrated Muslim population.

One issue: There is “a big variance” within Sharia law about exactly which financial practices are considered good and bad, said Mustafa Gultekin, a finance professor at the University of North Carolina at Chapel Hill.

For University Islamic, the niche appears to be paying off. Ranzini said he expects it to generate more than 25 percent of the overall bank’s revenue this year, up from about 20 percent last year.

Student Loans…What’s a Muslim to do?

Ahmed — Mon, 19 Jan 2009 16:42:23 +0000

Many among us have experienced the headaches of student loans. For the fortunate few, they received scholarships or parents’ savings to pay for education. This post is not meant to answer any questions in regards to Ribah (usury). A complex topic that will have to be addressed at a different time. Rather, I’d like to explore a few of the alternative models out there and leave it to discuss. You maybe surprised with the alternatives.

Some of you may have listened to the Marketplace broadcast that discusses student loans and options for Muslims, it is certainly the case that there are very few options for Muslims and non-Muslims who do not want an interest bearing loan.

The following are examples that exist abroad or in specific localities that may not be easily accessible.

IANA Financial a Canadian based Islamic non-profit, offers interest free student loans to Canadian students. That appears to be the only criteria set on their website. I could be wrong. It may only be for Muslims. They have the sole discretion to deny your application for any reason they see fit. The language is rather vague. From their website:

Are there special considerations to qualify for a loan? If so, what are they?

Yes! Special consideration is given to:

* orphans

* widows

* people with a difficult financial situation

* women

* volunteers and local activists

* those who are proactive and value independence

What are Reasons for Loan Applications to be Rejected?

Loan Applications can be rejected for the following reasons:

* Incomplete application or missing supporting documents

* Insufficient funding

* Guarantors unwilling to co-sign

* Disagreement in establishing payment schedule

* Other reasons deemed to be appropriate by Iana Financial

In Great Britain, qualified students are offered government loans that are set at the rate of inflation that you can pay back over the life of the loan. There are several disagreements over the permissibility of this scheme you can find opposing opinions here and here.
Also in Great Britain, Sharia compliant banks sell the student gold in the value of the loan they are borrowing. The gold is sold at market price and as part of the repayment program the student must pay back the value of the loan in addition to the new value of gold, presumably it would be higher than when the bank loaned it, as a result making a profit.
Another idea being explored, this one a little more sketchy and less developed, proposes to “invest” in a student for a percentage of future earnings. I think there are many self evident problems with this model.

If you have any other models that you are aware of please share in the comments below. Also, True and Good Words has a survey for Canadians on creating a business model for interest free loans.

FYI, This is an American blog in case anyone got confused by the lack of American representation on this post.

You Say You Want to Go to College!!

Ahmed — Sun, 18 Jan 2009 18:20:59 +0000

I’m working on a post for student loans. Until then enjoy this amusing cartoon.

Origins of American Finance House LARIBA

Ahmed — Sun, 18 Jan 2009 04:06:53 +0000

This is not an endorsement!

This is one of the few companies in the United States that offers Islamic Mortgages called LaRiba or no riba (usury). They have been around for sometime. There are some disagreements on whether or not their products are genuinely Sharia compliant. This is a video from their founder.

Islamic Mutual Funds - An Overview

Ahmed — Thu, 15 Jan 2009 03:56:38 +0000

I’ve conducted some very brief searches. Below is a list of Islamic funds. I have no knowledge of their performance or ethical practices. I will soon assess each fund in greater detail and compare it to market indexes and sharia compliance, though all of them are available through most major brokerages. For now, one thing to note is that there does not appear to be many types of funds like these to begin with. The only funds in this group that have received five star ratings from Morningstar are the Amana Funds. This should not be construed as an endorsement or positive outlook for future performance, as much more research needs to be conducted on these funds. The following is a brief summary of each. Additionally, if there are Islamic funds that I did not include in this list, please share it in the comments.

Edit: I find it thoroughly amusing that Azzad Fund’s description specifically cites weapons of mass destruction as one of the items it does not invest in, as though weapons in general are somehow okay. I’ll have to ask them about it.

Amana Income (AMANX)

Nicholas Kaiser / Asset Manager

The investment seeks current income and preservation of capital. The fund invests only in equity securities, including foreign securities. Investment decisions are made in accordance with Islamic principals. It diversifies investments across industries and companies, and generally follows a value investment style. The fund purchases only dividend-paying companies, which are expected to have more stable stock prices.

Minimum investments

Initial $250

Additional $25

IRA Initial $100

AIP Initial $100

AIP Additional $25

Amana Trust Growth (AMAGX)

Nicholas Kaiser / Asset Manager

The investment seeks long-term capital growth. The fund invests only in equity securities, including foreign securities. Investment decisions are made in accordance with Islamic principals. It diversifies investments across industries and companies, and generally follows a value investment style. The fund favors mid-sized and smaller companies expected to grow earnings and stock prices faster than the economy.

Minimum investments

Initial $250

Additional $25

IRA Initial $100

AIP Initial $100

AIP Additional $25

Iman Fund (IMANX)

Bassam Osman / Asset Manager

The investment seeks growth of capital while adhering to Islamic principles. The fund normally invests at least 80% of net assets in domestic and foreign securities chosen by the fund’s investment advisor that meet Islamic principles. Among the securities that meet Islamic principles, the investment advisor determines a security’s attractiveness for purchase based on a number of factors, including its anticipated value and record of earnings growth, among other things.

Minimum investments

Initial $250

Additional $50

IRA Initial $100

AIP Initial $100

AIP Additional $50

Azzad Ethical Mid Cap (ADJEX)

Jamal Elbarmil / Asset Manager

The investment seeks to provide long-term total returns that, after expenses, match or exceed the annualized performance of the Standard & Poor’s Midcap 400 index. The fund primarily invests in equity securities of mid-cap companies. It also may invest in equity securities of domestic and international companies of any market capitalization. The fund avoids companies with significant revenue from tobacco, alcohol, meat products, gambling, pornography, interest, insurance, and weapons of mass destruction, also banks or financial services companies. It may invest in foreign securities and acceptable fixed income bank deposits or securities. It is non-diversified.

Initial $1,000

Additional $50

IRA Initial $500

AIP Initial $50

AIP Additional $50

Azzad Ethical Income (AEIFX)

Jamal Elbarmil / Asset Manager

The investment seeks current income and capital; long-term capital appreciation is a secondary consideration. The fund normally invests at least 80% of assets in equity securities of dividend paying companies. It may invest up to 25% in middle or small capitalization companies and up to 5% in any one issuer. The fund avoids companies with significant revenue from tobacco, alcohol, meat products, gambling, pornography, interest, insurance, and weapons of mass destruction, also banks or financial services companies. It may invest in foreign securities and acceptable fixed income bank deposits or securities.

Initial $1,000

Additional $50

IRA Initial $500

AIP Initial $50

AIP Additional $50

Minimum investments
Initial	$250
Additional	$25
IRA Initial	$100
AIP Initial	$100
AIP Additional	$25

Initial	$1,000
Additional	$50
IRA Initial	$500
AIP Initial	$50
AIP Additional	$50