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Financial engineering for ethical investors

Islamic law once forced Muslims to make do with poor investment returns. Now, complex Shariah-compliant structures are burgeoning to add value. We look at the market leaders.

Islamic finance moves into the mainstream

COMPETITION IS BEGINNING to shape the development of the Islamic financial sector. Customers are becoming more sophisticated and conventional western and Middle Eastern banks are setting up their own Shariah-compliant institutions in Islamic markets that had previously been dominated by a few institutions.

Historically Islamic investors were divided into those who placed their money in conventional products where they looked for the highest return and those who wanted to invest in Islamic institutions. This latter group paid little heed to rates of return and most of their investments went into murabaha [see article: "A glossary of contracts used in Islamic finance"] or commodity-linked products.

Today there is a new group of sophisticated investors who want both a good rate of return and the assurance that their money is being invested in a way that is compatible with their religious principles. As a result, Islamic institutions need to have the capability to manage a far wider variety of products, ranging from equities to trust funds. A further challenge to banks is that the boundaries of what is regarded as Islamically acceptable is expanding almost by the month as new approved products are developed.

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