Madinat al-Muslimeen Islamic Message Board
|Profits according to the Prophet|
|07/04/01 at 21:46:59|
Profits according to the Prophet
By JUDY TARJANYI
July 04, 2001
- By most investment standards, stock in American Express, General Motors,
and McDonald's Restaurants would be good asset additions to any portfolio.
Not if the investor is a Muslim or a Muslim organization, however.
Islam's prohibitions against paying and charging interest and eating pork
prevent practicing Muslims from investing in companies that draw their
income from those activities. In addition, Islamic Shari'ah Law forbids
any involvement in or ties to gambling, pornography, tobacco, weapons, and
That rules out companies like American Express, which draws much of its
income from interest, and General Motors, which, although a manufacturer
of cars, operates a financing company that loans customers money and
charges them interest.
In Islam, interest is viewed by many as usury, or "riba," because of its
potential for exploitation of the borrower by the lender. And, while
McDonald's is best known for its burgers and fries, it sells enough pork
products such as bacon-egg-and-cheese biscuits to make it a questionable
investment for Muslims.
With the growing popularity of the stock market as a way to invest and the
widespread use of interest in today's economy, Islamic scholars and money
managers have been working to find ways for the world's 1.2 billion
Muslims to invest and still be true to their religion.
To meet their needs, Dow Jones has created a series of indexes for those
who want to base their investment decisions on Islamic principles. The
indexes are overseen by a five-member Shari'ah Supervisory Board and
contain no companies with primary business in alcohol, tobacco,
pork-related products, financial services, defense and weapons and
Considered competitive with other indexes, the Dow Jones Islamic Market
USA Index, for example, had an average annual total return of 27 percent
from 1996 to 1999, compared with 24 percent for the Standard & Poor's 500
for the same period.
In addition, Muslims now can invest in more than 100 mutual funds that are
managed according to Islamic principles. And, they can conduct stock
transactions through their own Internet brokerage service, www.iHilal.com,
based in Dubai, United Arab Emirates. The site is said to be the first
regulated financial-services Web site for products and services that
comply with Islamic law.
Rita Mansour, an American-born Muslim who is vice president and branch
manager of McDonald Investments Inc. of Toledo, Ohio, said as recently as
10 years ago, investing in the stock market was viewed as a form of
gambling by many Muslims.
Buying and selling stock still may be seen as gambling if an investor
bounces in and out of the market with the intent of making a fast buck.
However, Islamic experts draw a distinction between productive speculation
and treating the market like a casino.
"Following a 'buy low and sell high' strategy is at the heart of all
profitable trading, including the caravan trades in which the Prophet
(Muhammad) participated," Dr. Mahmoud Amin El-Gamal, professor of
economics and statistics at Houston's Rice University, advises in the
pamphlet "A Basic Guide to Contemporary Islamic Banking and Finance." "...
Whether or not speculation amounts to gambling depends on the intentions
of the trader, and the nature of the traded goods."
Mansour said the general rule for Muslim investors is that investments in
stock are permitted as long as they are in companies whose business is in
keeping with Islamic law. Investing in local businesses can even be viewed
as a way of giving back to one's community, she added.
Mutual funds that specialize in investments suitable to Muslims do more
than choose investments in companies whose primary business meets Islamic
For example, the AZZAD/Dow Jones Ethical Market Fund, which is overseen by
a three-member Shari'ah board, applies an additional filter to its list of
stocks by using three financial-ratio tests. Companies are then excluded
if their total debt divided by total assets is equal to or greater than 33
percent, if their accounts receivable divided by total assets is equal to
or greater than 45 percent, and if their non-operating interest income
plus prohibited income divided by total revenue is equal to or greater
than 5 percent.
Finally, all portfolio income is "purified" by removing amounts that are
related to interest or other prohibited earnings and donating it to
charitable organizations. This is a method Islamic scholars have arrived
at because it is nearly impossible, even in Muslim countries, to find
businesses with no interest income.
Most consider the acceptable limit for the amount a business may earn from
interest to be 25 to 33.3 percent, according to Muslim-Investor.com, a Web
site that answers questions about acceptable investment alternatives for
F. Scott Valpey, who co-founded Azzad Asset Management ("azzad" means
"provision" in Arabic) in 1997 with Bashar Qasem, a former client and a
group of Middle East-Gulf business leaders, said although the company's
funds are designed for Muslim investors, they have the potential for wider
appeal among investors interested in so-called socially responsible funds,
which screen profits from objectionable activities.
The Shari'ah principles under which Islamic funds invest, he said, make
the funds among the most socially responsible available. "I think anybody
interested in investing in a socially responsible fund would be impressed,
not only from a performance, but a content standpoint."
Azzad's flagship fund, the Azzad Growth Fund, and one of only a handful
based in the United States, was the No. 4 performing Islamic equity fund
in the world in 1999, Valpey said.
Other U.S.-based funds include the Amana Mutual Funds Trust growth and
income funds and Allied Asset Advisors' Dow Jones Islamic Index Fund.
Valpey, who is the only non-Muslim involved with Azzad, became interested
in Muslim investments while advising Qasem. "I found a lot of his
religious values matched mine. My religion is Christianity, but the
precepts underlying our religions are very similar. In the Bible, as well
as the Torah, there are major prohibitions against earning interest."
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