This might be a good time for investors to pick up a copy of the Holy Quran. Stocks and other investments that adhere to shariah, or Islamic law—though hardly unscathed—have fared better than the broader market - thanks largely to rules that forbid investing in collateralized debt obligations and other toxic assets that have caused the carnage in conventional financial circles.
A big part of the appeal of Islamic finance is its simplicity. Speculation is taboo under shariah, and there's a ban on assessing interest because the Prophet Mohammed s.a.w said debts must be repaid in the amount that was loaned. Money proffered must be backed by collateral, and if financial instruments are traded, they generally have to sell for face value, which deters banks from repackaging debt.
That doesn't mean Islamic finance won't suffer in an economic downturn. Because they must hold collateral, Islamic financial institutions tend to have more real estate assets than Western banks do. So far, shariah-compliant banks—mostly in the Gulf region—haven't suffered because housing prices there have held up relatively well. But if those markets were to dive, there could be trouble.
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