The champions of Islamic finance—banking and investing based on the Koran—believe that if Islamic principles had been applied to Wall Street, the global economic crisis never would have happened. The handful of men who decide which mortgages, car loans, and credit cards are spiritually sound are cashing in. But critics smell a con.
Illustration by Alex Nabaum for FP
Amid the worst economic crisis in nearly a century, Yusuf Talal DeLorenzo sells peace of mind. A Muslim convert who is the product of both a Massachusetts prep school and a Karachi madrasa, DeLorenzo issues pronouncements on the spiritual soundness of modern finance for the world’s Muslims.
Islamic law, or sharia, forbids pious Muslims from paying interest or investing in morally questionable companies. So, DeLorenzo serves as a well-paid counsel to the international hedge-fund managers, bankers, and asset managers who are determined to invest in line with the Koran’s principles. With his rare ability to move easily between medieval Islamic texts and 21st-century financial instruments, DeLorenzo has emerged as one of the world’s chief gatekeepers for the fast-growing market in Islamic finance.
He’s a member of an elite group of fewer than 20 top-tier experts. Sheikh Nizam Yaquby issues fatwas for blue-chip institutions such as Dow Jones and HSBC from the back office of an electronics shop in a Bahraini bazaar. “There is no sin in the Koran—not even drinking, not even fornicating, not even homosexuality—which could be as abhorrent and serious as dealing in riba [interest],” he has said. Pakistan-born Muhammad Taqi Usmani, with the trademark cap of a religious scholar and his beard stained henna red, bears little resemblance to the Wall Street bigwigs who eagerly seek his advice. He is the chair of the powerful sharia board of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry. DeLorenzo and Yaquby sit on the board, too, just as they both sit on the sharia board of the Dow Jones Islamic Market Index, which screens companies for Muslim investors to make sure they don’t peddle in the defense or entertainment industries or are in any way connected to forbidden activities such as pornography, gambling, and pork production.
That the same few names appear again and again on sharia boards—Yaquby sits on more than 60, according to the Islamic Finance Information Service—reflects the unlikely name-brand status these Islamic scholars have attained in the world of modern finance. “It’s only natural that if it’s a big bank going out with a big product, they want to make a big splash,” DeLorenzo says. “I would rather have Tiger Woods endorse my product than some no-name golfer.”
Until the credit crunch of 2008, Islamic finance was a fast-growing, if still relatively obscure, new specialty of international finance. But after Wall Street’s implosion, Islamic finance’s champions have begun to promote the sector as a safe haven from the ills of the global economy. At a Doha conference in late 2008, Sheikh Yusuf al-Qaradawi, arguably the world’s most influential Islamic scholar, asserted that “the collapse of capitalism . . . shows that the Islamic economic philosophy is holding up.” DeLorenzo is even more sweeping in his claims. “If you had sukuk [or interest-free bonds based on actual assets], the subprime crisis never would have happened,” he says.
But how truly Islamic is the Islamic finance these men promote? To their critics, many are nothing more than rent-a-sheikhs, willing to give the spiritual nod to just about any financial product for the right price. Within their own ranks, the top sheikhs debate vigorously over which new products and transactions are permissible—and which have been unjustly allowed. One recent study from the AAOIFI concluded that 85 percent of bonds marketed as sharia-compliant were illegitimate. And the fees many of these scholars take in—at times, six figures for a single decision—only add to such critiques.
“There’s a whole industry now—supported by a show of religious authority provided by Islamic scholars—with banks promoting conventional products as Islamic,” says Mahmoud El-Gamal, a professor at Rice University and author of Islamic Finance: Law, Economics, and Practice. “They’re preying on the religiously insecure.” And as the financial crisis continues to unwind, there are a lot of insecure people out there.
THE BUSINESS OF ALLAH
Whether scholars like DeLorenzo and Yaquby offer merely pious packaging or a genuine reconciliation of sharia and modernity, demand is growing enormously for their services. What began several decades ago with a few Middle Eastern banks trying to circumvent the Koran’s ban on interest has become one of the world’s fastest-growing financial sectors. And it has been propelled by record oil revenues in the Gulf, deepening Islamic sentiment in countries from Pakistan and Egypt to Britain and France, and the flight of Arab capital out of the United States after September 11.
Islamic finance accounts for just 1 percent of the global market, but the industry’s yearly value is estimated at about $500 billion, with annual growth of 15 percent. In five years, it could hit $4 trillion, according to a 2008 report from Moody’s Investors Service. And its potential could be even greater.
