Islamic Funds

Shares Overseen by Sharia

On the international financial markets one can now find "Islamic finance" and investments which conform to Sharia law. Matilda Jordanova-Duda looks at what makes them different

Man in front of an electronic stock board (photo: AP)
Most of the Islamic funds follow the Dow Jones Islamic Market Index of the New York Stock Exchange, which is under the supervision of a Sharia board of scholars

​​What does the average Muslim in Germany do with his savings? He takes them to the savings bank, even though his religion forbids the payment of interest. In the past, thousands of Muslims put money in "Islamic Holdings" and lost it. "Islamic Holdings" turned out to be a pyramid selling scheme.

Michael Saleh Gassner is an expert on Islamic banking. He says Muslim media have a responsibility to educate the faithful in financial matters and to warn them to check the legitimacy of what they are offered.

According to the "Manager magazine", there are currently around 150 Islamic funds. Most of them follow the Dow Jones Islamic Market Index of the New York Stock Exchange, which is under the supervision of a Sharia board of scholars.

Listed companies defined as "halal"

The scholars ensure that the companies they include, which are listed on Wall Street, are "halal" (permitted). Shares are an acceptable form of investment, but not in every business.

Companies which have to do with alcohol, tobacco, pork products, gambling, pornography, night-clubs or armaments are out, as well as banks and insurance companies which are based on interest. Even airlines or hotels may be avoided, since they offer alcohol to their guests.

International Financial Exchange in Dubai (photo: AP)
The opening of an international stock exchange in Dubai in September 2005 marked another step toward Dubai's goal to become the global financial hub between Hong Kong and Frankfurt

​​There are grey areas. For example, telecommunications is permitted although it could be used to transport pornographic content, and it is almost impossible to exclude completely the possibility that a particular company may not have been involved in paying or receiving interest.

For that reason, the faithful donate 0.2 to 0.3 percent of their dividends to charity. In addition, it is forbidden to invest in companies with more than 33 percent outside capital.

Observers note that the rigour with which these rules are applied has meant that Islamic Funds have avoided the major bankruptcies of recent years, such as Worldcom or Parmalat. That has saved them from substantial losses.

The bursting of the New Economy bubble also left them largely unaffected. That has made them attractive for investors who value security and ethical principles.

"Islamic Equity Builder Certificates"

Among the financial instruments on the Dow Jones Index are the so-called "Islamic Equity Builder Certificates", which the Deutsche Bank has been offering for over four years. They are recommended for investors who are looking for limited risk.

Every three months the companies in the fund are checked for compliance with Sharia principles by the "Dar al Istithmar," a joint venture of the Deutsche Bank, stockbrokers Russell Wood and the Centre for Islamic Studies at the University of Oxford.

The certificates, which can be in European, Asia, US or worldwide shares, are also listed on the Frankfurt stock exchange, although press spokesman Klaus Thoma says they are bought in "insignificant quantities" here in Germany.

This could be because nobody has heard of them. If customers are interested in such products, they have to ask for them specifically. "If you're interested, you can find information on our website," says Thoma – but only in English and only after a long and complicated search.

Customers in the Gulf region

"Products which conform to Sharia law have been developed for the Middle East," explains Thoma. Deutsche Bank – or rather its investment house subsidiary, DWS – sees the potential in that region. The five new DWS "Noor Islamic Funds," based in Dubai and on the market since the end of 2006, are not intended for German customers.

The Western banks see potentional in the strictly religious share-buyers of the Arab world, who place high value on the correctness of their investment, and who have money to play with because of the high oil price.

However, the strategy of relying on custom from the Gulf region did not work for the pioneer of Islamic finance in Germany, the Al Sukoor fund of Cominvest, a subsidiary of Commerzbank. The fund closed in 2005 for lack of demand. It fell in value from 40 million EURO in 2000 to four million at the end. "We saw a niche market," says Klaus Becker of Cominvest, "But our assumptions proved to be wrong."

Becker admits that he does not know why what seemed to be a sensible innovation turned out to be a flop. Perhaps the religious restrictions lowered the income too much. Al Sukoor was not advertised in Germany, but, says Becker, "we don't do that for a lot of products." It would cost too much.

The new fund could only be offered to financial advisers. Gassner is not surprised it was a flop. "Although they applied for a licence to sell the product in Germany, they never did any real advertising," he says.

In spite of the fact that families of Turkish origin in Germany have a high level of savings, there is still no Islamic financial structure in Germany.

A specialist Islamic finance company could scarcely survive on the few products which have a German licence. Gassner himself has moved his office from Cologne to London.

Matilda Jordanova-Duda

© Qantara.de 2007

Translated from the German by Michael Lawton

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