Doing Business in Islamic Countries: The Impact of Faith-Based Practices on Markets

January 23 — With 1.3 billion people, a rich endowment of natural resources, and large pools of capital, Islamic nations are a significant piece of the global economy. The immense geographical scope of the Islamic world stretches from North Africa to the Middle East and Asia, and each region is scattered with diverse subcultures of varying religious and business practices that present many challenges and opportunities to global business leaders.

So reported Prof. Emeritus Samuel Hayes at Harvard Business School and Prof. Frank Vogel, Adjunct Professor of Law and Director of the Islamic Legal Studies Program at Harvard Law School, in the second installation of the HBS “Rising to the Challenge” series, “Doing Business in Islamic Nations.” [HBS community members can see the presentation on video.]

To illustrate the diversity found in the Islamic world, Prof. Hayes contrasted Qatar, a relatively small and wealthy country with a liberal government replica watches, with Yemen, a much larger and poorer country with a conservative government that sided with Iraq during the Gulf War. He drew distinctions between Turkey’s secular government, and Iran’s religious society. Moreover, Malaysia’s history of economic development and its relatively small population contrasts significantly with the world’s largest archipelago, Indonesia, which Prof. Hayes described as now “practically lawless.”

“Terrorism is a contravention of the central tenets of Islam,” continued Prof. Hayes. The principles of appropriate personal behavior inherent in the Muslim faith are in essence benign, and have a direct impact on how business should be conducted in the Islamic world // For example, partnership is often preferred to hierarchical structures, speculation is prohibited, and charging of interest is not allowed because it is seen as exploitative according to the teachings of Islam.

In many ways, these principles shape Islamic markets. For example, the prohibition of speculation forbids futures markets, currency hedging, or the representation of gambling companies in mutual funds. The prohibition of fixed, predetermined interest payments also prevents the establishment of primary or secondary debt markets.
Prof. Vogel explained how faithful Muslims follow a set of religious guidelines that cover the most personal aspects of ritual and family law to the most macro elements of international and constitutional law. The origins of these laws are in the texts of medieval Islamic scholars and the Koran. Though two main schools of Islamic thought exist, Sunni and Shi’i, Islamic Shar’ia law takes very diverse forms and is open to interpretation.

The most extensive application of Islamic Law occurs in Saudi Arabia, where laws are not written and legal precedent is not always followed. From a business perspective, banking and insurance suits are not enforced. Because of their speculative nature, damages for lost profits are often not awarded. And despite signed treaties to the contrary, Saudi Arabia has never enforced a non-Arab arbitration award or court judgment.

The literal wording of contracts, however, is upheld in Saudi courts. Therefore, foreign companies operating in Saudi Arabia must often resort to lengthy, literal contracts to mitigate the risk of legal uncertainties. Other states—Egypt, Algeria, and Morocco for example—adopt a semi-secular approach to business law in order to avoid hampering international commerce.

Estimates of the amount of capital invested in religiously permissible (“Halal”) assets vary between $200-$500 billion. There is a growing number of Islamic banks that offer exclusively Halal investments. Though debt and speculative instruments are prohibited by the teachings of Islam, the use of leases is permitted. Also, instead of debt, Islamic businesses often use “mark up” financings that, when analyzed, imply interest rates similar to those encountered in conventional markets. Still, overall returns on Halal investments lag in comparison to comparable returns generated elsewhere in global markets.

Both Profs. Vogel and Hayes have visited Islamic countries since the events of September 11. Their assessment of the safety in the countries for foreign businesspeople was noncommittal. Prof. Hayes counseled people of western origin to stay close to hotels and sponsors. Moreover, when conducting business in an Islamic setting, Prof. Hayes recommended avoiding the topic of the Palestinian-Israeli conflict. “There is a conviction in the Islamic world that [American policy] is tilted toward Israel and is to a large degree anti-Muslim,” he added.
Prof. Hayes finished with some practical advice. He emphasized the role of prominent “names” in order to establish the credibility of new foreign business ventures and to attract customers. Of all asset classes, real estate holds special fascination for many Islamic investors. Facility with Arabic is flattering, but business people generally are proud of their fluency in English. If an Asian Muslim has studied abroad (in an English-speaking country), then he or she most likely attended a British or Australian university. In contrast, most Gulf state Muslims who study abroad attend American universities. Advising its judicious use, “the Harvard name is magic” said Prof. Hayes, “and no one has heard of Yale,” he added.

January 28, 2002
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