Sunday, December 19, 2004

Islamic Investing

Consistently one of the most popular pages on FinanceProfessor.com is the Islamic Finance page. One reason I beleive is that so few people understand what Islamic Finance is.

From the executive summary on FinanceProfessor Islamic Finance page:
"Islamic Finance is based on interpretations from the Qua ran. Its two central tenants are no interest can be earned on loans and socially responsible investing. The key difference from a financial perspective is the no-interest rule since the Islamic socially responsible investing paradigm is not much different than what other religions do."

Islamic finance, and the majority of all socially responsible investing (SRI), is different from "regular investing" that ignores social factors. SRI is based on the premise that by investng responsibly, we can improve the world. SRI has taken on many aspects: economic, environmental, social, and even whether the firm encourages gambling, drugs, or other so-called vices.

Many of the differences in Islamic Finance (especially Islamic banking) revolve around the no interest (no-riba) principle. For example, Islamic banks must take equity positions in homes rather than taking a traditional mortgage. Others examples include profit sharing plans, leasing, and repurchase plans. These allow the financial institution to make money while satisfying the no-interest principle.

While still a relatively small percentage of the overall financial market, Islamic Finance is a fascinating, important, and often overlooked area. Moreover, its importance will only increase as nations with large Islamic populations play a increasing role in world markets.

Therefore, I was quite excited when I received a link to AIF Investor Services. AIF is designed to help make Islamic Investment easier by not only explaining what Islamic Finance is, but also by rating firms (only a few at the present) on how well they abide by Islamic rules.

While making recommendations on for-profit firms is well beyond the scope of this blog, I can say I learned several things by reading their site and especially will recommend the FAQ page on Islamic Investing. It is good!

1 comment:

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