As credit markets have imploded, triggering a global economic crisis, Islamically correct investors have seen a change of fortune: The conservative principles this small group of devout Muslims clung to during the economic heyday has insulated them from the worst of the past year's suffering.

Bay Area residents who bought homes through an Islamically compliant lender in San Jose, the Ameen Housing Cooperative, don't have to worry whether their lender will work with them if they lose their jobs. Islamic lenders are required to work in good faith with distressed borrowers to figure out ways to make payments manageable - and co-op leaders say they will.

Islamic investing

Warde and other Islamic finance experts and investors caution that the crisis doesn't mean that Islamic finance is a better model than Western capitalism. They say Islamic finance, a system of ethical finance supported on an institutional level, provides unique insight into an economic meltdown created in part by financial practices forbidden by strict observance of Islam. 

Renouncing interest is the high-profile element of Islamic finance that relates to the current economic crisis. For Islamically correct investors, that means there are limits to how much debt a company can have or how much profit it can derive from interest-based investments. That criterion eliminated the possibility of holding stocks in financial services companies, like Citigroup or Washington Mutual, whose stocks lost 86 percent or all of their value last year, respectively.

Avoiding crisis' practices

Islamic finance also prohibits selling assets you don't own, selling someone's debt and engaging in high-risk investments. Thus, there was no participation in practices that have been blamed for Wall Street's meltdown: complex derivatives trading, short-selling and the $30 trillion market in credit default swaps. 

The Islamic principles playing out across the larger stock market are also playing out in smaller, if no less significant ways for ordinary investors.

Housing cooperatives

In San Jose, the Ameen Housing Cooperative has helped roughly 30 members buy homes without mortgages. Yet the recession has had "no impact whatsoever" on the co-op, according to board member Humayun Sohel. The reasons have much to do with an Islamic requirement that the lender and the borrower share the risks and rewards of a loan. 

When the deed of transfer is finally given to the borrower, Ameen members get a slice of the home's increased value - or take a loss if the price has gone down. With the median home price dropping as much as 40 percent in Santa Clara County and many worrying about their jobs, Ameen remains confident. 

Borrower loses equity

As long as the borrower is earnest, Sohel said, Ameen will work to reduce payments, though that may mean a borrower doesn't gain equity or possibly loses some. If someone cannot pay at all for an extended time, Ameen will rent the home instead of selling it and locking in the loss, which is what banks do during foreclosures. 

"Not only was I keeping myself spiritually clean by not engaging in that in my life, but financially, it was helping me," Aleem said. "You cannot ever truly go wrong by practicing the principles of your faith." 

Islamic finances 

The second annual Islamic Finance Symposium, "Islamic Finance: Resilience in a Time of Financial Crisis," is a daylong conference on Feb. 28 at UC Berkeley's Boalt Hall School of Law. To register, go to: links.sfgate.com/ZGBS.

For more information on the Dow Jones Islamic Market Indexes, go to: links.sfgate.com/ZGBT. 

For more information on the Ameen Housing Cooperative, go to: www.ameenhousing.com. 

E-mail Matthai Kuruvila at [email protected].

Source: The San Francisco Chronicle