Saturday, December 29, 2007

Investing The Muslim Way

I knew quite a bit already about finance and Islam as I have already read a couple of articles about it, but I wanted to write an article about it on my article as the San Jose Mercury News wrote an article about it in its Sunday the 23rd edition.

Hence, Mark Schwanhausser, founder and president of Saturna Capital, a specialist in funds guided by Islamic tenets, gave an interview to the newspaper about how to invest "the muslim way".

Indeed, you have to know that by Islamic law, there is a prohibition against any kind of interests, rule known under the name "riba". That means that a bank can't lend you money and ask to pay interests on it, but also that means you can't have interests on a saving account for example.

These rules change deeply how banks can work in an islamic environment.
That means some investment, in companies selling tabacco, alcoholic beverages or ponographic content are not possible.

One of the main quote of the article is about companies having debt:
"I had two scholars one time. One said, "You know, Nick, I'd really like you to concentrate the portfolio in stocks that have no debt." I did a screen out of the Standard & Poor's 500 index, and there were 36 stocks that had no debt. He said, "Good, I'd like you to buy those stocks."

The other scholar said, "You know, Nick, I really don't want you to have companies that have a lot of cash, because that means they're earning interest on their cash flows."

I said, "That eliminates those 36 companies. So, guys, how do I build a diversified portfolio?"

You have to say, well, under American standards, maybe a little interest is OK. So, we use some screening rules, for instance, where long-term debt is not more than 33 percent of the market capitalization. About half the stocks get dropped out."

How to deal with this riba? Banks or investors have to establish partnership where they acquire the ownership of part of the investment. Here is how Nick structures a mortgage under islamic law:

"You should be partners. In other words, if you're the bank and I'm the borrower, you should actually take an ownership interest, like a partnership. Let's say you start out owning 90 percent of it, and I own 10 percent. I would be paying you monthly, and my percentage might go up a half of 1 percent every month as I bought that share. I'm buying you out. Eventually I become the majority shareholder. Eventually, you're out of the deal."

What is interesting about this article

Thanks to this article we can clearly see how different are the American and Muslim business cultures. On one hand, we have an American economy based on credits and consumption, and on the other hand, a Muslim vision that forbid the use of credits of any kind. Knowing this culture, international investor have to adapt themselves on the local culture to make business.

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