Last month, two economists published a working paper suggesting an unusual way to diversify one’s investment portfolio: buy something called sukuk, or bonds that conform to the demands of Islam.

The Koran, most Islamic scholars agree, forbids the charging of interest, so traditional bonds are off-limits to devout Muslims. But sukuk generate a steady income from actual, tangible assets, like a rented piece of land.

Sukuk are also, it turns out, more stable than traditional sovereign bonds. While the sample size was small, the study by Selim Cakir, of the International Monetary Fund, and Faezeh Raei, a graduate student at the University of Texas, suggested that a portfolio that mixed sukuk with traditional bonds would do a better job than an all-bond portfolio of hedging against unpredictable seesaws in the financial markets.

One of the fastest growing areas of finance today is based on the 1,400-year-old strictures of shariah, or Islamic law. Sukuk are part of the field of “Islamic finance,” which – while it emerged in its modern incarnation in the late 1970s – has in recent years been attracting money at a precipitously quick clip. Sukuk issuance in 2007 is on pace to at least double last year’s total.

And while exact figures are impossible to come by, industry analysts estimate that as much as $500 billion is now invested worldwide under Islamic guidelines. Most of the world’s leading banks and investment companies, including Chase Manhattan, Goldman Sachs, Deutsche Bank, and HSBC have started offering financial tools and services that meet the Koran’s requirements.

Now the industry is broadening its reach, from oil-rich Middle Eastern royalty to the middle class, raising the prospect that the impact of Islamic finance could be felt well outside the Muslim faith. More than 60 percent of the money in the investment firm Saturna Capital’s shariah-compliant mutual funds comes from non-Muslims, attracted by the funds’ industry-leading returns.

Last year a Texas-based oil and gas company raised $165.67 million by issuing sukuk, many of which were snatched up by American hedge funds. And regional banks in parts of the United States with large Muslim populations have started offering a growing range of innovative financial products – Islamic home and business financing instruments, Islamic savings accounts – that they believe could attract non-Muslim investors as well.

“Islamic finance is just finance – it’s conservative, people-oriented finance,” says Shaykh Yusuf Talal DeLorenzo, a Virginia-based shariah scholar who consults for many of the banks and firms that have set up Islamic financial instruments. At a time of volatile markets, he says, “I think a lot of people are going to start taking a look at what we’re doing.”

In the United States, the growth of Islamic finance fits into a larger trend of so-called “ethical investing,” where funds and financial instruments are tailored to accord with ethical principles, whether it’s the tenets of the Catholic church or those of the environmental movement.

Shariah-compliant mutual funds and asset management companies don’t invest in companies that make money from anything Islam considers haram, or forbidden: alcohol, tobacco, gambling, pornography, pork, or interest.(MORE)


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