Islamic Finance

Stephen DeAngelis

August 9, 2007

As I’m quickly learning, doing business in the Middle East is not always as straight forward as it is in most of the developed world. Some of the factors that you have to deal with are Islamic views of financial transactions. A few of the main tenets of Islamic financial transactions include, the payment of zakat charity by believers, borrowing and lending without payment of fixed interest (riba), and socially responsible investing.

The giving of alms or tithing (zakat) is something embraced by all major religions. In Islam there are eight categories of people who may receive the collected zakat: first, the destitute (those without any property or income); second, the poor (those who can’t afford the basic necessities of life); third, the collectors (charitable organizations); fourth, people whose hearts are to be reconciled (converts or investigators); fifth, slave owners willing to free slaves; sixth, debtors (to help those heavily indebted to pay their debts); seventh, those who are “In the Way of Allah” (normally taken to mean helping those fighting jihad — a term widely misunderstood in the West — Christians would classify this as donations for the building up of the Kingdom of God); and, finally, travelers (those finding themselves in difficult circumstances). Zakat offerings are not used in trade, but Islamic charities that collect such offerings need a secure place to deposit their funds and that puts them in contact with Islamic banks, which I’ll discuss later. Unfortunately, nefarious individuals have taken advantage of this charitable system by establishing money-raising fronts that have been used to support terrorist activity. For more on this topic, see my post Charity, Horizontal Scenarios, & Resilience.

There is nothing particularly different about charitable giving in Muslim countries than charitable giving elsewhere, nor with the admonition to make socially responsible investments. Although the list of companies that are considered socially irresponsible or unlawful (haraam) in Muslim countries (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography), might be different. The Islamic tenet that has created the most difficulty for business transactions is riba. Islamic law prohibits usury (the collection and payment of interest). Despite its long history of inventive past, it was only late last century that a number of Islamic banks were created to cater to this particular banking market. Because some of the nefarious characters mentioned above, have used these institutions, the entire Islamic banking community is often viewed with mistrust.

That mistrust of Islamic banks is the focus of a New York Times article by Landon Thomas, Jr. [“Islamic Finance and its Critics,” 9 August 2007]. Thomas’ story focuses on Dar al-Maal al-Islami (DMI) Trust, a Bahamas-incorporated holding company with a portfolio of Islamic banks in Bahrain, Niger, Egypt and Pakistan that was established in 1981 by Prince Muhammad al-Faisal al-Saud, a member of the royal Saudi family. A frequent visitor to the United States before 11 September 2001, he now avoids the U.S. because DMI is part of a trillion dollar lawsuit by families of 9/11 victims.

“Some see him as a founding father of Islamic finance, a thriving piece of the global economy that approaches $800 billion in assets; others view the prince, a follower of the puritanical Wahhabi sect of Islam, as the invisible hand behind a flow of money to Al Qaeda. Fueled by soaring oil prices and an increasingly open investment climate, capital is flowing to the Middle East, often steered to institutions like DMI and its subsidiaries, which, to comply with Islamic law, shun interest and speculation in favor of investments in which the borrower and lender share both risk and reward. Yet, in the wake of the attacks on Sept. 11, the tendency to connect the businesses of established Muslim financiers to Islamic extremism continues. That point became clear last year during the outcry over whether DP World, a Dubai-based port operator, should run terminals in the United States.”

Ties between members of the royal family and the Wahabi movement have been shown, which is cause for concern. From its perspective, the royal family sees such ties as a natural result of its self-proclaimed role as protector of the faith and Islam’s holiest sites.

“For the prince, his legal difficulties and a growing resentment of United States policies in the Middle East have put a strain on what traditionally has been a robust business relationship. ‘There has been a cloud on relations,’ said Richard A. Debs, an advisory director at Morgan Stanley and vice chairman of the United States-Saudi Arabian Business Council. ‘There is disaffection — people think Prince Muhammad has been unfairly persecuted and attacked. I just don’t see the connection between Islamic finance and Islamic extremism.’ In the case of DMI, others are not so sure. This year, the Justice Department’s counterterrorism division disclosed that it was investigating whether clients of a DMI subsidiary, via a private equity fund once owned by DMI, avoided paying their share of taxes.”

There are a limited number of players in the Islamic banking sector, which means that the good, the bad, and the ugly are going to be found in these institutions. Thomas’ article talks about the ties that lawyers for the plaintiffs in the lawsuit mentioned above are using to tie DMI to terrorism, but DMI’s lawyer, as one would expect, dismisses the charges.

“A lawyer representing DMI, James J. McGuire, denies any such intent. ‘The fact that DMI unknowingly had an account with someone who was later deemed a terrorist is hardly evidence that the bank is involved in terrorism,’ Mr. McGuire said.”

I would guess that every banker in America would agree with McGuire’s argument, but the article points to a broader attempt by plaintiff lawyers to demonstrate a history of support. It’s not my intent to take sides in a legal case and Thomas’ article certainly doesn’t offer enough evidence from which one could draw an informed conclusion. I’ll let the courts do that. Thomas concludes his article by noting:

“Ibrahim A. Warde, an expert on Islamic finance at the Fletcher School at Tufts University has written a book, out this summer, called ‘The Price of Fear.’ In it he contends that contrary to popular perception, there is no monolithic financial pool sustaining Al Qaeda — a view that is supported by the Sept. 11 Commission’s report on terrorism financing.”

My only point in bringing up the article is to demonstrate that business ventures in the Middle East can have unique challenges. Every opportunity has its challenges and, in the Kurdish sector of Iraq, which is my current focus, opportunities abound. The bottom line is that business is business. When it is conducted ethically between trusting partners, it is good business — regardless of whether that business is conducted in New York City or at the Edges of Globalization.