Published November 13, 2008
Shariah-compliant banking, sometimes called Islamic banking, is growing in popularity in the Western and Islamic worlds. But critics say American interest in the system at a time of economic crisis is opening the door to increased Islamic influence in the American banking system. Worse yet, some fear the banks may be helping to finance international terrorism.
In Shariah-compliant banking, lenders may not charge interest and investors cannot make money from forbidden industries like gambling, alcohol, pork and pornography. Selling debt, devising derivatives and short selling are also prohibited, and investments must be closely tied to actual assets.
In the U.S., the Dow Jones Islamic Index tracks Shariah-compliant companies and funds, and funds have sprung up like the Amana Mutual Funds Trust and the Azzad Asset Management.
American investment funds, like those offered by TD Ameritrade and Charles Schwab, can invest in Shariah-compliant companies, and those companies can offer investments in American companies. Top holdings in the Azzad Ethical Midcap Fund, for example, include Western Digital Corp., Southwest Electric Co. and Apple Computer, Inc.
But allowing Shariah-compliant finance in the U.S. is green-lighting a seditious system that supports jihad, said Frank Gaffney, founder and president of the Center for Security Policy in Washington, D.C.
"If you understand what Shariah is, you understand that it is a pretty awful system. Not something that you'd want insinuated in your society and becoming a major feature of your economic system," Gaffney said.
"Shariah (Islamic law as dictated by the Koran) governs all aspects of life, from the personal practice of the faith to how you relate to your family to how you relate to your business partners, to your community ... all the way up to how the world is run, and it is all one seamless program. You can't say 'I'll take the personal pietistic practice ... and skip the beheading and the flogging and the stoning and the global theocracy,'" he said.
Punishments for some crimes under Shariah law include amputation and stoning to death. On Tuesday it was revealed that a 53-year-old Egyptian doctor had been sentenced under Shariah law in Saudi Arabia to 15 years in prison and 1,500 lashes for allegedly getting a Saudi princess in his care addicted to drugs.
But despite Islamic banking's association with Shariah's harsh practices, the U.S. government is taking an interest in it.
On Oct. 25, while on an official visit to Saudi Arabia, Deputy Secretary of the Treasury Robert M. Kimmitt told reporters that the U.S. was interested in learning more about Islamic finance, and the Treasury Department held an "Islamic Finance 101" course in Washington on Nov. 6 to educate government officials on its ins and outs.
Islamic banking and investment products sprang up beginning in the 1970s when the Middle East experienced its first oil boom, and have been growing in popularity as oil prices soared in the past few years.
Yet it's unclear who is investing in Shariah-compliant mutual funds and other investments, Gaffney said. "An awful lot of them seem to be petrodollar-rich potentates and companies and royal families."
Nicholas Kaiser, fund manager at Amana Mutual Funds Trust in Bellingham, Wash., said that his company's Shariah-compliant mutual fund products are no different from any other religious funds and that the company carefully screens its investors.
"Our shareholders are American. We don't take money from non-Americans because of money-laundering laws. We have to know our shareholders and be sure they aren't engaged in nefarious activities. We screen and check and verify every shareholder," Kaiser said.
He disagrees with Gaffney's assertion that Islamic funds are a threat to the American way of life.
"We simply take people's money, invest it and give it back to them when they want it. We don't try and convert the country. We don't have any religious position. We aren't evangelical. We aren't zealots. We're money managers," Kaiser said. "I happen to be Episcopalian."
Azzad Asset Management declined to be interviewed for this story.
Estimates put the Islamic banking industry in the hundreds of billions of dollars. And while it's a small portion of the global finance industry, the Islamic sector is growing — by more than 30 percent in 2007.
A board of Shariah scholars determines which investments are compliant.
As Shariah law forbids charging interest, Shariah-compliant mortgages, like those offered by Devon Bank in Chicago and Guidance Residential, which operates in 23 states, are attracting pious Muslim buyers.
In one type of Shariah-compliant mortgage the bank buys a home and then either leases or re-sells it to the purchaser in monthly installments — interest-free, but at a higher price.
The bank's profit and the buyer's payments wind up being similiar to what they would be if the bank charged interest, said Ibrahim Warde, adjunct professor of international business at Tufts University.
"In the Koran there's a verse saying that making money from trade is good and making money from money lending is not, so basically whenever transactions are structured, they are sales transactions," he said.
Rachel Ehrenfeld, director of the American Center for Democracy, said that whether they're sound investments or not, conforming to Shariah shouldn't be American policy.
"We should not allow Islamic banking to continue and definitely not to flourish in this country," Ehrenfeld said.
"Muslims in the United States who want to conduct their business according to Islamic banks can do it with mortgages ... but to allow Islamic banking as a rule to operate — it's our money and we shouldn't be abiding by Islamic laws. Period. I don’t want to have any kind of association with any laws that dictate wife-beating in Saudi Arabia," she said.
Ehrenfeld said that the practice of "zakat" — giving alms to the poor — while innocent on the surface can in fact be used to promote terrorism and the spread of radical Islam.
She said that that the money the Shariah banks give to charities goes to build madrassas and mosques and spread radical Islam and anti-American sentiment.
"They also send money to Hamas. They also send money to Al Qaeda," she said. "This is a huge Pandora's box. We don't know what the hell is going on with their charities ... even if nobody will say openly that they're giving money to terrorism."
In June, the Kuwait-based charity Revivial of Islamic Heritage Society was designated by the U.S. Treasury for providing money and material support to Al Qaeda, its affilitates and to acts of terrorism.
"It is illegal for anyone in the United States to provide funds to charities that have been designated by the Treasury Department as supporters of terrorism under Executive Order 13224. If the Treasury Department has information that anyone in the United States were engaged in such activity, we would take appropriate action," said Treasury spokesman Andrew DeSouza.
Warde, however, said that there is no reason to think that all Islamic financial institutions have terrorist ties.
"There are some people who equate all things Islamic to terrorism," he said. "Some people look at the world that way. We've seen that during the presidential campaign with the insinuations that Obama was a Muslim, therefore a terrorist. I don't think we should give much credence to that."
He said critics are not being fair to the system.
"People who don't like Islam and who are afraid of Islam would obviously not like the notion of Islamic finance. I'm not sure that those who hold this view necessarily know much about it, but it's some kind of visceral view that some people hold," Warde said.