Capitalism That Crosses Cultures
Will U.S. firms embrace Islamic investment rules?
HSBC, Citigroup, and Lloyds TSB Bank now carry lines of sharia-compliant mortgages. Several companies, including Dow Jones, offer Islamic funds and investing indexes. Some conventional multinational and Middle Eastern banks have opened sharia-compliant units or are converting their whole operations. UBS recently opened a separate Islamic private bank in Dubai for well-heeled Middle Eastern clients. And last year the British government launched a sharia-compliant children's education savings account.
The market for Islamic bonds–what Meyer is betting U.S. corporations will soon be issuing–is growing at breakneck speed. While Persian Gulf countries and industries issued only $3 billion in Islamic bonds between 2001 and 2003, more than $20 billion in Islamic bonds is expected to be issued in 2007, says Alain Marckus. He helps run GFI Group's new London trading desk for Islamic bonds, the first set up to handle the nascent secondary market that allows the bonds to be easily traded.
Even $20 billion in bonds is a drop in the bucket compared with the conventional bond market. But GFI's decision to open a trading desk shows that western investors see growth potential. "It is very hard work, and we are six months to a year from it reaching its full potential, but the upside is massive," says Chris Steer, head of GFI Group's Islamic finance desk.
Those who ignore the trend do so at their peril, adds DeLorenzo. "Conventional banks [in the Persian Gulf], even the local ones, are losing clients and deposits every day to Islamic institutions," he says, noting that one recent study showed non-Islamic banks there could lose up to 40 percent of their clients over the next 10 years to Islamic counterparts.
Cash flows. But significant hurdles stand in the way of Islamic financial products being universally accepted. Not all Muslims agree on what it takes to make a sharia-compliant bank account, mortgage, credit card, or bond. Many Islamic banks lack the expertise needed to develop a sharia-compliant investment that would also pass muster with western credit-rating agencies like Standard & Poor's.
To comply with sharia principles, a company looking to finance an expansion might have to issue securities that make payments based on cash flow from an underlying tangible asset, like a toll road, or offer lenders some sort of fixed rate of return based on the bank's increasing ownership of the actual asset.
Most Islamic bonds continue to back infrastructure projects in Muslim countries, although the World Bank and the German state of Saxony-Anhalt have also floated them. Also, few public western companies state themselves to be fully sharia-compliant. The notable exceptions are Meyer's company, which went public in December on a small-company stock exchange in London, and Caribou Coffee, which is predominantly owned by an Islamic investment bank.
Only one American company, a small Texas oil and gas exploration firm called East Cameron Partners, has issued an Islamic bond based on U.S. assets–some of its offshore Louisiana gas reserves. It raised $116 million in July. Campbell Evans, the company's general manager, said at the time that the Islamic bond proved a good alternative to conventional oil and gas financing.
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