Newark, April 16 (The Star-Ledger)--Financial planning can be tricky business for devout Muslims living in the United States. Tahir Zafar should know.

Two years ago, the 42-year-old Pakistani businessman discovered a newfound faith in God--and with it, just how difficult it can be to re-arrange one's financial affairs in accordance with Islamic law.

Consider the simple act of taking out a bank loan to buy a home or a car. Banks, by their very nature, charge interest--a taboo in the Islamic faith as damning as, say, adultery or eating pork. Doing business, then, with a bank or a money lender or a credit-card company is forbidden for practicing Muslims.

Zafar was leveraged to the hilt. He had all the above: the big, fat mortgage; the car loan; the credit cards; the checking accounts; stocks he bought on margin; even options, which are also prohibited, because Islam bans all types of speculative investments.

And to make matters worse--at least from a theological point of view--Zafar had earned his living for nearly 20 years as a banker arranging debt financing for private companies in eastern Europe and Southeast Asia.

In short, Zafar's soul was damned from just about every financial angle for doing what amounted to the devil's work, according to Islamic stricture. At least that's how he felt as he embarked on a holy pilgrimage to Mecca, Saudi Arabia, two years ago. The ritual pilgrimage to holy sites in Saudi Arabia is meant to purify the soul and in effect wipe your slate clean from any past transgressions and sins. There, in the searing midday heat, Zafar, clad in two-piece seamless white cloth--the traditional garb worn by worshippers in Mecca--had a spiritual epiphany and decided to clean up his financial act.

His solution: Get rid of it all.

Such thinking is a far cry from traditional Wall Street wisdom, which historically has had little room for religious vagaries. But Islamic investors, like Zafar, looking for alternatives to conventional Western financial services, are starting to emerge as a serious and growing niche market.

And the investment community is answering with alternatives. The demographic potential of the sector, after all, is huge.

Islam, with 1 billion adherents, is the world's second-largest religion after Christianity. And Muslims worldwide have plenty of money to invest--between $80 billion to $150 billion--a figure that's growing as much as 15% a year, according to A. Rushdi Siddiqui, director of the Dow Jones Islamic Market Index.

Unofficial estimates peg the number of Muslims living in the United States between 6 million and 10 million, with the average per-capita income ranging between $38,000 and $44,000. "It's basically a niche market whose needs are not being served," Siddiqui said.

At least until now. In the past year, a number of seminars, courses, and Internet sites have materialized devoted to Islamic investing in the United States. Last month, a new Islamic finance website, www.islamiq.com, went live with hopes of becoming the No. 1 Internet portal in the Muslim financial world. And in March, Dow Jones University, a division of Princeton-based Dow Jones & Co., which publishes The Wall Street Journal, began offering an interactive online course titled "Principles of Islamic Investing." Nearly 100 people registered for the eight-week course.

Siddiqui, one of four course professors, noted that Dow Jones University has offered eight interactive courses since opening its cyberdoors a year ago, and not a single one generated the same degree of global media attention as the Islamic investing course.

"This sends a message to people who recognize and respect what Dow Jones is about that the world of Islamic finance is coming of age," he said. Coincidentally, the heightened interest in Islamic finance coincides with a general rise in the number of socially responsible funds, particularly religious funds.

In the U.S., money in funds tailored along religious or ethical lines has increased 82% since 1997, totaling about $2.6 trillion, or about 13% of all money invested in the United States, according to the Social Investment Forum. And in the past five years, the number of religious-based funds has risen from six to 34, according to the fund-tracking firm Morningstar Inc., reflecting growing investor demand for fund options that honor their religious faiths.

One of the reasons for the boom: Many of these funds have performed exceedingly well in recent years, according to Emily Hall, an editorial analyst with Morningstar.

For example, The Amana Growth Fund, one of two funds that caters to Muslim investors in the United States, had a 12-month return of 102.46%, said Hall.

"It has challenged the theory that you are automatically making a bad investment choice if you invest according to your values," said Hall.

Dow Jones, the creator of the venerable Dow Jones industrial average, the most widely quoted market indicator in the world, launched its Islamic Market Index last year. The index tracks 650 companies that meet strict Islamic investment criteria and provides a much-needed benchmark for fund sponsors to follow. Before the index was launched, there were 40 global Islamic funds worldwide. Today, there are 85.

"The money flows to wherever there is confidence," Siddiqui said. "For Islamic investing to really take off from where it was, [it] required an index established by a reputable index provider so people could measure their relative portfolios."

Creating the Islamic index was no small feat. The rigorous screening process that led to the actual creation of the Dow Jones Islamic Market Index took nearly four years, he said.

Companies that made the final cut had to pass a strict four-part financial screening process designed by four renowned Islamic religious scholars, known as a Sharia Board. The Sharia Board worked directly with Dow Jones, poring over tons of financial data and setting criteria. In order to pass religious muster, companies first had to pass a "primary business" test.

Like other social and religious forms of money management, Islamic investing forbids investments in tobacco, weapons, alcohol, gambling, or pornography. In addition, all financial-service firms, like banks, investment houses, credit-card companies, and lenders were excluded because of the Qur'an's strict admonition of usury--a ban widely accepted to include interest rates.

Companies that made it past the first screen then had to pass three financial ratio tests as well, Siddiqui said. Those ratios were as follows: A company's debt-to-asset ratio could not exceed 33%. So all companies that were highly leveraged were cut. A company's accounts receivable had to be less than 45% of its assets. A company's interest income had to be less than 5% of its total revenue. The final tally: 650 companies from 34 different countries, including heavyweights like Intel, Microsoft, and Cisco.

"The best way to describe the index is a low-debt, non-financial, social, and ethical index," Siddiqui said.

The ratios were established because no major company on earth has zero debt, zero interest income, and zero accounts receivable. "But we tried to have the companies come as close as possible to Islamic compliance," he said.

Muslim investors, however, must "purify" any earnings they derive from these companies because they are not totally free and clear of "bad money," meaning debt or interest income, Siddiqui said.

"The investor must calculate the bad income, and he or she must give it to charity without a tax write-off," he noted.

Siddiqui noted that the financial parameters set by Dow Jones' Islamic Sharia Board are non-negotiable, and a company can lose its place in the index for slipping outside any of the prescribed ratios. Biotechnology giant Biogen Inc. and PepsiCo. found that out in February. Both companies are highly regarded by Wall Street analysts, and until February both companies were on the Dow Jones Islamic Market Index.

Both, however, got booted for failing to live up to the key Islamic financial ratios set forth by the Islamic Sharia Board. Biogen's non-operating interest income for the quarter came in at 5.37%, instead of the mandated 5%. And Pepsi exceeded the 33% debt-ratio level by a smidgen, coming in at 35%.

"Unfortunately, even good companies like that cannot be in it," Siddiqui said. "At the next review, if the numbers improve, they would be back in." The companies are reviewed every three months, and, on average, the index has a 2.63% turnover rate because of companies failing one or more of the financial ratios. Still, strict as the criteria may seem, even conventional money managers think the ratios are financially solid.

"We did a very close examination of the underlying financial criteria and found it to be very sound," said Jordan Kimmel, president of Randolph-based Magnet Investment Group, a division of First Montauk and a Dow Jones Islamic Market Index licensee. Magnet is planning to launch an Islamic hedge fund for off-shore private investors in the coming months, using the Islamic index as a benchmark.

Already, 16 firms have licensed the index so they can fashion their own funds, including two that will be marketed here in the United States, Siddiqui said. And while two may not sound like a lot, it will effectively double the number of Islamic mutual funds being offered in the United States.

For years, there have been only two other funds in this country that cater to Muslims: Saturna Capital's four-year-old Amana Growth and 14-year-old Amana Income funds. The new entrants include Zad Asset Management, a McLean, Va.-based private money manager, which hopes to offer a partially managed fund in three to six months; and Allied Asset Advisors, a Burr Ridge, Ill.-based subsidiary of the North American Islamic Trust, which plans to offer its own fund linked to the Dow Jones Islamic Market Index as well. Siddiqui expects more fund sponsors to step up to the plate in the near future.

"This index was what was needed to open the flood gates," Siddiqui said. "Suddenly, you've got Dow Jones involved, telling this emerging niche market that we have recognized you, and we're doing what we can to service you."

Zafar, meanwhile, is doing his part. In his quest to cleanse his soul and purge his portfolio of all things un-Islamic, he was forced to make radical, life-altering decisions. Shortly after completing his pilgrimage to Mecca in April 1998 and settling back down in his West Windsor home, he shut down his debt-financing company for good. He closed out all his options positions. He stopped borrowing on margin. He cut up his credit cards. And he paid off the mortgage on his Princeton Oaks home and got rid of his car loan.

Radical, yes. But for a devout Muslim intent on taking his cues from God, rather than Goldman Sachs, it was mandatory, he said.

He now runs Noor Capital Management, LLC, in Princeton, designed to help other practicing Muslims manage and invest their money in accordance with Islamic law.

"It took a lot of soul-searching," said Zafar. "But if you really believe in something so strongly, it may look from the surface like a losing proposition, but mentally and spiritually, I know I was doing the right thing. I was so motivated, the profit and losses become secondary.

"I have a lot of satisfaction. That is my reward."

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