Religion & return on investment »Ban on interest, what ban on interest?«

08 December 2008
Religion & return on investment »Ban on interest, what ban on interest?«

Orginaltext: Financial Times Germany Aug 2008 By Heiko Metzger & Christine Mai Translation: J.H.

Women cannot open a bank account, interests are taboo - the moral laws of the Koran affect the financial markets and even the West cannot and does not want to elude them.

The makers of the financial markets are worried about Muslim savers' clear conscience for Koran forbids Riba – accumulation of money, and also interests. The banks and borrowers have therefore created special financial products in order to open the the equity market to the faithful. A new booming division of the financial industry was born in the past few years: Islamic finance. Investors have paid more than 2 milliard dollars into ETCs (raw material bonds traded in the stock market) compliant with Islam in Europe alone. But this is not sufficient. The biggest ETC trader ETF Securities have subordinated their trading platform to the Sharia Law.

The demand also booming in Germany has inspired the German Muslim Central Council (ZMD): in the future, the Council will survey and certify Islamic financial products. Also, it encourages German banks to enter the Islamic business.

This may be worthwhile. The business consultancy Booz & Company calculated a market potential in Germany of 1.2 milliard Euro per year. The banks calculate higher interests for the Islamic financial products. The savers are left with a cleaner conscience and the financial overhaul.

“The return on investment of assets compliant with Islam is on average 0.5% lower than comparable western products”, says Michael Saleh Gassner, the ZMD expert in Islamic finance.

This weakness of the return on investment could have caused that public funds and public investors from Muslim countries already bypass the prescriptions of the Koran.

"When a transaction is appealing, the economic interests have priority", said a solicitor who has been advising public funds. Gassner says more clearly: "Public funds don't care about Sharia."

The Qatar Investment Authority (QIA) for example has demonstrated how indifferent they are towards the ban on interests: in February it stepped into Credit Suisse and has also shares in Barclays. This is a clear break from the Islamic ban: these banks trade on interests.

Also the Saudi prince al-Walid Bin Talal shows little sensitivity. He is the principal shareholder of the Citigroup and also heir to the throne of a country where women can open a bank account. An expert speculates that in this contradiction lies the reason of the opposition against more transparency – not in the fact that the population could start asking uncomfortable questions when the investment behaviour of the fund becomes public.

"The Islamic financial market is simply still too small to grab all the petrodollars”, Gassner believes. However, already now “each western financial product can be made compliant with Islam”.

A 100 million asset of the county Sachsen-Anhalt proofs this. The county council in Magdeburg transferred rights of use of the county real estate to an endowment fund in Netherlands. The endowment collected 100 million Euro from faithful Muslims.

The money flows into the county treasury and after five years bit flows ack. In the meantime Sachsen-Anhalt pays leasing rates for the real estate to the Dutch endowment fund.

The payments are recognized as profit sharing, not as interests and are therefore an undisturbed financial blessing for the faithful savers.

Such a construct is called Sakk in the Arabic tradition. The ZMD calls a Sakk "halal" - pure, allowed, the same as the predicate associated with the right kind of meat.

Islamic Economics: What Does It Mean? By Daniel Pipes