Capitalism That Crosses Cultures
Will U.S. firms embrace Islamic investment rules?
Few American CEOs have ever heard of Islamic bonds, much less tried to float them to investors. But one Connecticut money manager is betting that they will soon be lining up to do so.
Eric Meyer once spent his days ferreting out socially responsible investments for groups like the Boy Scouts of America and the Roman Catholic Archdiocese of New York. Now, as president of Shariah Capital in New Canaan, Conn., he's trying to convince American companies that they should seek out oil-rich Muslim investors in the Middle East to finance growth.
On the surface, the pitch makes perfect sense. Rising oil and gas prices have left Persian Gulf nations swimming in petrodollars. At the same time, there is an increasing desire among the world's 1.5 billion Muslims for investment products that comply with sharia, Islamic law as laid out in the Koran.
Sharia strictly forbids Muslims from taking or charging interest, holds that money should be lent only on physical assets, bars speculation, and prohibits investing in items like pork, alcohol, gambling, and pornography.
So, unlike typical corporate bonds in which companies pay a fixed rate of interest to investors, Islamic bonds, or sukuk, derive their investment return from the assets used to back them. The concept is not unlike that of a revenue bond that a city might use to finance a municipal project. The first American company to issue an Islamic bond, for example, did so based on its ownership of oil reserves in the Gulf of Mexico.
"It is not lost on either corporate issuers or institutional investors that there is a large and ever growing liquidity in the Middle East," says Meyer, whose firm also runs screening and sharia certification services for hedge funds wanting to set up Islamic funds.
Petrodollars. There's no lack of money in the Islamic world; oil-exporting, emerging economies, such as those in the Persian Gulf region, took in some $500 billion more in 2006 than they were able to spend or invest elsewhere.
But unlike with the last Persian Gulf oil boom in the late 1970s, investors aren't parking as much of their money in traditional western investments. Real estate is still a big seller, but instead of just being socked away in U.S. treasuries, more of this new oil wealth is being invested back in Muslim countries, businesses, and stock markets, or being funneled through trade into Asian economies. Fallout from the American response to 9/11 and the invasion of Iraq has "resulted in the repatriation of funds to the Middle East," says Tahir Jawed, a Dubai lawyer with the Cayman Islands-based firm of Maples & Calder, which advises clients on complex, sharia-compliant financial structures. "On a social level, world events have resulted in many Muslims looking more closely at their religion, and many have sought to incorporate their religion into all aspects of their lives, including investments."
This has meant that western financial institutions have had to roll out more specialized products to attract Muslim investors they once took for granted. "Companies that do business in the Middle East are realizing that Islamic finance is not just a flash in the pan but is a regional and generational development," says Yusuf Talal DeLorenzo, Meyer's new chief sharia officer. "It isn't going away."
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