How To Do Business in Islamic Countries

What's it like doing business in Islamic countries today? Harvard Business School professor Samuel L. Hayes III and Harvard Law School professor Frank E. Vogel recently gave students the real deal.
by Martha Lagace

The business scene in the Islamic world may be as complex as its 1.3 billion people, but one rule is nevertheless quite straightforward for Westerners who want to do deals.

"One thing you do not bring up is the Palestinian-Israeli situation," advised Samuel L. Hayes III, an expert on Islamic finance and an emeritus professor of investment banking at Harvard Business School.

Hayes, who continues to travel regularly to Islamic countries for research and consulting, offered advice to HBS students on January 23 as part of the school's post-September 11 speaker series, "Rising to the Challenge." He was joined by a specialist in Islamic law, Harvard Law School professor Frank E. Vogel, for the series' discussion on doing business in the Islamic world. Vogel and Hayes are also co-authors of the book Islamic Law and Finance: Religion, Risk and Return (Kluwer Law International, 1998).

According to Hayes and Vogel, business people, particularly Westerners who work in the Persian Gulf and other Islamic regions such as Asia and North Africa, need to appreciate the extent to which religion and Islamic law are intertwined and permeate all levels of society, including commerce, to greater and lesser degrees depending on the country. "This law is seen as deriving from direct, divine command," said Vogel. "This is important to grasp."

photo of Frank E. Vogel
Frank E. Vogel

Executives who understand the basic tenets of the Islamic religion as it relates to commerce will have an easier time abroad, they said. According to Hayes, the following principles of comportment are expected among businesspeople:

  • Contracts should be fair to all parties. Partnership is preferred over hierarchical claims.
  • Speculation is prohibited. "They don't like gambling," said Hayes. "For instance, if you invested in an Islamic mutual fund, among those industries which would be barred from representation as funds would be the gambling industry. But gambling also relates to futures; it relates to currency hedging; so it's a major situation that you have to be aware of."
  • Interest is prohibited. "This is the probably the thing that is most often identified with Islamic finance. Back in the time of the prophet Mohammed, some of the most rapacious individuals were the moneylenders; and so as a response to the things that these moneylenders did which were so reprehensible, part of the religious belief is that you do not charge interest or accept interest. Now, of course, that isn't always practiced, but it is the theory."
  • Compassion is required when a business is in trouble. "In any country that has Islamic influences in its legal structure, if somebody is in bankruptcy or if somebody is experiencing financial reversals, you can't put pressure on them, because that is not an appropriate thing to do when somebody is down. You don't kick them when they're down," said Hayes.
They don't like gambling. ... But gambling also relates to futures; it relates to currency hedging; so it's a major situation you have to be aware of.
—Samuel L. Hayes III

Like religious people everywhere, Vogel said, not all Muslims follow the faith in every respect. Some do deal in futures, for instance. "What Frank and I found after working with religious mullahs for most of the 1990s—and Frank a lot longer than that—is that it's a process of education," Hayes told the group. "When they get to understand what's involved in an international transaction, they are more willing to interpret an option, for instance, as not being speculative.

"There are very few who are doing that yet," he added. "As a result, truly few Muslims who are international businesspeople are exposed to the vagaries of currency exchanges." There are religiously acceptable options for commodities, but they're very cumbersome, he said.

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On a practical basis, names are very important for doing deals in Islamic countries, as in most of the world, the professors said. Who you know is key. Similarly, relationships and family connections are vital in business. "Relationships that have gone on over time inspire confidence, and of course that's no different than in [the U.S.]," said Hayes.

Personal staff can be very influential and should not be underestimated, he continued. The man who meets you at the airport or who chats you up in a company's waiting room may turn out to be a relative or confidant of the person you're there to do business with.

While it's good for Westerners to be able to speak Arabic socially in the Gulf region, Hayes said, many people would be insulted if you try to speak Arabic about something as important as a deal: "That would be like suggesting that they don't speak English well enough." Those at the business level have usually gone to college in the U.S., Britain, or Australia. Speaking English is a status symbol.

Perhaps surprisingly, Western women sometimes have an advantage doing business in some Islamic countries, Hayes pointed out. They're seen as special and different, almost a "third sex," since most companies send men on the assumption that men will be more acceptable. "Women seem to be able to get to people quicker than the men can," he observed.

Forward And Back

Membership in the World Trade Organization should loosen up the Middle East and particularly the Gulf economically, said Vogel, yet only countries around the periphery of the Arabian peninsula have joined so far. "The big elephant," he said, is Saudi Arabia. It is nowhere near being able to join the WTO, according to Vogel, in part because it is unwilling to enforce foreign arbitration awards.

"It's very important to watch how fast Saudi Arabia moves toward WTO membership. It will have a great deal to do with the political stability of the country, its dealing with the challenges of the future—very serious ones like a demographic bubble that is terribly frightening, affecting, particularly, young males otherwise prone to all sorts of radical beliefs—and a lot of other things, such as the status of women.

"Adaptation and liberalization can happen quickly if the government is in the mood," said Vogel. "It hasn't got there. So far there's too much freight Saudi Arabia is holding back."

Asked if they see a lessening of dependence on Gulf oil since the September 11 terrorist attacks, Vogel said Central Asia should be tapped to counterbalance dependence on Gulf countries and OPEC, while Hayes offered a realist perspective. The U.S. political system is very short sighted, Hayes said. American politicians, who only look two years down the road to the next election, try to "placate the electorate" with short-term benefits at the expense of long-term solutions.

"I think President Carter was right when he tried to initiate a number of long-term energy projects which would have given us greater independence from the Gulf area," said Hayes. "But of course they were completely chucked as soon as he left office.

"So I'm not optimistic about this, and I therefore think we will find ourselves continuing to be vulnerable to that part of the world."

About the Author

Martha Lagace is senior editor of Working Knowledge.