Nicholas Kaiser founded Saturna Capital in 1984 after being approached by Muslim investors looking to invest without violating Islamic teachings. It’s probably hard for most Americans to imagine a financial world without interest. We earn it in our savings accounts. We pay it when we shop with credit cards. In Silicon Valley, we couldn’t dream of owning a home without a mortgage.
Yet devout Muslims follow strict rules about money, including a prohibition against interest known as riba. In addition, certain businesses are incompatible with Islamic law, including those involving alcohol, gambling, pornography or the production of pork.
Those religious convictions create difficult challenges for Muslims investors. But since 1984 Nicholas Kaiser, founder and president of Saturna Capital in Bellingham, Wash., has managed two highly rated socially responsible mutual funds guided by Islamic tenets: Amana Growth and Amana Income.
Personal finance reporter Mark Schwanhausser talked about the delicate balance of principles and profit when Kaiser visited Palo Alto to speak to investors this month.
Q Can you describe what financial life is like in the Muslim world because interest is prohibited?
A Clearly, the prohibition against interest is the big issue for personal finance. How do you, say, get a mortgage? How do you deal with banks?
The thing that’sprobably not well understood about Islam is that what you do and believe is up to you. Islam is a relationship between you and Allah. You’re allowed a fair degree of latitude. If it’s inconvenient to have a life without interest, that might be all right. That’s up to you. It’s just a teaching that it would be better if you didn’t.
Q What’s the basic concept behind riba, the prohibition against interest?
A What is not acceptable is where you are forced by some contract to pay me back. Therefore, I have an advantage over you. We are supposed to be equal before Allah.
So you restructure it so we’re both sort of partners. Since we’re partners in the deal, you put in more, you’re going to get more back, but you’re also put at bigger risk.
QHow would you structure a mortgage?
AYou 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.
Q How do Islamic tenets limit what you can hold in your investment portfolios?
A 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.
QWhat else fails to make the cut?
A If companies make money from interest – that’s primarily the financial sector, like banks but even things like brokerages. Then there are some basic screens like no pornography, no alcohol.
But let’s take alcohol. You have Southwest Airlines. They sell drinks. Is that going to cross them out? Well, it’s not their primary business. Their primary business is transportation.
QThen what about a grocery that sells alcohol?
AGrocery is a little tougher. We actually had Albertsons at one time. Their business is to buy it wholesale and sell it to you at retail. We basically allow 5 percent of revenues to come from baram activities, which means prohibited activities. If it’s their primary business, you can’t really do it at all. We sold Albertsons because it’s not allowed, and it’s what they were really doing, selling beer and wine alongside the rest of their groceries.
We had to sell Target recently when we found out they started selling wine in California. Costco is a stock we’d love to own, but they’re the biggest wine retailer in the country, so we can’t own that.
A hotel chain that has casinos – we couldn’t have that. Pornography – that’s always a lot of fun because the screen for pornography is, “I don’t know what it is, but I know it when I see it.” Disney has a subsidiary that makes X-rated movies. “X” is out, but “R” is in.
QDo any technology companies pose special issues?
AIs that Islamic or not? There, the primary business is to make a gazillion on a new drug that will save the world. So, that’s OK.
Q Morals, unlike financial numbers, can’t be quantified. How do you make these decisions? Is it basically judgment calls debated by a team of referees?
A We can ask the board. The board members are all Muslims, except for myself. Most of them are businessmen who have an interest in Islamic finance.
We debate both internally within our firm, and we also have what are known as shariah scholars. We can go ask a consultant. The consultants talk with other professors, imams and scholars. I think there are nine major centers around the world for Islamic finance and scholarship.
Q What drew you to the idea of investing with a Muslim approach?
AI’m just a professional money manager. These guys came in and said, “If you can do this, we’ve maybe got some money.”
I said, “Well, I can run funds. I don’t know anything about Islamic investments, but if you’ll teach me what the rules are, we can make this work.” That was 1984.