Scandals spark tougher screening of western investments

Islamic financial institutions - with an estimated US$230 billion under management, much of it in Western markets - have been shocked by the scandals which have toppled some of the biggest companies in the United States and tainted operations elsewhere in the world.

This issue will be debated openly at the International Islamic Finance Forum (www.iiff.net) - a major gathering of Islamic bankers and financiers taking place in Geneva, Switzerland, later this month, organised by the Dubai offices of the Institute for International Research.

The seeds for the scandals at Enron, Xerox, WorldCom, Tyco and others were sown during the "anything goes" high-tech boom in which Islamic institutions invested heavily because they appeared not to conflict with Islamic morality and were "Shari'ah compliant."

But they have since discovered, as US President George W. Bush recently pointed out: "A lot of money was made but too often standards were tossed out."

New York-based Rushdi Siddiqui, director of the Dow Jones Islamic Market Indexes, believes increased scrutiny of potential investments by Islamic financiers is inevitable.

"In the light of continuing financial scandals in the West, which include formerly Shari'ah compliant companies like Enron and Worldcom, Islamic jurists and bankers will be defining and discussing the merits of an Islamic 'corporate governance' screen as part of the investment process," he said.

"This is of paramount importance because many of the Islamic equity funds from the Arabian Gulf, Europe, and the US have large exposure or holdings in companies from the US."

The Dow Jones Islamic Market Indexes track Shari`ah compliant stocks around the world for Islamic investors. Included is a broad Islamic Market Index with 1,600 plus companies with market capitalisation of $9 trillion, from which about 29 Islamic indexes have been created covering all regions and almost all economic sectors.

Combined with increasing anecdotal evidence of a slowdown in investment in the West by Islamic institutions post September 11, the International Islamic Finance Forum is also slated to debate the regulatory environment affecting Islamic financial institutions since the attacks.

In the wake of September 11, less knowledgeable banking observers expected the pall cast by the search for the terrorist money trail to fall on the Islamic banking sector. That trail proved false, however, with most suspicion falling firmly on conventional finance sector.

Nevertheless, some even went as far as predicting the sector could be quickly crippled by investors distancing themselves from all things Islamic.

But as Global Finance magazine recently wrote: "It didn't happen. If anything, the Islamic finance industry has emerged stronger, more visible, and with more determination to offer acceptable financial solutions to the world's 1.2 billion Muslims - and anyone else who is interested."

Further evidence of the huge potential of Islamic finance is provided by the fact that the 10 largest Muslim states have a combined GDP of $1.2 trillion and there are 150 million Muslims resident in non-Islamic countries.