Opportunities in Islamic Finance

For professional casualties of the mortgage debacle, the expanding market for Islamic-style structured products may provide a new home.

Burgeoning Middle East wealth is stoking an upsurge in demand for financing and investment vehicles constructed in line with Shariah, the body of law based on the Quran. In response, global banks are building out Islamic finance desks while established money managers are linking up with a small community of financially savvy Muslim scholars to design portfolios that will appeal to Muslim investors in the Middle East and elsewhere.

These alliances have spawned an array of instruments involving equities, commodities, currencies, and even bond, money-market and mortgage alternatives, all structured to satisfy the Quran's prohibition on paying or receiving interest or selling borrowed or notional assets.

The vast majority of Islamic finance jobs are physically located either in Arab countries - close to the client base - or in London. However, a U.S.-based firm is emerging as a key player in bringing the Shariah-compliant concept to hedge funds - a vehicle once viewed as all but incompatible with the Quran's strictures.

Shariah Capital in New Canaan, Conn., has built what it calls "the infrastructure for a Shariah compliant fund of hedge funds." So far the company has convinced at least two U.S.-based asset managers to adopt its model to create modified versions of their existing fund products for sale to Middle East investors. It's also partnered with Barclays Capital to market a variety of hedge funds employing equity long-short and market-neutral strategies to institutions that invest according to Islamic law.

Chief Shariah Officer on Staff

Eric Meyer, the investment manager who founded Shariah Capital, reportedly plowed $5 million of his personal funds into developing the Islamic hedge fund infrastructure. It's a proprietary cookbook of carefully worded contracts and techniques that sidestep un-Islamic financial tools like debt and short-selling, and keep funds out of forbidden niches from pornography to pork chops, all the while adhering to secular regulatory rules.

Shariah Capital employs a prominent U.S.-based Islamic finance scholar full-time as "Chief Shariah Officer." In October the company hosted its third Islamic Finance in North America Conference, in New York.

GRT Capital Partners, a Boston firm led by former Fidelity mutual fund managers, has worked on Shariah-compliant hedge funds with Shariah Capital since 2005. In June, New York-based William D. Witter Inc. - headed by a grandson of the original Dean Witter - signed on to launch Shariah-compliant versions of its long-short equity hedge fund and a long-only mutual fund. A real estate fund is also planned.

Dow Jones compiles a family of Islamic stock-market indexes. Saturna Capital Corp., in Bellingham, Wash., and Azzad Asset Management, in Falls Church, Va., manage Islamic mutual funds. The $333 million Amana Income Fund, run by Saturna, is among this year's best-performing equity income funds. U.S. institutions that offer Islamic financing for consumers and small businesses include American Finance House LARIBA in Pasadena, Calif., and its affiliate, the Bank of Whittier; Guidance Financial Group in Reston, Va., and Devon Bank in Chicago.

Positions Currently Advertised

Despite all this activity in the U.S., the market for Islamic finance products remains heavily concentrated in the Middle East and Southeast Asia. Thus, large-scale institutional attention is directed toward those regions.

A recent keyword search of eFC job postings found 20 that include the words "Shariah" or "Islamic." Twelve were based in the Middle East (Dubai, Bahrain, Saudi Arabia, and Kuwait), five were in London, and one each in Hong Kong, Malaysia and Paris.

For Middle East sales coverage, top-tier banks like UBS, HSBC and Deutsche are increasingly seeking candidates with knowledge of Shariah-compliant products as well as a client base in the region, says Jonathan Drechsler, a consultant in the London office of the international search firm Huxley Associates. In the past year especially, bank desks that sell conventional financial products to Mideast institutions are adding Islamic finance specialists to cover clients who require them. An understanding of fixed-income products helps, since Islamic finance often involves interest-free alternatives to conventional fixed-income.

Drechsler says an industry-wide trend toward integrating Islamic and conventional products within Middle East desks creates opportunities for conventional sales professionals to learn Islamic finance. In addition, he says some have made the transition by obtaining the Islamic Finance Qualification, or IFQ. A formal education and certification program, the IFQ was launched in October 2006 by the Securities & Investment Institute, a U.K. professional body, and Ecole Supérieure des Affaires, a Lebanese MBA school.

The IFQ is especially relevant for structuring and other technical roles, Drechsler says.