The credibility of sharia-style investing has received a boost by its relative outperformance during the credit crunch. The performance of almost 4,700 sharia-complaint stocks across the world’s largest developed and emerging markets has fallen, but less severely than others’ stock.
The Standard & Poor’s (S&P) Global BMI Shariah Index fell by 20.8% over the fourth quarter of 2008, and by 6.2% over the three months to the end of March 2009.
The S&P Global BMI Index, a non-Shariah equivalent, dropped by 22.9% and 10.4% over the same periods.
The relative outperformance has led to interest from those you might not expect to invest in the asset class.
Alka Banerjee, vice-president of S&P’s index services, says: “Despite ongoing market volaility, sharia investing continues to attract market share from conventional western investors as well as the Islamic investment community, and sharia-compliant investment vehicles continue to grow in range, complexity, and variety at an impressive speed.”
The managing director of Islamic Finance Advisory and Assurance Services, the leading sharia advisory body in the UK and France, Farukkh Raza, adds that if pension funds had been invested under Islamic principles, exposure would be very different.
“Funds would not have been exposed to such risks as everything must be asset backed. There has been a serious increase in non-Muslims looking at sharia funding. In particular, pension funds are becoming very interested in Islamic bonds, sukuks.”
This is backed by Steven Amos, marketing director for the Islamic Bank of Britain.
“Our core business will always be Muslims, but the numbers of non-Muslims are really picking up. We’ve had increased interest and it’s one of the number of reasons why we’re insulated from the credit crunch,” he says.
If this seems unrealistic, a look to countries where sharia banking is more established provides definitive evidence. In Malaysia, a quarter of all Islamic banking is carried out by non-Muslims.
For those not familiar with the concept, sharia investing operates on a couple of principles that differentiate it from western banking. It prohibits any involvement with alcohol, gambling, pornography, human cloning, arms dealing and pork. Accruing interest on investments is prohibited, as is any investment where the debt to equity ratio is more than 30%.
No sharia-compliant financial institution has failed since the start of the current crisis and there are several reasons why Islamic funding has fared better in the maelstrom of the credit crunch than its western counterparts.
The immediate future for sharia funding is for Islamic bonds, sukuks, to be introduced in the UK this year. The global market is estimated to be worth $24bn (£14bn), and there has been a call for sukuks to help fund London 2012. Kitty Ussher, the City minister and economic secretary to the Treasury, says she is “hopeful” that the UK government will issue a sukuk this year. HM Treasury is pushing ahead with the legislation, which is published in the Finance Act 2009. This prepares the government should it decide to go to the market later in 2009 or in early 2010.
Despite, or perhaps because of, its economic health, sharia funding has its critics and faces significant obstacles as it expands.
There is an initial problem with regard to the subjectivity involved. Banks like HSBC employ a panel of expert scholars to ensure they are operating in line with sharia law. Nevertheless, there is not really any continuity between boards and what one person may claim is acceptable, another may vehemently object to. At present there are also only around 260 scholars who reportedly know enough about Islamic finance to be deemed experts.
Marshall Sana, Islamic expert at the Institute for the Study of Islam and Christianity, is also critical of some of its central ideological tenements: “It has inequality built into it, between woman and men and Muslims and non-Muslims. If you look at the literature and you look at the internal dialogue, the end is supremacy. The end is controlling institutions. It’s setting up an Islamic economy and an Islamic economy is to be the world economy.”
Another critic is Melanie Phillips, who wrote an article in the Daily Mail entitled ‘Britain’s a world-leader in sharia banking – but we haven’t grasped the sinister and dangerous implications’, published earlier this year. She argued anyone who endorses sharia-compliant products effectively endorses the extremist ideology of conquering the west for Islam. Her article highlighted the muslim belief there is no authority superior to sharia and she took this to mean Islamic banks may not respect the law of the land. If they continue to grow in wealth, she thinks this could be dangerous. She also criticises the idea of charity, zakat, arguing sharia banks could be using these donations to fund terrorist organisations.
If views such as this represent mainstream thinking, it could be very difficult for sharia funding to expand, despite government backing.
Words to know
■ Riba – a dirty word in sharia funding – it means interest
■ Sukuk – an asset-backed bond
■ Mushraka – the cooperative partnership between two parties, usually the bank and the client which involves profit and loss sharing. Profits are shared as per an agreed ratio whereas the losses are shared in proportion to the capital/investment of each partner
Liz MacMahon is a freelance journalist
