Keeping Money in Line with Mecca

Islamic finance learns to accommodate the religious dictates of the Koran

When Robert Kokshoorn needed $16 million to expand his fiberboard factory in Malaysia, he did what any businessperson might: He headed to the bank and got a loan. But unlike most debtors, he pays no interest. Instead, Kokshoorn makes a monthly payment to Bank Islam Malaysia on a promissory note that factors in a profit for the bank. That way he gets the capital he needs and the bank gets a new customer and a return on its money -- but keeps the transaction in compliance with Shariah, or Islamic law. "Islamic bank managers had a much higher degree of personal interest in our business than conventional bankers," says the Dutch-born Kokshoorn, managing director of Penang-based Merbok Hilir.


Kokshoorn is one of thousands of investors worldwide looking to Malaysia for Islamic banking services. From $20,000 car loans to $263 million bond issues, Malaysia -- which is 60% Muslim -- is rapidly outpacing the Middle East in this kind of finance. The country has more than 20 local and foreign banks offering services that comply with Shariah. In addition, 14% of its mutual-fund assets are Shariah-compliant, and 700 companies listed on the Kuala Lumpur Stock Exchange are considered free of haram, or sin. "Malaysia is at the forefront of innovation in Islamic finance," says Mahmoud Amin El-Gamal, an Egyptian professor of Islamic economics at Rice University in Houston.

Islamic banking is based on two main principles, as interpreted by many scholars. First, the Koran condemns the notion of charging interest for loans as usury, so Islamic financial products are interest-free. Instead, borrowers pay some sort of rent or a percentage of their profits. Second, borrowers are not allowed to produce or sell alcoholic beverages, pork, or cigarettes, or be involved in gambling.

Because there are many different interpretations of what's acceptable in Islamic banking, Malaysia is seeking to standardize it. Last November, the government joined with the International Monetary Fund and the Jeddah (Saudi Arabia)-based Islamic Development Bank to create an Islamic Financial Services Board to help set ground rules. The board is just the latest step in a decade-long effort to build up the sector. In 1990, Malaysia enacted a unique "dual banking" law that allowed banks to open special Islamic teller windows where Shariah-compliant accounts could be offered. And in 1994, Malaysia created the world's first Islamic interbank money market, where Islamic banks can swap funds overnight to balance their books. By 2007, Bank Negara Malaysia -- the central bank -- expects Shariah-compliant financial assets to make up 15% of the country's total, up from 11% today.


The push goes far beyond simple bank loans. More than $4.3 billion worth of Shariah-compliant bonds were issued in Malaysia last year. Bankers in Malaysia say about 20 more Islamic bond deals are in the pipeline. "Today, almost every issue that comes out is Islamic," says Shaipudin Shah Harun, head of the Islamic banking division of Citibank in Kuala Lumpur.

There's growing secular interest, too. By some estimates, more than 60% of customers at Islamic bank windows are non-Muslim. And in March, Nestlé, the Swiss food company, issued a $184 million, seven-year Islamic bond underwritten by Citibank. Such bonds are designed to attract investors who are "staunch Muslims who could [otherwise] be putting it under the pillow," says John Tham, an analyst at rating agency Moody's in Singapore. In other words, Islamic banking is all about making religion comfortable with modern finance. Malaysia is providing a bridge between the two.

By Michael Shari in Kuala Lumpur

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