Meet the New Bosses of the Lending World

By Sam Hopkins
If you’ve been praying for the stock market to turn back to positive territory over the past several weeks, you’re probably part of the largest congregation in the world.

But economics and religion don’t just connect when recession looms. Many faiths prohibit one member of the community from charging interest to another. So where does that leave faith-based finance in the era of the credit crunch? You may be surprised…

A Look Into Islamic Finance

On the shores of the Persian Gulf, the emirate of Qatar sits atop the world’s #3 natural gas reserves. Qatar is the smallest oil producer in OPEC, but its location between Saudi Arabia and Iran makes the small monarchy hugely important.

Now, Qatar is turning into a financial force to be reckoned with. That’s because Islamic Shariah law, and its restrictions on how money can be invested, is gaining notice around the world as the safest way to save.

Bloomberg puts the case simply:

Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, so interest is banned. Bankers sell Islamic bonds, or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money can’t be used to finance gambling, guns or alcohol.

Qatar International Islamic Bank welcomed in billions more in the past year, logging a profit jump of 44%.

In the United Arab Emirates, Abu Dhabi Islamic Bank reported its quarterly results on Monday, just like any secular Wall Street firm would do…

But in a time when lending houses from Charlotte to Reykjavik are hemorrhaging debt, Abu Dhabi’s #2 bank just reported a year-on-year Q3 profit increase of 58%.

The reason is clear: Western banking, with its emphasis on risky innovation, has failed to provide financial security.

Persian Gulf monarchies like the United Arab Emirates and Saudi Arabia have made fortunes in petroleum products. In the UAE, foreign workers outnumber locals and wealthy oil heirs can zoom in their Ferraris to and from classes at local branches of American universities or the Guggenheim museum. They can also ski indoors, right there at the desert’s edge.

Dubai’s sovereign wealth fund managers even dove deep into the stock market game last year, teaming up with Nasdaq to buy the northern European company OMX, which operates a family of Nordic exchanges. There are also thousands of Gulf natives who have been educated in the U.S., the U.K., and elsewhere, taking stories of stock market fortune to heart and working hard to create similar equity opportunities at home.

Fact is, the traditional underpinnings of Islamic finance provide shelter from the international financial storm.

Moving Into the Mainstream

It’s important to note that Islamic banking is every bit as formalized and efficient as secular banking, it not more so.

There’s an Islamic Interbank Money Market, based in Malaysia, which acts like the London forum where global banks lend to each other and set the LIBOR rate (which has skyrocketed lately as credit tightens).

Kuwait Finance House, one of the world’s largest Islamic banks, predicted in a report this week that Islamic finance will soon move from the periphery to the center of the lending world:

In the current financial turmoil, it is interesting to note that Islamic financing may have prevented a majority of the mess created by the conventional banking and financial institutions…The outlook for Islamic financing is bright and will likely take the lead in terms of providing funding for major projects as the conventional banking system reevaluates its business model.

Indeed, the biggest banks in the world already have Islamic finance divisions: HSBC (NYSE:HBC), Barclays (NYSE:BCS), Citigroup (NYSE:C), and Standard Chartered (LON:STAN) all have advisory boards of Islamic scholars who vet investments.

How to Get in on the Action

Understand, it’s not easy investing directly into Islamic banks. Since the governments that often back them have so much money, public listings are unnecessary.

Fortunately, Dow Jones features a growing array of Islamic indices focused on different regions. You can view those here: Dow Jones Islamic Indices.

And the knowledge that the world’s top financial brass are listening to a new sort of lending logic should provide some comfort to investors in Islamic financial stocks. If you hold any banking shares, it’s worth checking up on what those companies are doing.

You should also look into buying some Islamic bonds for yourself. Non-Muslims can buy Islamic bonds, use Islamic credit cards, and even access some carefully crafted derivatives…

In fact, Kuwait Finance House’s Malaysian unit says a full half of its customers are non-Muslims!

While we’re still trying to sort out the subprime trainwreck, a little ethics and common sense may be just what every boardroom and portfolio needs to move forward and avoid another systemic catastrophe.

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