Is Shariah Compliant Finance a Secret Weapon?

by Kevin D. Freeman on February 29, 2012

Shariah Compliant Funds are among the fastest growing pools of wealth on the planet representing about $1 trillion, not including major Sovereign Wealth Funds that loosely conform to Shariah principles. Even Goldman Sachs has joined the party, offering a $2.2 billion Shariah Compliant bond issue announced last September. The problem is that Iran is the world’s leader in Shariah Compliant investing, representing more than one-third of all Shariah assets. This is a concern in light of the economic war underway between Iran and the West. The second concern is that Shariah funds require mandatory payments that can be problematic.

According to a Joy Brighton article last week in The Washington Examiner:

“It is not unrealistic that taxes and fees paid into this (Iranian) Shariah market will fund anti-Western activity.

Wading thru poorly disclosed Shariah requirements that Goldman Sachs must fulfill to receive a “Shariah compliant blessing” reveals an opaque financial system, with a kind of hidden taxation scheme.

In order to receive the necessary fatwa, a bank must pay and hire Shariah-committed imams as bank board members to help oversee the business, and they are often also made to pay a tax to Shariah governments like Saudi Arabia.

In addition, they must invest in Middle East economies; and they must not invest in “Western” business ventures that threaten the supremacy or undermine the defense or moral sanctity of Islamic-majority countries. (Other requirements such as the “ban” on interest are not relevant here.)”

The other serious problem is that there are no set standards of what is and what isn’t Shariah Compliant. Rather, this is the province of Shariah scholars, some of whom may have more than religious purity in mind. From a Reuter’s article:

Islamic finance, based on principles such as bans on interest and pure monetary speculation, has grown rapidly over the last several years because it draws on pools of investment money in the oil-rich Gulf and Asia that have been relatively untouched by the global financial crisis.

The industry’s global assets are expected to rise 33 percent from 2010 levels to $1.1 trillion by the end of 2012, according to consultants Ernst & Young. Islamic finance will remain far smaller than conventional finance, with its tens of trillions of dollars, but the gap may continue narrowing; Ernst & Young expects Islamic banking in the Middle East and North Africa to expand over the next five years at a compound annual rate of 20 percent, versus less than 9 percent for conventional banks.

Sharia scholars, with expertise in both religious and conventional law, are key to this growth. Investors will not buy instruments without believing they are religiously acceptable, so most wholly Islamic financial firms have their own board of sharia scholars which certifies products and monitors the firm’s business. “Independent” sharia boards also exist, offering their services to financial firms for a price.

There are over 400 sharia scholars worldwide but only around 15 to 20 prominent and experienced ones, which creates demand for scholars to sit on multiple boards. The top 20 scholars hold 14 to 85 positions each, occupying a total of around 620 board positions or 55 percent of the industry, data compiled by investment research firm Funds@Work show.

The shortage of scholars is a capacity constraint for the industry, said Sheikh Muddassir Siddiqui, a sharia scholar and Harvard-trained attorney at law firm SNR Denton. He is a member of the sharia standards committee of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), a Bahrain-based body setting standards for the industry.

“If you engage a lawyer or a doctor you would naturally want someone with a big name and reputable,” said Siddiqui.

“But unlike a rock star who can entertain thousands of people at once, a sharia scholar’s role should be viewed more like a doctor’s — it is natural to ask how many surgeries a doctor can perform in one day. It is a question of capacity.”

The capacity problem is worsened by the fact there is no single, universally accepted interpretation of religious principles. So firms seek out the scholars who they think will carry the most weight with investors; in effect, a scholar’s reputation becomes a currency used in completing a deal.

“The reason the Islamic finance industry is still emerging is that governance standards are not as well established as in other industries,” said Murat Ünal, CEO of Funds@Work.

“It’s like a social network. People and their relationships play a very important role. If you have a prominent scholar on board, this increases trust and makes up for the lack of governance standards. Institutions sell their products via the reputation of the scholars, so you better make sure you have accepted scholars on board.”

And this leads to sky-high fees paid to the top scholars. A senior banker at an Islamic lender said some scholars could be paid $1,000 to $1,500 per hour of consultation — in addition to an annual bonus of between $10,000 and $20,000 per board seat.

So what happens if one of the Shariah scholars, operating without uniform standards, decides to direct assets in a manner to achieve “jihad with money?”  We have already shown that Shariah Compliant Finance approved a form of naked short selling just as the stock market was peaking in 2007 (covered in a Wall Street Journal article). Some of the many concerns can be seen here:

The bottom line is that Shariah assets are large and growing rapidly. They are connected with the biggest and most influential financial firms on the planet. And, some of the scholars may have jihadist intentions. Those who invest may never know that their money is being used as a Secret Weapon to destroy the West. It’s all very nebulous.

To learn more about Secret Weapons, including Shariah Compliant Finance, check out the book Secret Weapon (

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