Finance minus interest

In the midst of the world’s financial crisis, a new “old” way of doing business through finance has grown in prominence. Islamic finance – which has existed since the eighth century in rudimentary form and was adapted to modern finance in the late 20th century – was already gaining attention before the 2008 economic crisis. But since then, it has been championed as an almost providential remedy for a money system that has strayed irredeemably. The main difference between Western and Islamic finance is that the latter is based on the values of sharia law, which itself is based on the Quran. For example, usury, or interest on loans, is forbidden. As such, so are bonds. Moreover, every operation needs to have a social outcome. This means that most speculative actions are also forbidden, and an investor has to strive for desirable social effects. Obviously, there are legalistic loopholes and instruments designed to get around what would seem like draconian strictures. For example, in an Islamic mortgage, instead of loaning the buyer money to purchase a house or car, a bank could buy the item itself from the seller, and resell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank’s profit cannot be made explicit and there are no additional penalties for late payment. Putting aside such structural manipulation, what is important to the spirit of sharia compliant banking is that the lender and borrower share the profit, loss and risk.
This spirit of Islamic finance is considered by some a model with which to address some critical issues that have emerged since the financial crisis. Other ethical proscriptions involve investing in haram (sinful) goods and services, such as alcohol, pork and gambling. Boosted by the Gulf monarchies’ sovereign investment funds, which have increased dealings in Islamic finance, there has been a shift of economic power eastward. Countries like Saudi Arabia, Qatar, the United Arab Emirates and Oman are at the forefront of this resurgent concept of finance and have experienced a noteworthy development rate in just a few years. According to exponents of Islamic finance, new rules, are needed to restore the role of financial markets and avoid a new wave of economic turmoil. Islamic finance, they feel, could be a starting point for a new approach to doing business, following the example of some Muslim countries. Indeed, even old-school investment banks like Goldman Sachs have committed significant resources to establishing sharia compliant products and now engage Sharia Supervisory Boards to advise them on a more ethical way of making money.