Islam, Shari'ah Law, and Cultural Capitalism

Written by Gavin Chait

"If I was a non-Muslim travelling by plane I would always ask for the halaal meal," says Saliegh Salaam.  "Not only will the meal be prepared to a significantly higher standard than other airline food, but ..." he pauses dramatically, "you get fed first."  And he laughs uproariously and contagiously.

Salaam is the head of equities at Futuregrowth, a South African-based asset management firm.  The Albaraka Equity Fund, of which he is the portfolio manager, was started in June 1992 and is South Africa's first, and one of the world's oldest, Shari'ah compliant funds.

We are at lunch at a Jimmy's Killer Prawns, celebrating the fund's recently passing the R 1 billion (US$ 140 million) benchmark of equities under management.  It is also Jimmy's first fully halaal restaurant and the Muslim brokers and fund managers at the lunch are celebrating their community's success and invigorated self-confidence.

There are three criteria for Shari'ah compliant investments:  i) qualitative - the company must not have any association with alcohol, gambling or non-halaal foodstuffs; ii) quantitative - the company must not earn its income from interest-bearing instruments or have a debt:equity ratio greater than 30%; iii) the investment case - despite these rules the company must still offer stable and good returns.

"Our intention is to be in the top 25% of equity funds on the Johannesburg main bourse," says Salaam.

The limitations are onerous: no retailers (who sell alcohol and issue credit), no banks (who issue credit), no property (who buy on credit) and so on.  That leaves industrials (like mines and industrial processing), telecommunications, oil and gas, health care and consumer goods.  Still a lively investment portfolio.

So how is Albaraka doing?  On a five-year average they perform rather well, at an average of 31.5% per annum - this relative to the Johannesburg Stock Exchange all-share index return of 23.7% for the same period.  Remember, this is an emerging market.  You have to factor in that the Rand fell by 12 - 18% in the past year, so your Dollar-denominated returns would be about 15%.  This is still quite good if you're used to the low rates of returns in developed countries.

How does this compare to less constrained funds?  Well, my Alan Gray Equities returned 38 - 42% over the same period and so the Albaraka fund is well-placed.

Now, the question you should be asking is this: how many non-Muslims invest in Albaraka.  Very few.  And this is a pity.

"Our fund is a low-beta fund," says Salaam.  "This means that, while we don't aim to outperform the other funds by taking on high-risk stocks, it also means that we don't fluctuate wildly when conditions change."

In other words, the fund is suitable for anyone looking for higher yields than they get by keeping their money in a bank account but still wants a safe place to keep it.  People who have cashed in their pensions are ideal clients for these types of funds.

In South Africa there are now three Shari'ah compliant funds and dozens around the world.  They are relatively new instruments but prove something exciting about equity markets: capitalism is a bicycle.  Whether you're Muslim, Socialist or a born-again environmentalist, the capitalist system will work the same for you.  Like a bicycle, it is just a tool for interacting with your environment.  If you want to go faster, you can.  Slower, you can.  Choose a different route, you can.

As Albaraka proves, a Muslim can engage with capital markets dominated by Anglo-Saxon companies and still have their cultural and religious preferences respected.  More significantly, they prove that their community is engaged, outward looking and important.

R 1 billion is a great deal of liquid cash.  In the competitive equity markets Anglo-Saxon or Asian companies now have another source of capital.  They will have to comply with Muslim principles if they wish to attract these funds, but that is no different from needing to comply with environmental policy to attract European investments.

Muslim communities are no different from any other conservative grouping:  hardworking, disciplined and responsible.  They now have an attractive and successful alternative to the arrogant, angry and violent response to Western success epitomised by Osama bin Laden.  Shari'ah funds allow Muslims to engage but maintain their beliefs. 

Call it the dawn of Cultural Capitalism.

As Shari'ah funds grow in popularity, as Muslims around the world realise that they can engage with the capital markets on their own terms, non-Muslims too will invest.  In so doing we cross our cultural boundaries and explore new ways to do more than just co-exist; now we can co-invest.

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