Islamic Banking

In a comment to an earlier post Hosam asked what I thought about Islamic Banking versus “Conventional Banking”. This is a very controversial subject, but a very important one. I started getting interested in Islamic Banking in 2002 when I came across a few papers written by non-Muslim economists about Islamic Finance & Economics and how it applies to Banking. The papers looked at the Islamic economic model as an equity-based model with all economic activity funded by ownership capital (equity) and no-debt. Those papers tried to develop the theoretical foundations of Islamic Economics and understand the intentions and implications of such a system. However, this approach has gained very few followers. Dar Al Istithmar, a newly-established think tank that tries to develop the theoretical foundations of Islamic Banking, hasn’t done much either in my opinion. I’ve had a chat with its Vice President, Dr. Humayon Dar, in an Islamic Banking conference in Bahrain a few months ago and it seems to me, from what I heard from him and other participants in the room, that no one is interested in that approach. The reason I believe no one wants to spend time building this theoretical foundation is because (1) It takes too long and (2) it means you have to reform your whole economy and laws, and most people don’t want that. So, what did they do instead? The looked at conventional financial products (eg. credit cards) and tried to see how they can use Islamic legal contracts (usually in combination) to re-create the same product and the same outcome.

 

Let’s take an example. Let’s say you want $100 today. You go to an Islamic bank and they’ll give it to you and you would have to pay them back $110 next year. Of course, they don’t call it interested nor does the contract say that. Instead, they go through a series of transaction (buying Platinum for a future price and then getting “permission” from you to re-sell it a second later at today’s price, then turning around and giving you the cash). We can argue whether niyyah (intention) is the most important thing, but in this case—a legal and economic system—I don’t believe your intention is the important factor. When Islam prohibits stealing, it does so regardless of your intention, if you steal a bank and tell the police that you thought you were doing good it doesn’t change the prohibition of the act, it may change how God views you, but on Earth its irrelevant because it’s a crime. Riba has been portrayed in Quran as a crime, and prohibited because of its social ills. Therefore, what you were thinking when you charged/paid riba does not change its legal status since we’re talking about a law here. In addition, once you learn that it is riba you have no excuse whatsoever. So, if I have two transactions, one called “interest on credit card” and the other is called “insert-any-old-Arabic-word” with the exact outcome, the exact cash payments by both sides, and they look exactly the same short of what happens in the bank’s back room, how come one is acceptable while the other is not? To me, if you’ve got the same outcome, you’ve got the same thing, regardless of how you write the contract.

 

One objection to my argument was presented by Dr. Dar of Dar Al Istithmar, he says that when two parties have consensual sex what they write in the contract is important. If there’s a marriage contract between them, it is accepted, and if not it is prohibited. This is the best argument I’ve heard so far, but I believe it is flawed for the following reason: sex wasn’t prohibited because it is intrinsically evil like riba was (at least that’s what I understand from all the verses prohibited riba), it is the context of sex outside wedlock that was prohibited. Therefore, in what context (in or outside marriage) sex occurs, is fundamental to whether sex is evil or good. Sex was prohibited conditionally (outside wedlock) while riba was prohibited unconditionally. As a result, the legal context of where/when/how riba is charged is not important to whether it is acceptable or not in Islam.

 

The bottom line is that Islamic Banking as it is practiced today (at least what I came across in Saudi) is similar to conventional banking in its outcome and should carry the same Islamic “status” as Conventional Banking. There might be another way of applying Islamic Banking, but I still don’t know how it can be done (or whether it can be done), we’d have to wait until a theoretical basis for Islamic Economics and Finance is developed first before we can judge that. Until then, don’t lie to yourself and pay more money to banks that have found that they can charge more if they add the word “Islamic” to product’s title. It’s all marketing, that’s my opinion.