The zero percent solution: A renaissance for ‘Islamic finance’

From The Boston Globe:

Zero LAST MONTH, two economists published a working paper suggesting an unusual way to diversify one’s investment portfolio: buy something called sukuk, or bonds that conform to the demands of Islam. The Koran, most Islamic scholars agree, forbids the charging of interest, so traditional bonds are off-limits to devout Muslims. But sukuk generate a steady income from actual, tangible assets, like a rented piece of land. Sukuk are also, it turns out, more stable than traditional sovereign bonds. While the sample size was small, the study by Selim Cakir, of the International Monetary Fund, and Faezeh Raei, a graduate student at the University of Texas, suggested that a portfolio that mixed sukuk with traditional bonds would do a better job than an all-bond portfolio of hedging against unpredictable seesaws in the financial markets.

One of the fastest growing areas of finance today is based on the 1,400-year-old strictures of shariah, or Islamic law. Sukuk are part of the field of “Islamic finance,” which – while it emerged in its modern incarnation in the late 1970s – has in recent years been attracting money at a precipitously quick clip. Sukuk issuance in 2007 is on pace to at least double last year’s total. And while exact figures are impossible to come by, industry analysts estimate that as much as $500 billion is now invested worldwide under Islamic guidelines. Most of the world’s leading banks and investment companies, including Chase Manhattan, Goldman Sachs, Deutsche Bank, and HSBC have started offering financial tools and services that meet the Koran’s requirements.

More here.