A jaunt to now-Muslim-majority Bethlehem, in the Palestinian Authority, reveals a thriving city: renovated, bustling, affluent. When I remark on the profusion of late-model European SUVs, my Palestinian host shrugs: “Like in the West -- they live beyond their means.”
This was echoed by a report in the Israeli press, which stated that “Palestinian and Arab banks in the West Bank are offering… incentives to draw the average Palestinian into purchasing a car… by paying 10% of the new car’s value and slowly paying off the rest to the bank, with interest…” (my translation, Haaretz, July 16, 2010).
With interest?
Strictly speaking, Muslims are forbidden to charge or pay interest -- by the Qur’an, the hadith (sayings of the Prophet and his followers), and contemporary rulings based on these. Islamic banking does not in fact permit the charging of interest, but Islamic banking is relatively new. The first Islamic bank appeared in Egypt in 1963, and the sector only began to gather steam in the 1990s.
Unlike conventional banks, Islamic banks use a complex mix of banking and investment vehicles to comply with religious dictates. Examples include home financing through declining rent schedules and offering investments in real estate and other sectors that offer non-interest income.
Several factors have strengthened the Islamic banking sector. Foremost among them is the rapid growth of the world’s Muslim population -- by over 235 percent in the past 50 years. Second, this population is increasingly demandingshariah-compliant banking services. Last but hardly least, Islamic financial institutions have weathered the recent credit crisis with relative success.
The result? By 2010, more than 500 institutions worldwide were providing Islamic banking and financial services, solely or alongside conventional ones, managing an estimated $1 trillion in assets.
One might reasonably expect these institutions to have a sizeable presence on the Internet. Yet this is not the case. Those Arab banks that offer online services, such as Arab Bank Palestine, often do so solely for their conventional services. Exceptions are Habib Bank Ltd. and Dubai Islamic Bank, which launched e-banking in 2002.
More notable in a global context is HSBC Amanah’s premier online service, launched this August and aimed at “internationally mobile, affluent consumers.” HSBC Amanah also offers its regular customers Islamic e-banking services.
Yet until quite recently, these banks were the exception, not the rule. One study found that, of 24 institutions offering both Islamic and conventional services, only eight offered Islamic e-banking, while 17 offered conventional e-banking. Among the reasons cited for this, the most plausible is also the most interesting: that e-banking’s advantages -- speed, efficacy, convenience -- are less valued in a region where “a visit to the bank… might be… an opportunity to socialize.”
However, as Internet access increases in the Middle East and the Muslim middle class expands, so will the presence of Islamic online banking. One sign of this is the online Dow Jones Islamic Market Indexes. Another is Failaka, a research and advisory fund in Islamic financial investment established over a decade ago.
That Failaka’s Website lists more members on its shariah advisory board than it does professional staff may obliquely highlight why there’s a lag in Islamic banking’s online parity with its conventional peers. The imperative that an Islamic financial institution have an advisory board of shariah experts may slow decision-making and, hence, transactions, making them no match for Internet speed. Moreover, until recently, there has been a shortage of professionals who are experts in both Islamic law and economics.
Yet this, too, is bound to change, as institutions and programs such as The Global University of Islamic Finance -- which, saliently, offers study online -- proliferate. It is their graduates who will provide the innovative products on which the future of Islamic banking depends.
For now, no doubt, some of Bethlehem’s stylish, hijab-clad soccer moms are relying on iPhone4 access to the impressive, successful Palestine Exchange as they squire their children to practice in SUVs.
— Marsha Weinstein is a writer, editor, translator, photographer, and social worker who divides her time between Connecticut and Israel.
And thank you for the compliment! Sorry for the lag time in my response.
To answer your question: Islamic banks welcome everyone, Muslim or not. And as noted, non-Muslims are beginning to take an interest in this unique way of banking. Previous aspects of this post/comments cite some of the banks that offer Islamic banking services.
Regarding your comment, Judaism and Islam govern all aspects of the observant adherent's life, and both have extensive legal systems to accomodate any and every imaginable form of human experience and interaction. Their sacred texts and oral traditions set guidelines for all aspects of human interaction - including monetary transactions.
Marsha! Thanks, i really enjoyed reading your post.I have never thought that religious books can define monetary relations as well. I know that for example Jews did a lot of financial jobs but that was because they were prohibited to be craftsman.
Can only Muslims be clients of Arabic banks or they are for everyone?
Thanks for responding - and for your terrific comment.
You're right - I'm not going to touch the theology - and by the way I assume you do remember your NT correctly (and in any case probably know it better than I do). But I will reiterate that our use of the word "usury" has changed over the years: We take usury to be synonymous with any itnerest. But the biblical injunction - and again, this was open to interpretation in Jesus' time, as in ours - was against usury meaning unfair interest - either interest that was deemed "too high" or that was earned to someone's disadvantage in some other way. As such, I can envision a situation in which Jesus' suggestion was perfectly congruent with the biblical injunction.
You ask an excellent question (as always): Why do people seek out Islamic banks/banking? My guess is that they do so from a desire to live as completely in accordance with the dictates of the Qur'an as possible, as you suggest. Perhaps this need is even more pressing for the Muslim who lives in the West, and thus feels an imperative to not assimilate - but this is only a guess.
It's no accident, as you rightly say, that wealthy Muslims have for years sought to keep their money overseas. (HSBC's Amanah Premier program is aimed precisely at this sector - to bring in wealthy Muslims who until now have not banked Islamically.)
It is interesting to contemplate why Islamic banking is gathering steam precisely at this juncture. Personally, I think the recent credit crisis is the short end of the story. I think - and I say this very cautiously - that it has more to do with the polarization between East and West, the encroachment of Westernization of the East and the East's reaction to it, and/or to a general increase in religious observance among Muslims (and perhaps not only among Muslims), as trends in "religiosity" wax and wane...
I agree with you that Islamic banking is not a "threat" to conventional banking, which will continue to function according to the "rational profit motive".
Lastly, if there is any innovation involved here - other than the relative novelty of the ideas behind Islamic banking for those of us accustomed to conventional banking - it lies in the creative solutions Islamic banks must find to shariah restrictions. As for the matter of whether or not there is a general movement within Islam (which would of course subsume Islamic banking) to return to Islam's glory days of 7th century Arabia - I will only say that the topic fascinates me, but this may not be the forum.
Thank you very much Paul for weighing in so thoughtfully.
I don't want to embroiled you into any theological debatre here. But if my theology serves me well, I remembered in the NT a section in the Scriptures where Jesus told the the servant who had received just one talent but couldt not do anything with it but rather went and hide it in the field. Jesus told him that at least he could have put it in the treasury to get some interest. So I don't see usury as being unbiblical if Christ did approved of it.
Now to the concept of Islamic Banking, one area I would like you to touch on is the consumer perspective. Do people join these banks purely for religious reasons? In this vein once can imagine that Islamic banks have the easiest marketing strategy of pulling religious and holy consumers towards them who might only worry about Islamicity of banking services. It was mentioned that Musims with foreign capital generally preferred to keep their cash overseas, even though the returns there were less than the roughly 20 percent returns FIBE was promising on current accounts. The greater security of foreign deposits made up for their lower rate of return. The rational profit motive never lost its place as the key factor in investor behavior. In my view a banking system without debt will be too unstable and on this basis I will argue that Islamic banking is really less about innovation than it is about a return to the ways of seventh-century Arabia.
Don't be so sure about an Islamic bank's not being able to do business in Oklahoma: The only (apparently) exclusively Islamic bank in the US is in southern California: The Bank of Whittier. According to one Web site I checked, it has a three-star rating and over $100 million in assets.
In addition, the following banks offer Islamic banking services in the US (as far as I know - there may be others): JP Morgan Chase, Devon Bank of Chicago, University Bank of Ann Arobor, Michigan, Citigroup, and of course US branches of HSBC and Deutsche Bank, which offer conventional and Islamic banking services worldwide.
As far as I know, there are Islamic banks in France and England, as well as banks that provide both conventional and Islamic services in these (and other) European countries.
In other words, it seems that anywhere there are Muslims, an Islamic bank can function - in the meantime offering its services to non-Muslims, as well.
The interesting thing is that Islamic banking is a relatively recent phenomenon, in the Muslim world as well as in the West... so there's lots to watch, and lots of food for thought here...
Thanks for the detailed reply and sources, Marsha. Now, these Islamic bankers that are branching into online services, I wonder how they would deal with operating in non-Muslim countries? Obviously, none of these companies could do business in Oklahoma.
Hi Root Maniac, and thank you for your comment and excellent questions.
First, it is my understanding that the Torah prohibits the charging of interest - period. Interpretations of this injunction vary, however (as do interpretations of almost everything in the Torah); and in any case while the Torah severely criticizes usury, it does not label it a "sin", as did the Catholic Church of the Middle Ages. In general, certain of the commandments by which the Jews were meant to live, such as keeping a day of rest, they were also meant to apply to those living in their midst or under their sovereignty. It has always been my understanding that this applied to usury, as well, at least during the biblical period, when the nation of Israel was sovereign.
The reason Jews ended up as moneylenders during the Middle Ages is because pretty much every other profession was closed to them. They were barred from guilds by virtue of their being Jews, and relegated to those few professions, usually considered "socially inferior", that the Church was willing to tolerate having them practice. They were ghettoized, as well, and generally demonized, such that their points of interaction with non-Jews were limited. Add to this expulsions every few years from one European country or another, and you have a people who have little recourse but to live off of professions that can be easily uprooted and taken elsewhere. I'm not sure whether the Jews can be said to have developed a "financial class" during the Middle Ages. But the Jews are a whole different kettle of fish.
As for the charging of interest by Muslims to non-Muslims being haram (forbidden) - this is apparently open to interpretation. What I have found is that the charging of interest to non-Muslims is haram in a Muslim country in which shariah can be imposed (on everyone), but not necessarily in a non-Muslim country. For an interesting discussion of the various aspects of this question, see IslamOnline's Fatwa section: http://www.islamonline.net/servlet/Satellite?cid=1119503543904&pagename=IslamOnline-English-Ask_Scholar%2FFatwaE%2FFatwaEAskTheScholar
It is worth noting that Islam and Judaism are very similar in the way in which shariah and halacha (the religious law of each, respectively) govern the observant believer's everyday life; in the role that interpretation of these plays in each religion/community; and, often, in the actual interpretation(s) that hold(s) sway.
Regarding your second question, I have encountered at least one study that would support your instinct - that is, that it is harder to default on a loan from an Islamic bank than on one from a conventional bank. According to Baele, Farooq & Ongena (2010), the hazard rate on Islamic loans is less than half that on conventional ones and, moreover, the same borrower is less likely to default on an Islamic loan than on a conventional one. For the full study see: http://www.istfin.eco.usi.ch/ongena-139141.pdf
Clearly, these questions can be explored in much greater depth; but I hope this gives a good preliminary response, which is at least somewhat illuminating.
Marsha, it was my understanding that, during the Medieval period, the Catholic Church outlawed the charging of interest by Christians, while the Torah only prohibits Jews from charging interest to other Jews, so the result was Christian rulers turned to Jewish moneylenders for financing, leading to the rise of a Jewish financial class. Is the Islamic interpretation that any charging of interest is haram, or are they permitted to charge interest to non-Muslims?
Of course, as these Islamic bankers demonstrate, there are many ways to get around the rules, yet it seems that the advantage of the Islamic position, is that it is much harder to trap people into revolving credit, where they can't pay off the remaining principal, and keep getting charged more interest. The borrower has a fixed fee to repay, which will not increase over the life of the loan. I am curious if there is any data comparing rates of default/foreclosure among borrowers from Islamic banks, to users of conventional interest-based finance?
First, it is important to note that the Biblical concept of usury involves not only earning interest, but earning an unfair amount of interest - something that is over and above what seems fairly due to the person providing the protection or loan. This is of course open to interpretation, legally and financially - which is why (n part) Islamic banks have shariah councils to advise them.
The two main ways that an Islamic bank earns money, if I have understood correctly, is by charging fees, and by fixing a profit margin in advance of a transaction. Here are some examples of how this works.
Fees are set for the "safekeeping" (wadiah) of an investor's money. The bank may invest this money while it is in safekeeping, but will likely pay the depositer a "gift" (hiba) at the end of the fiscal year if "too much"money has been earned through the bank's investment of the customer's money. What "too much" means is open to interpretation, of course.
When an Islamic bank enters into a profit-sharing scheme (mudharabah) to promote an entrepreneurial venture, for example, it will set a ratio for its and the entrepreneur's relative profits, which both agree upon. Of course, this ratio can favor the bank if the parties agree. Losses are usually borne by the entrepreneur, not the bank, such that in either case, and whether or not the venture succees, the bank will not suffer.
A last example is that of a transaction involving the sale of goods (murabahah) - a house or car, for example - which includes a fixed profit margin agreed to by both the bank and the individual. The bank buys the commodity/goods, and sells them to the customer at a mark-up that includes this profit margin (even though the bank must indicate the real value of the asset to the customer). The point is that this profit margin will remain fixed, no matter what transpires in the market. Default is impossible (since the bank already owns the commodity) - and also, the customer cannot pay off the loan ahead of time, which would perforce change the bank's profit margin.
I hope this elucidates a bit.
Law, whether secular or religious, is always open to interpretation; Islamic banks find creative interpretations of shariah, which enable them to flourish.
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And hold fast, all together, by the rope which Allah (stretches out for you), and be not divided among yourselves; and remember with gratitude Allah’s favor on you; for ye were enemies and He joined your hearts in love, so that by His grace, ye became brethren...
Dateline: Jerusalem -- The shops are open and the alleys are abustle. The sweets stands do a brisk business in the brightly wrapped pink toffees to which children are treated after midday prayers. Slowly, the first strains of the adhan insinuate themselves into the hubbub. As the call to prayer grows more insistent, the shoppers hasten their steps and the shopkeepers rush to turn off lights, lock cash registers, and place a broomstick temporarily across the shops’ entryways. Then they, too, join the throng of people washing like a river toward the revered Al-Aqsa Mosque. It is noon on Friday.
And among His signs is this, that He created for you mates from among yourselves, that you may dwell in tranquility with them, and He has put love and mercy between your hearts. Undoubtedly, in these are signs for those who reflect. -- Quran 30:21
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