It’s an alternative investment market that’s bounded by religious guidelines and is growing rapidly.
One of the consequences of the global financial crisis has been the rapid growth of Islamic finance as an alternative to the kind of “savage capitalism” that Pope Francis and Jewish leaders have criticized.
The fast-growing alternative investment market is becoming a focal point for competition between international markets and financial services providers, said Larry Zimpleman, chief executive officer of the Principal Financial Group. It’s bounded by religious guidelines, is attracting interest from investors in many oil-rich nations, and is expected to reach $6.5 trillion in assets by 2020.
England took a step toward establishing the London Stock Exchange as a hub for Islamic finance last week with the announcement that it plans to be the first Western nation to issue an Islamic bond, called a “sukut.” It’s part of the race to tap into a financial services market that includes a Muslim population of 1.6 billion people.
“This is a 35-year-old industry now moving at light speed, and I suspect that 95 percent of the U.S. knows nothing about it,” Zimpleman said Thursday during a panel on Islamic finance at Drake University. “The global financial crisis has served to propel, or perhaps jet-propel, its growth and awareness.”
Principal has made a name for itself by pursuing global growth opportunities in emerging nations. The Des Moines-based insurance and investment management firm launched a joint venture in 1995 with CIMB Group Holdings Berhad, the world’s largest Islamic banking group. In 2002, it entered Malaysia, which has sought to establish itself as the financial center of the Muslim world for the past 35 years.
Principal is now exploring growth opportunities in an Islamic finance sector that had an estimated $1.6 trillion in assets at the end of last year, according to KFH Research. The sector, which has had a 19.5 percent compounded annual growth rate since 2008, is forecast to grow to $6.5 trillion by 2020.
Global financial markets in the Western world are also joining the race to lead in Islamic finance, said Noripah Kamso, former CEO of CIMB Principal Islamic and author of a new book, “Investing in Islamic Funds: A Practitioner’s Perspective.” One of the drivers is a global backlash against the idea that “all profit is moral.”
“When you’re talking about the United States, you’re talking about the global financial center in New York, which is in a neck-and-neck competition with London,” Kamso said. “The U.S. is going to lose its edge if it doesn’t embrace Islamic finance.”
The idea is not to supplant traditional Western-style finance, she said, but to present Islamic finance as an alternative, especially for investors who view certain mainstream practices as immoral.
Pope Francis criticized savage capitalism, which he described as “the logic of profit at any cost,” in May. Jewish leaders issued a call for ethical renewal in September 2009 in response to financial scandals involving Jewish financial leaders like Bernard Madoff.
Islamic finance aligns investments with religious prohibitions and obligations, Kamso said. It forbids the practice of charging interest for loans; the use of ambiguous or uncertain investment vehicles, such as derivatives; and investments in products Muslims are prohibited from consuming, such as pork, alcohol, pornography and gambling. Many of the same products are also anathema for ethical investment funds.
Under Islamic finance, Kamso said that contracts must be backed by tangible underlying assets, profits and losses must be equitably shared, and funds must avoid highly leveraged businesses, such as Enron and WorldCom.
A sukut differs from a traditional bond in that the investment return is not determined by an interest rate. Usury has been condemned by most of the world’s major religions. However, it’s widely practiced outside the Muslim world.
Daud Vicary Abdullah, president of the International Center for Education in Islamic Finance, said his organization has awarded 619 master’s and doctoral degrees in Islamic finance since 2007, when there were fewer than 60 professionals trained in the field.
“There’s no threat here — it’s not about taking over the world,” Abdullah said. “You are missing out on major business opportunities (in the U.S.) because you are not doing as much as could be done to capture this amazing growth in Islamic finance around the world.”