Unlocking Hidden Wealth

11 October 2004


Islamic Hedge Fund Starts Operations

While the hedge fund world’s profits soared, the devout Muslims of the world had to watch the infidels profit while they made do with more paltry gains. Now that the hedge funds have lost some of their allure, The Shariah Equity Opportunity Fund has started trading. It has taken Connecticut-based fund managers Eric Meyer three years and $2 million to set up. However, if successful, Mr. Meyer estimates that there is $300 billion waiting to be managed.

Under shariah law, investment is not as freewheeling as it is under Wall Street’s customary terms. One problem is that charging interest is suspect if not down right sinful depending on the terms and on which religious scholar is taken as the authority. For example, Malaysia’s “Islamic” sovereign bonds issued in 2002 were deemed “unIslamic” by some of the more conservative religious scholars in the Persian Gulf region.

This is not the sort of problem that can be fixed by government action. Indeed, it cannot even be fixed by religious action in the short-to-medium term. Islam lacks a clearly established hierarchy. While there are mullahs and ayatollahs, there is no way that a fatwa from one scholar can be undone by a fatwa of another. At very best, a long period of discussion and reflection may result in a code of finance law that most (but never all) Muslims could accept.

However, an even greater challenge to Mr. Meyer and potential imitators is the hostility of some governments in the Islamic world to the very idea of Islamic investment. At first glance, this seems inconsistent, bordering on irrational. However, in many of these countries, the government practices a secular authoritarianism. Islamic finance is usually seen as the tool of more sectarian political actors, and thus, is a threat to the established regime. Libya and Syria exemplify this situation.

Islam does permit such things as lease purchase financing ( ijarah wa iqtina), trust finance ( mudaraba and equity participation ( musharaka
© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

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