Muslim Funds Are Rewarded for Their Faith

Islamic law prohibits the collection and payment of interest. That means mutual funds aimed at Muslim investors must avoid financial services stocks.

This proved to be a winning formula in 2007, when Wall Street finally paid the price for several years' worth of predatory lending to financially strapped homeowners.

During the long housing boom, mortgage banks loosened their lending criteria, making it possible for people with poor credit to buy homes they ultimately couldn't afford. Many of these mortgages had low introductory rates that reset after several years, pushing monthly payments up. Some sported onerous prepayment penalties.

Doesn't sound very halal.

As long as housing prices kept rising, many borrowers were able to refinance before rates reset, keeping payments low. But as the real estate market softened, more and more fell behind on their payments, ultimately defaulting.

The rising number of bad loans spread like a contagion across Wall Street and the broader stock market. The mortgages were purchased by investment banks that repackaged them into securities and sold them to all kinds of investors -- including other banks, brokerages, mutual funds and pension funds. As defaults spiraled, demand for this paper evaporated, and investors were forced to mark the value down on their books.

When investment banks stopped buying mortgages, they deprived lenders of the funds they had relied on to make new loans, putting some out of business.

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