Most Americans don't realize that some very popular American companies are owned by an Islamic bank, which chooses its investments and adjusts its business practices according to Muslim religious law.
The companies include a New York-based discount clothing landmark, a group of southern fried chicken fast food restaurants, and the busy Caribou Coffee shop chain.
Business is good at Caribou. Nationwide, revenue has gone up 30% each of the past two years. CEO Michael Coles cites numerous changes he's made, including the way the shops look and how employees are paid. He also gives credit to Caribou's owner. "They have allowed the company to take some risks," he says. "They've done the best thing that financial partners can do in a business, which is try to be helpful but not get in the way."
The owner is First Islamic Bank of Bahrain. The bank bought controlling interest of Caribou in 2000, ultimately spending about $85 million. While foreign ownership of U.S. businesses is nothing new, the bank is paving some new ground by choosing its investments according to Islamic religious law, known as Sharia. That means staying away from companies offering certain products or services "like alcohol, gambling, pornography?which are basically not in accordance with Islamic principles," says Mohammed Chowdhury, director of the bank's financial management group.
Mr. Chowdhury says that, because of religious law, the bank also avoids charging or paying interest. So, instead of operating like a traditional bank, First Islamic collects money for long-term investments and follows some creative methods to get a profitable return. "We use a leasing type structure," he explains. "The company we acquire will sell its buildings and machinery to the bank [and] the bank will lease those assets back to the company. So, instead of interest payments, you have rental payments."
That's how the bank obtained the Loehmann's Department store and Church's Chicken chains, spending hundreds of millions of dollars in the process. In total, First Islamic has invested about $8 billion worldwide, more than half of it in the United States through its Atlanta subsidiary, Crescent Capital.
Crescent Capital Executive Director Charley Ogburn says the hope is that, years down the road, the companies can be sold at a hefty profit. That's quite different from a traditional system, under which investors can make money almost immediately through interest and dividends. "For us, we now own the asset and have to worry about it for a period of years," he says. "That's a fundamental shift in the thinking of somebody in the deal marketplace." Crescent Capital tells investors that it seeks companies that will grow, but also warns them that the deals are high-risk.
Risky or not, more and more companies are launching similar efforts and drawing Muslim investors. Another major Middle Eastern bank established a U.S. subsidiary last year, and a third plans to open one later this year.
According to Harvard Business professor Sam Hayes, increasing numbers of Western banks are creating Islamic investing programs. "Most of the major money-center banks in the U.S. and Europe have put their toe into this market by now," he says. Mr. Hayes co-authored a study of Islamic investing and has looked into how much money is in these kinds of programs worldwide. "Nobody to my knowledge has been able to unlock the accounting and the data sources that would be able to show today just how large it is," he says. "But I would estimate that it's more than $200 billion at this point."
Professor Hayes says wealth flowed into the Middle East following oil price hikes in the 1970s, and the increasingly global economy encouraged investing that money outside the Arab World. Islamic investments in the United States have grown steadily in recent years?except during what the professor calls "a blip" after the September 11 terrorist attacks.
"The investors from the Gulf concluded that they might be subject to some kind of freezing of investment accounts or spotlights being turned on their personal affairs that they would find onerous," he explains. "So they made the unilateral decision to pull their money -- or some of it - out, and put it in safe havens in Switzerland." Mr. Hayes says the money quickly returned.