As credit markets have imploded, triggering a global economic crisis, Islamically correct investors have seen a change of fortune: The conservative principles this small group of devout Muslims clung to during the economic heyday has insulated them from the worst of the past year's suffering.
Their renunciation of the interest-based economy kept them away from investments in financial services companies, whose stocks have collapsed, and out of traditional mortgages.
"There was a time two or three years ago that Islamic finance was considered simply too conservative," said Professor Ibrahim Warde, author of "Islamic Finance in the Global Economy" and an adjunct professor at the Fletcher School of Law and Diplomacy at Tufts University. "Right now, many people are recognizing that maybe it wasn't such a bad thing."
Dow Jones Islamic Market Indexes, which represent benchmarks for Islamically correct investment categories, have been outperforming their non-Islamically compliant counterparts by 3 to 4 percent in key indexes. The two Amana Income and Growth funds, the largest Islamic mutual funds in the country with $1.2 billion in combined assets, have been outperforming the S&P 500 in the past year by 13 and 7 percent, respectively. (Both Amana funds also outperform the S&P index on 5- and 10-year comparisons.)
Bay Area residents who bought homes through an Islamically compliant lender in San Jose, the Ameen Housing Cooperative, don't have to worry whether their lender will work with them if they lose their jobs. Islamic lenders are required to work in good faith with distressed borrowers to figure out ways to make payments manageable - and co-op leaders say they will.
Warde and other Islamic finance experts and investors caution that the crisis doesn't mean that Islamic finance is a better model than Western capitalism. They say Islamic finance, a system of ethical finance supported on an institutional level, provides unique insight into an economic meltdown created in part by financial practices forbidden by strict observance of Islam.
"I don't think there's anything miraculous about Islamic finance, or that it's a panacea," said Warde, who will be speaking at a UC Berkeley School of Law symposium on the issue this month. "But we can understand why Islamic banks did well in the current financial environment."
Renouncing interest is the high-profile element of Islamic finance that relates to the current economic crisis. For Islamically correct investors, that means there are limits to how much debt a company can have or how much profit it can derive from interest-based investments. That criterion eliminated the possibility of holding stocks in financial services companies, like Citigroup or Washington Mutual, whose stocks lost 86 percent or all of their value last year, respectively.
Avoiding crisis' practices
Islamic finance also prohibits selling assets you don't own, selling someone's debt and engaging in high-risk investments. Thus, there was no participation in practices that have been blamed for Wall Street's meltdown: complex derivatives trading, short-selling and the $30 trillion market in credit default swaps.
While Islamically correct investing is a booming industry, it hardly guarantees good returns. The Iman Fund, run by Allied Asset Advisors and one of the largest Islamic mutual funds in the country, has performed worse than the S&P 500 and others in its category, according to Morningstar, a mutual fund rating service.
But performance alone isn't the point of compliance with Islamic law, known as sharia. For the committed, investing finance with faith is about living with values.
"We don't claim to our investors that we're going to be consistently outperforming the market because we have sharia criteria," said Monem Salam, director of Islamic investing and deputy portfolio manager for Saturna Capital, which manages the Amana funds. "We're going to give our investors the best return they can (get) based on the criteria. If that means outperformance on certain indices, then great."
The Islamic principles playing out across the larger stock market are also playing out in smaller, if no less significant ways for ordinary investors.
In San Jose, the Ameen Housing Cooperative has helped roughly 30 members buy homes without mortgages. Yet the recession has had "no impact whatsoever" on the co-op, according to board member Humayun Sohel. The reasons have much to do with an Islamic requirement that the lender and the borrower share the risks and rewards of a loan.
Ameen members pool their money to give out loans. Borrowers put at least 30 percent down, and monthly payments are based on local rental values. Monthly payments pay down debt and pay dividends to Ameen members. In its 13-year history, Sohel said, Ameen has given a quarterly dividend of at least 3.8 percent and as much as 7.8 percent to co-op members.
When the deed of transfer is finally given to the borrower, Ameen members get a slice of the home's increased value - or take a loss if the price has gone down. With the median home price dropping as much as 40 percent in Santa Clara County and many worrying about their jobs, Ameen remains confident.
Borrower loses equity
As long as the borrower is earnest, Sohel said, Ameen will work to reduce payments, though that may mean a borrower doesn't gain equity or possibly loses some. If someone cannot pay at all for an extended time, Ameen will rent the home instead of selling it and locking in the loss, which is what banks do during foreclosures.
"What we are counting on is riding out this difficult time," Sohel said.
Islamic compliance also precludes investing in things Muslims are expected to avoid, like pornography, tobacco, alcohol and gambling. Those prohibitions drew Juveria Aleem to the Amana funds. But the Oakland Web designer feels like the relatively lower losses on her investments have only reaffirmed her faith.
"Not only was I keeping myself spiritually clean by not engaging in that in my life, but financially, it was helping me," Aleem said. "You cannot ever truly go wrong by practicing the principles of your faith."
-- The second annual Islamic Finance Symposium, "Islamic Finance: Resilience in a Time of Financial Crisis," is a daylong conference on Feb. 28 at UC Berkeley's Boalt Hall School of Law. To register, go to: links.sfgate.com/ZGBS.
-- For more information on the Dow Jones Islamic Market Indexes, go to: links.sfgate.com/ZGBT.