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Islamic Principles Help Steer Muslim-American Investors Through Economic Shoals


At a time when the American economy is buffeted by the aftershocks of a mortgage crisis involving loans at sub-prime rates to consumers with shaky credit, many Islamic investment funds are prospering. They avoid banks, mortgages, and interest-related transactions. And they are attracting non-Muslim investors.

Muslim Americans used to joke about what they called the cost of being a Muslim, because their religion restricts them from paying or earning interest on investments. Over the years, they developed their own organizations that found ways to achieve high yields while abiding by Islamic teachings, which require that investors share in profit and loss. One such organization, Amana Mutual Fund, was developed to provide investments that are consistent with Islamic principles.

Munem Salam is an investment adviser there. He says Amana initially was started by a group of Muslims as an investment club in 1984. The demand grew so quickly that they realized they could not operate as an investment club anymore.

With the help of experts in mutual funds, Muslim Americans established Amana – the first investment fund of its kind – in 1986. Eight years later, in 1994, they launched the Amana Growth Fund.

Salam says the Amana Income Fund is now worth more than $1 billion, and both funds are doing well. "For the (last) three-year and five-year periods, the Amana income fund is the number one fund in the country in the category of equity income, where there are about 1,100 companies."

Munem Salam notes that while Islamic funds may not invest in businesses that deal in pornography, gambling, alcoholic beverages, or interest-based finance, he says Amana's success proves there is no special cost of being a Muslim in America. To the contrary, he says, its return of 9 to 22 percent over the past five years has caught the eye of non-Muslim investors as well.

"There are two basic categories of non-Muslim Americans who are coming to our fund," Salam says. "The first category is ethically or socially-based, because if you look at all of the socially responsible investing funds or the ethically-based funds, we are outperforming them as well. And we are seeing a lot of demand from brokers that are buying our fund just because of our performance alone."

Salam says that at a time when thousands of Americans are losing their homes because they were allowed – or even enticed – to borrow more money than they could afford to repay, more Americans would welcome the Islamic way of financing a home.

Ajaz Khan, who heads the Ameen Housing Cooperative in California, explains it as a "partnership."

"There is no fixed interest rate; it does not matter if the house price goes down or up. At Ameen Housing it is shared by the homeowner and members of Ameen Housing."

A member buys shares in a cooperative that purchases many units of housing. Once the member has invested about one third of the cost of a particular house, the fund buys the house, and the member and member's family move in. They pay rent, part of which becomes a return on shareholders' investment, and part of which builds equity in the house until the loan is paid and the member gains full ownership.

Ajaz Khan says that although Islamic fund members make a larger down payment compared to most Americans, they usually own their homes within six years, rather than the 30 years of the most popular conventional mortgage.

Kahn says the partnership would not extend sub-prime loans to risky prospects, and thus not face an implosion if loans were not repaid. Nevertheless, he says Muslim investors are plenty concerned about the subprime crisis. That's because worried consumers cut their consumption of gasoline and retail goods – two portfolios in which Muslim investors have lot of stock.