Business change to lure Muslim investors

updated 5:08 p.m. ET Oct. 12, 2006

MINNEAPOLIS - When Caribou Coffee went public last year, sharp-eyed investors noticed some unusual promises in its prospectus. Caribou, the nation’s second-largest coffeehouse chain, said it would never sell pork or porn. It wouldn’t charge or receive interest, either.

By following financial rules that are part of the Islamic code called Shariah, Caribou is among a small but growing list of Western businesses looking to make themselves as attractive as possible to Muslim investors. Some, like Caribou, are motivated by principle, while others see Muslim investors as an attractive new source of money.

Middle Eastern investors flush with oil profits are looking for new places to invest, and American Muslims are looking to invest in a way that doesn’t conflict with their faith.

“There’s a bunch of Islamic investors who are prohibited from a lot of regular investments, so a lot of money is sitting in cash not earning anything at all,” said Khalid Howladar, a vice president for Middle Eastern and Islamic Structured Finance with Moody’s Investors Service in London.

Companies and governments who need to raise money are saying, “’There’s a bunch of people out there with money they can’t spend — how about I create something for them?”’ he added.

Dow Jones has created an Islamic investing index. A Texas company issued almost $166 million in Shariah-compliant bonds to finance natural gas operations in the Gulf of Mexico. And the German state of Saxony-Anhalt issued a floating-rate 100-million euro note — managed by Citigroup — that followed Shariah rules.

Assets invested at two Shariah-compliant funds run by Saturna Capital in Bellingham, Wash. have swelled nearly 10-fold, since 2002 from $34 million in 2002 to $331 million now — though that’s still tiny by mutual fund standards. The funds invest only in companies that are Shariah-compliant.

Islamic financial rules come from passages in the Quran that prohibit “riba” — making money from money. Generally, that means not paying or collecting interest, though some scholars say only abusively high interest rates are prohibited. Other prohibitions are more moral than financial, such as a ban on selling pork.

While many Muslims have invested conventionally in the West for years, some did so because they had few alternatives.

Moazzam Ahmed, a software engineer from Carrollton, Texas, has no car loans. Credit-card charges go on a zero-percent card or get paid off at the end of every month. And he’s got a home mortgage that is a lease-buyback arrangement, rather than an interest-bearing loan, a frequent arrangement among Muslims looking to buy homes while obeying Shariah.

But he fretted about his conventional retirement investments until four years ago, when he discovered the Saturna funds.

“As soon as I found out about it I switched everything to it,” he said. “I would have loved to do it from Day One, but it wasn’t available, or at least I didn’t know about it,” he said. He said his returns have been as good as, or better than, more conventional investments he could have made.

Estimates of the number of Muslims in the United States vary from two million to six million.

Eric Meyer, who runs a Connecticut-based hedge fund called Shariah Capital, says Western banks and financial institutions need to have Shariah-compliant products or risk losing market share.

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