Aamer Madhani

USA TODAY

CHICAGO -- Ahmed Irfan Khan was poised to transform his family's small but successful slaughterhouse into a specialty-meat selling juggernaut.

Just one thing stood in his way: His faith.

Khan's thriving business in Chicago's old stockyards -- which sells halal meat -- protein slaughtered in a way prescribed by Islamic law -- might have made him attractive to Main Street investors. But his strict adherence to his Muslim faith made going down that path complicated.

Under Islamic law, collecting or paying interest is prohibited, making it difficult for Khan to borrow the roughly $2 million needed to expand his company, Barkaat Foods.

But Khan was ultimately able to get the capital for his business — and stay true to his faith -- with the help of a traditional bank and a boutique venture capital firm willing to hammer out arrangement that Khan said was "Shariah compliant."

"This shows there are ways to follow your principles," said Khan, who plans to use the money to double the size of his 40-person operation. "Other entrepreneurs are going to be inspired by this."

Big and small investors are increasingly dipping their toes in the world of Shariah-compliant financing, a sector that has grown to more than $1.6 trillion in assets worldwide over the past three decades. It's one that analysts see as having the potential for even greater growth as the Muslim population grows in the U.S. and Europe.

Earlier this month, Luxembourg issued a $254 million, five-year Islamic bond, known as sukuk. Meanwhile, Hong Kong last month completed its first sale of Islamic debt raising $1 billion. That came after Britain in June became the first Western nation to issue sukuk, an Arabic word that roughly translates as "certificates."

Sukuk act much like traditional bonds, delivering payments to investors until maturity.To comply with Sharia, the bonds have to be tied to some sort of physical asset. Instead of interest, investors are being rewarded with a share of the profit derived from the asset.

Goldman Sachs and HSBC are among western financial service behemoths that have introduced sukuk in recent years. And in the U.S. for the last decade, a number of banks have been arranging for mortgages and auto loans for their Muslim clients that are permissible under Islamic law.

Outside the U.S., Shariah finance is making huge strides from London to Kuala Lumpur. Assets held by Islamic banks continue to grow by more than 15% per year, and analysts predict the potential size of Islamic financial markets could reach several trillion dollars in a matter of years, according to a Council on Foreign Relations report on Islamic finance published earlier this year.

"It's a fairly global phenomena," said Ibrahim Warde, an expert on Islamic finance at Tufts University. "Islamic finance in general has benefited from the financial crisis largely because Islamic institutions have done better than the conventional ones. One of the fundamentals of Islamic finance — beyond not just charging interest — is there must be a direct connection in between the financial product and the real economy. That's made it more attractive."

In addition to the no-interest requirement, all parties to the deal agree that the money changing hands will be spent on activities that promote social good and the banks and investors pledge to return a portion of their profits to Muslim charity.

There are also prohibitions on money from deals being used to promote or sell certain products, such as alcohol, pornography and pork.

In the Barkaat deal, the Chicago-based venture capital firm Prairie Street Capital borrowed from Ohio's FirstMerit bank on standard terms. Prairie Street then entered into what is known in Arabic as a murabaha, a deal that is effectively structured as a lease-to-own agreement. The firm rents back equipment and the building to Barkaat at a marked up rate.

A Chicago investment bank, Sikich, assisted Barkaat in brokering the deal.

Michael Barry, president of Prairie Street Capital, said his firm was enticed by Barkaat, even as the Midwest has seen several mainstream meat producers go out of business in recent years. With the U.S. Muslim population projected to grow by 35% in the next 20 years, Barkaat was uniquely positioned, Barry said.

"We saw a business that we felt good about owning, we felt good about being part of," Barry said. "It's a business we can add value to and we could make money with. It's what drove us to the decision."

Khan, whose first career was in IT, knows first-hand the demand for his product. When his family moved to Chicago from Bombay in the mid-1980s, they struggled to find halal meat.

For years, he looked for slaughterhouses, like the one he eventually bought in 2009, that would let him come in and slaughter his own lamb or goat, so that he could be assured his family was eating authentic halal meat.

Already, Khan is selling his meat directly to thousands of Muslim customers throughout the country, who buy his lamb, goat and veal, and have it shipped to them. (With the $2 million cash infusion, he plans to buy new equipment and retrofit parts of his slaughterhouse, so that he can begin slaughtering cattle as well.)

While most of his customers shop online, many come to check out his facility in person. Earlier this month, hundreds of Muslim families came to his slaughterhouse to kill lambs themselves to mark the holy day of Eid al-Adha.

Non-Muslims are also his customers, with much of his product being sold to a Wisconsin meat company that sells high-end organic meats to grocers.

"There's a good chance that piece of lamb you are buying at Whole Foods is halal, even though it's not branded as halal," Khan said.

Some critics, including the conservative Center for Security Policy, warn that Americans should be wary of Shariah-compliant financing. They charge that certain aspects of Shariah are draconian, including requirements that women seek permission from their husbands before doing something as mundane as getting a driver license and calls for capital punishment for those who slander Islam.

"Islamists are attempting to impose Shariah Compliant Finance (SCF) on Western institutions to use our own financial strengths against us," the group writes on its blog dedicated to the issue, Shariah Finance Watch. "The most serious problem with SCF is that it legitimates and institutionalizes Shariah law… a theo-political, legal doctrine violently opposed to Western values."

Chris Geier, partner-in-charge at Sikich, the investment bank that helped broker the Barkaat deal, said such criticism is unfair.

"This is a company in the U.S., legally domiciled, approved by the USDA to do business the way they are doing it," Geier said of Barkaat. "We try to help companies and support their business plan and therefore support this economy. It is done without a belief about what they do religiously."

Khan said he's unfazed by the criticism, and instead said his deal shows that American financial institutions are beginning to see Islam in granularity that they hadn't before.

"It's progress when you can find a way to do business and stay true to your beliefs," he said.