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 Koranthat 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.
The Glenmary Research Center of Nashville, Tenn., estimated that there were about 1.6 million Muslims in the United States in 2000, the first time it gathered information on Islam as part of the census of religious groups it carries out every 10 years.
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.
"There is a younger generation of Muslims who grew up during the last 20 to 30 years that have a reawakened sense of nationalism and religious pride that motivates them to invest according to their faith," he said.
But in Western finance, it takes some creativity to avoid earning or paying interest.
To borrow money, Shariah-compliant companies often pledge the lender a share of the profits from an asset instead of interest. Investors who need to earn a shorter-term return can contract to buy, say, $100 of copper today, and simultaneously pledge to sell copper in 90 days for, say, $103.
Caribou Coffee Company Inc., for instance, has a revolving line of credit. But instead of paying interest, it sells assets and then pays to lease them back.
"It's fair to say we do things a little differently," said Charles Ogburn, Global Head of Corporate Investment at the firm that controls a majority of Caribou stock, Bahrain-based Arcapita Bank B.S.C.
Ogburn said when he joined Arcapita five years ago, there were perhaps two or three U.S. banks who had done those kinds of loans. Now it's more like 25 or 30.
Many companies follow Shariah without even trying.
To build its index, Dow Jones in 1999 hired six Shariah scholars to set standards to screen companies. Out of 5,000, Dow Jones found 1,800 that met its standards, including drugmakers Merck & Co. and Pfizer Inc., BP PLC, Microsoft Corp., Hewlett-Packard Co., and IBM Corp.
"I don't think that many of them know about Shariah-compliant investing, frankly speaking," said Rushdi Siddiqi, Dow Jones' director of Islamic market indexes.
Dow Jones now has over 60 Islamic indexes that track Shariah-compliant stocks and bonds. Siddiqui said about 30 firms have licensed the indexes, and about $5.5 billion in investments are managed in line with the indexes.
The indexes are not as strict as some might prefer. The Dow Jones indexes include companies with debt that's as much as one-third of their market capitalization, and allows companies that generate some interest.
In fact, the wide range of what counts as Shariah-compliant can be frustrating for businesses that want to raise money that way. Investment firms retain councils of Islamic scholars who determine whether a transaction complies with their interpretation of the rules, adding an extra layer of complexity to already complicated deals.
But some investors appreciate companies willing to do so.
Shirin Elkoshairi, who works for a technology company and lives in Ashland, Va., said he is getting ready to switch his investments over to a Shariah-compliant mutual fund. He already has a Shariah-compliant mortgage.
"At the end of the day, you know you're living in a house and you can actually put your head down at night and not feel bad for going against Islamic shariah," he said.