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World Politics Review | As Oil Revenues Boom, Islamic Banking Goes Global August 24, 2007

Posted by islamicfinanceaffairs in Uncategorized.
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World Politics Review | As Oil Revenues Boom, Islamic Banking Goes Global

Caribou Coffee,
the second-largest U.S. java seller, seems at first blush like a fairly
ordinary American company. The chain was founded in 1992 in the small
town of Edina, Minn., the brainchild of idealistic newlyweds, and has
since expanded to over 400 coffeehouses in 18 states. Caribou’s menu is
muffins and lattes — not an Arabic coffee in sight. It may come as a
surprise, then, to know that Caribou Coffee is “Shariah compliant,” one
of the largest American businesses to run its operations in accordance
with Islamic law.

Caribou isn’t alone. After decades on the economic backburner, flush
oil revenues are giving Middle Eastern companies and investors new
prominence on the global financial stage. As a result, rising demand
for Islamic-friendly investments is forcing multinational corporations
— and not just in Muslim-majority countries — to consider what the
Quran has to say about their business practices. The boom carries over
to the financial sector, where firms offering Shariah-compliant
products or consulting services to companies that seek compliance have
themselves seen explosive growth rates.


Caribou went Shariah-compliant in 2000 after the Bahrain-based
investment bank Arcapita purchased a controlling stake in the company.
In terms of day-to-day operations, the Shariah-compliance designation
primarily affects how the firm manages its finances. Under Islamic law,
or Shariah, it is forbidden either to pay or receive interest. Interest
— the fee charged for the chance to borrow money — is one of the
central principles of modern economics, but Shariah-compliant companies
structure their financial operations in a manner that bypasses interest
altogether.

Jawad Ali, a partner at the law firm King & Spalding who
specializes in helping companies adjust their financial operations to
attain Shariah-compliance, recently explained to me in an interview
how this process works. In many cases, Ali says, firms and would-be
lenders structure Shariah-compliant deals around the principle of
leasing. Suppose a company wants to buy a property. Rather than
granting a loan for the price of the property, a bank can instead buy
the property and rent it to the firm. The arrangement is acceptable
under Islamic law, Ali explains, because the bank has taken the risk of
owning the property, and no interest is charged in the process of the
transaction. Lease arrangements of this sort represent one of the most
common types of Shariah-compliant contracts, but there are many others.
The Web site Islamic-finance.com has a useful primer that takes a more thorough look at the technical workings of different types of Islam-compliant contracts.

The financial nitty-gritty aside, though, the simple fact of Islamic
banking’s rapid growth within the financial services sector stands out
as striking. The multinational accounting firm KPMG estimates in a prospectus
(pdf file) that the global Islamic finance sector encompasses around
270 banks, $265 billion in assets, and over $400 billion in
investments. Moreover, KPMG says the sector is growing at a clip of
roughly 15 percent per year, and could serve 40 to 50 percent of the
world’s Muslim population within a decade. Ali, for his part, says King
& Spalding’s Shariah-compliance services have seen even faster
growth, expanding at 35 to 40 percent per year. [read on]

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