Category Archives: Interviews

Investing the Muslim way

Investing the Muslim way

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.

Pakistan has worked wonders in Islamic Finance: Shariah Advisor of BankIslami Pakistan

Pakistan has worked wonders in Islamic Finance: Shariah Advisor of BankIslami Pakistan

Irshad Ahmad Aijaz is the Shariah adviser for BankIslami Pakistan and is also a member of the Shariah board. He informed The News on the Shariah aspects of Islamic banking and what issues have arisen with its arrival in the financial sector.

Question: When was the concept of Islamic banking introduced in Pakistan and how did it develop here?

Answer: Islamic banking was initially introduced during the time of Zia ul Haq when the theoretical base was provided by a scholar who said that if Musilms wanted to replace conventional banking, then this was an acceptable system. However, when it went into execution it was to be implemented by bankers, and they said practically it was not possible to follow.

At operational level there were lots of problems and then there were policy problems and there was no one at this introduction level with Islamic banking expertise and so a solution could not be found to the issues that arose. Nonetheless, banks went ahead and launched Islamic banking parallel to conventional banking. Then arose the issue that only the name had changed and it was basically the same theoretically and practically as conventional banking methods.

But the attempt failed. However during the Nineties Islamic banking revived again and policy-makers decided that if Islamic banking was given an individual identity and made a separate institution, then it might work and be a success. This is when the concept of a Shariah body to decide on matters such as laws, policies and conflicts was introduced.

The Shariah body initially also had issues such as they being not taken seriously and stronger decision-makers prevailing over them, an example of which is of the Islami Nazriati Council that raised objections but were convinced. Nevertheless, now the Shariah board has powers even over board of directors and can overrule them, and this makes Islamic banking more successful now as there is a strong foundation established to support it.

Q: What are the tasks of the Shariah board and Shariah advisers?

A: For instance, if there is an issue, then the State Bank of Pakistan (SBP) would ask the Shariah board if they approve of it. If they say it’s not permissible, then that would not be implemented. It also makes strategic level policies such as policies for business finance, house finance and reviews the proposals and then gives approval to concepts presented by Islamic banks.

After approval comes the role of the Shariah adviser. When the time comes for implementation, the documentation, agreement, the process of introduction are all checked by the Shariah adviser to ensure that it is in accordance with the guidelines of the Shariah board. The SBP has made it mandatory that every Islamic bank should have a Shariah adviser and it’s a part of the regulatory law.

Q: What if there are disagreements between the Shariah board and advisers? How are the issues solved?

A: If there are disagreements, then several discussions are held by all the board members. The Islamic Fiqh Academy and the Accounting and Auditing Organisation of Islamic Financial Institution are international bodies where scholars and Muftis gather and vote on issues that have conflicting views.

Q: What job opportunities are there in this sector?

A: First of all, a fact that has to be accepted is that Pakistan has worked wonders in this field. Pakistan, Malaysia and Bahrain have an edge over all other countries.

Unfortunately, even then there are many issues with regard to Islamic banking. The most important is that there are no skilled and informed Islamic banking human resources as there is not a single institution to teach Islamic banking, though the SBP is trying its best. There is a Centre for Islamic Economics at Bait ul Mukarram, Karachi.

These are not enough, however. This sector offers many good opportunities, but the right people are lacking.

There is also a wide gap between business people and Shariah scholars which needs to be bridged. This is important because when Shariah scholars bring ideas, business people say it’s not practicable and vice-versa, so we need people who have knowledge of both the fields to bridge this gap which can be done by creating awareness or by practice. Resolution of this issue is critical to the success of Islamic banking.

Q: What problems Islamic banking is facing?

A: A major problem is lack of awareness of Islamic banking among people. Seminars and conferences should be organised to popularise and remove misleading perceptions about Islamic banking. The media should also play its part because it is the easiest mode to reach out to the masses as Islamic banking may be progressing but people are generally not aware of it.

Dr. Hussein Hamid Hassan: All Arabs will prefer Islamic banking

“All Arabs will prefer Islamic banking”: Interview with Dr. Hussain Hamid Hassan

Hussein Hamid Hassan is considered as the father of Islamic finance. He received his PhD from the faculty of Sharia at the Al Azhar University in Cairo in 1965 and holds two degrees in law from the International Institute of Comparative Law, University of New York. He chairs the Sharia Supervisory Committee of many Islamic banks in the Middle East, and has advised several governments.

An expert in Law, he had been the attorney general for the government of Egypt between 1969 and 1970. He has advised several governments in the Middle East and CIS countries on establishment of Islamic Finance Institutions. According to Mr Hassan, Islamic financing is the most equitable form of financing since it enables the creation of wealth without fuelling inflation or stoking a financial crisis.

In order to do away with the concept of interest rates, Islamic banking entails structuring products in different ways. If it is primarily to acknowledge that there is a price of money, how is it different?

The function of conventional banks is to receive deposits with fixed interest rates and to lend the same to borrowers at a fixed rate. The difference will be the revenue of the bank to meet expenses and distribute profits to shareholders. Conventional banks are not permitted to invest deposits at all, but can only lend it to investors.

Islamic bank doesn’t receive deposits with fixed interest rates. Rather, the deposits are in the form of equity from depositors to be invested, along with shareholders’ equity in one common pool. On the asset side, conventional banks have, since inception, had only one product, that’s loan with interest.

Sharia has unlimited products to suit every customer and every project under any circumstances. For instance, if you need to buy an aircraft or vessel or plant, you come to me for financing. If you want to buy an aircraft for $300 million, I will buy and transfer it you after 10 years after collecting installments with a profit margin. It can be fixed or floating like any benchmark or any index.

This is called Murabahah, to buy with agreed margin. Then there is Mudarba for financing project, where the businessman has full freedom to invest; the bank has no right to interfere in the project. According to Sharia, if something happens beyond your control, a force majeure event like war than I lose the capital 100% and you will lose your share in this limited liability venture. Your share is the expertise that you bring in.

Conventional banks sell loans through securitisation to raise resources. Can Islamic banks do something similar?

Sharia does not allow trading of loans. But if you have a combine, which has up to 30% tangible assets and 70% receivables, you can securitise the portfolio, where you take the assets from the balance sheet and sell them. This I have done it for Islamic banks in Abu Dabhi, Sharjah, and the UAE which have issued Sukuk bonds for several billion.

There is a real estate company called Amlak, which has securitised its portfolio in this manner. I am working on sukuk bonds for Morgan Stanley for $5 billion, but we are fighting with them. They want to make it Sharia-compliant, but they want bondholders to be pari passu with creditors of the company. But I have said no. This kind of bonds cannot be Sharia-compliant. But Morgan Stanley says that according to the American law, they have to make bondholders similar.

This is also what we have been telling central banks for 25 years on capital adequacy. Central banks treat Islamic banks on par with conventional banks and ask for 8% capital. I have been saying this is not correct because depositors of Islamic banks are equity investors and if you treat their money as equity, capital adequacy of Islamic banks will be 90%.

Today, when people want investment avenues to multiply their wealth, can Islamic products generate same returns?

The Sharjah government had asked me to convert Sharjah’s national bank into Islamic bank in 2002. Before they were paying interest of 1.2 to depositors. On June 30, we closed the conventional bank books. The share of the bank was quoting at three dirhams. Overnight from July 1, the share price went up to seven dirhams. After six months, the bank distributed profit of 3.5% for six months.

A lot of money is going to non-dollar assets, which is reflected in euro’s rise, do you think this shift is permanent or temporary?

I think this will continue, they were waiting for this. They are re-evaluating their currency. Kuwait has already gone from the dollar.

Would you advise others to drop the dollar peg and shift to euro?

For the present circumstances I would. Why? because the dollar is coming down and why should I lose. Business is business. Everyone has a right to protect themselves. If after 25 years, things come back to where they were, we can move back. One should mitigate his risks. For any risk, it is compulsory that you mitigate for yourself. This is not religion. Religion does not prescribe what currency one should select. This means that fortunately, every country should look at its own interest.

Given the rise in revenues of the Arab world, one would have expected Islamic banking to grow faster.

Not everyone invests in Islamic banks. But every week and every day, conventional banks are converting into Islamic banks. This is happening gradually. I can guarantee that all Arabs will move and prefer only Islamic banks. This is my personal belief as I have my own analysis and research on this. When we built the first Islamic bank in 1975, it was easier to say Islamic whisky than Islamic bank. I myself could not imagine that the Islamic banking industry would grow that fast.

Are there bankruptcy laws in Islamic banking for recovery from defaulters?

We have in Egypt a proverb, “giving the keys of the food store to the cat”. Conventional banking does that. In Islamic banking, I am not giving money to you to buy equity in your name or your wife’s name. Instead, I will buy an aircraft and lease it to you for 10 years. In return, I will get fixed rental and I will also get variables as a percentage of your profits. If you default, the lease is terminated and the asset is leased to someone else. Under Islamic financing, default means to commit financial suicide.