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Middle Eastern wealthy to pull out of Europe and US

A staff reporter, 30 January 2005

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The hard won confidence of Muslim investors by western private banks could be the one of the first casualties of the war in Afghanistan. Ane...

The hard won confidence of Muslim investors by western private banks could be the one of the first casualties of the war in Afghanistan. Anecdotal evidence from the US and Switzerland suggests that some Islamic investors have already begun to feel the pinch of increased personal scrutiny since the 11 September terrorist attacks and are having second thoughts about investing their money. Yet others suggest that jurisdictions such as Switzerland will be on the receiving end of an inflow of Muslim funds as investors seek safe havens. One industry watcher in no doubt that tighter scrutiny on prospective investors from Islamic backgrounds would be "suicidal" for western private banks is Muazzam Ali, the founder and chairman of the London-based Institute of Islamic Banking & Insurance. Ali said western banks were doing themselves a disservice by pointing the finger of blame for terrorism on Muslim investors. "Western banking, until now, has enjoyed the confidence of Middle Eastern investors. However, the present policies of Western banks have been counterproductive and the confidence of investors from the Middle East has been destroyed. It will take long and positive measures to restore that confidence," Ali told Private Client Management. Laurent Chappius, head of Islamic equities at Geneva's Pictet & Cie, said there was definitely a feeling of unease among Middle Eastern clients who had invested assets offshore. Chappius said: "It is a concern of some of our clients from the Middle East that their assets might be frozen given the current military situation. We have not been subject to it but we've heard there has been some repatriation and that's definitely what the local banks are selling at the moment. They are going to clients and saying the money they have offshore is at risk." Private banks have put in place a series of measures to woo Islamic investors away from the typical Sharia-compatible investments. Muslim investors, mainly oil-rich Arabs from the Gulf, have been pouring money into Islamic stock funds in recent years. The products have been carefully designed to be in strict keeping with the Koran-based Sharia law, under which interest is considered to be usury. Funds must avoid bonds and fixed income securities. Also barred is investment in companies involved in businesses such as alcohol, pork, gambling, hotels and pornography. Funds also tend to screen out companies that are highly leveraged and have high debt to equity ratios. Ali, however, said that hard work could soon all be for nothing. Ali said an unfair emphasis on accounts held by Muslim investors could open the floodgates of corruption. "What will happen is that any unscrupulous businessman or institution can drop a letter to Western governments alleging that the actions of a rival are suspicious and linked to Islamic terrorism. Accounts will be frozen and inquiries started. The effected person or institution could lose business. This is an evil practice and Western banks will regret opening the floodgates to a culture of allegation leading to financial anarchy." Another theory is that Middle East investors will rush their money into jurisdictions such as Switzerland, which is considered a safe haven at the expense of the UK and the US, which have been heavily involved in the Afghanistan conflict. "I think there is a general feeling of thinking what might happen with the funds they might have more specifically in the US and the UK which have been more frontline in that battle as opposed to Switzerland," said Chappius

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