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Finance that complies with Shariah, or Islamic law, is still a niche within the ethical investing niche. In all, there are at least $500bn worth of Islamic finance assets worldwide. That's not much in terms of global banking - US banks alone hold about $12.7 trillion in assets.
But the industry's growth is eye-catching: Islamic banking has expanded by more than 10% annually over the past decade, according to Standard & Poor's. It's grabbing the attention of some of the biggest banks in the world and changing how they do business.
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In the 1990s, HSBC and Citigroup established global Islamic finance divisions. Far beyond just offering a few mutual funds to suit religious investors, they and stand-alone Muslim banks are creating instruments that parallel many of the Western world's financial products, from consumer loans to insurance to bonds.
Central banks and corporations in other industries are likewise feeling the demand. The governments of Japan and the UK - whether in an attempt to lure Muslim investors or impress Muslim voters - have announced plans to issue sukuk, which behave like bonds but conform to Islamic law.
Ford Motor's $848m sale of Aston Martin to Investment Dar, a Kuwait-based Islamic bank, required Shariah-compliant financing, and Caribou Coffee, America's second-largest speciality coffee chain after Starbucks, is owned by a Shariah-compliant private equity firm based in Bahrain.
Shariah banking
So just what does Shariah-compliant banking entail? Some of it is simply prohibiting things seen as immoral. Investing in casinos, pornography and weapons of mass destruction is out.
The animating religious goal behind other restrictions is to achieve greater social justice by sharing risk and reward. Islamic finance bans people from selling what they don't own, which rules out short selling, and from engaging in contracts deemed to have excessive uncertainty on either side. That rules out traditional insurance, so Islamic banks have instead developed takaful, in which a group of people pool risk.
The Shariah stipulation banning interest, though, is the one that poses the most problems for modern finance.
To be sure, from the Bible to Buddhism, most of the world's faiths have issued warnings against usury, and theologians through the ages have debated the line between permissible and excessive interest rates. But ultimately, in the West, governments and religious authorities deemed some amount of interest permissible.
Not so in Islam, in which most scholars deem fixed-interest payments forbidden.
Staff Reporter
