business corporate responsibility economics religion social justice

Learning from Islamic finance

A few months back Archbishop Rowan Williams faced a media outcry after speaking positively of certain aspects of Sharia law. It’s a shame that the debate was shut down in a storm of protest, because it has denied us the opportunity to look at Sharia principles more broadly, and see if there is anything applicable.

If we did, we might take note of Islamic principles on finance, addressed yesterday on the Adbusters blog:

What is at the core of the philosophy of Islamic Finance is the idea of money a measure of value, and not a real asset in itself. According to the principles of Islamic Finance, profiting from money–including charging interest on loans–is regarded as riba, or non-permissible investing activity under Sharia law. Instead, what Islamic Finance emphasizes is the idea that the investors should share the risks involved in whatever projects they are investing in, and that they should be investing in real things, whether it’s land improvement projects, housing, or helping start up a new business.

The first Islamic bank only opened in 1975, so in some ways it is a new phenomenon, but a growing one. Here are a few principles of Islamic banking as an example of how it works:

Profit sharing (Mudarabah) – Rather than charge interest on a business loan, the bank will make its money from a percentage of the business profits until a loan is repaid.

Safekeeping (Wadiah) – The bank looks after deposits, like any other bank. Where we might expect interest, an Islamic bank may pay a ‘gift’ for the use of your money, at its discretion.

Cost Plus (Murabahah) – for large purchases, the bank buys the item and then sells it back to the buyer in installments, a form of leasing or ‘rent-to-own’.

Leasing (Ljarah) – since it is the use of assets that counts, not the ownership of assets, Islamic banks make use of leasing agreements for equipment or property.

We shouldn’t put Islamic banking on a pedestal – the growth sector is among Middle Eastern millionaires in places such as Kuwait and Bahrain. These customers want to make a profit, but their religion forbids usury. Some Islamic banking is therefore based around loopholes. Scholars pore over the Koran to find ways of getting around the law, creating hedge funds and other financial mechanisms that are within the letter of the law, but perhaps not in the spirit. It’s on the more local front, the mortgages and loans, that the system seems much fairer than the mainstream. I’d welcome an Islamic bank on the high street, and since I live in Luton, that’s not an unrealistic possibility in the near future.

Although I’d happily consider a mortgage from an Islamic bank if I needed one, my point here is not necessarily to advocate Islamic banking as the answer. The title says it all – what can we learn from this? Are their some principles we could take away about exploitative interest? How can we provide mortgages that are fair in the long term? Can we distribute profit and loss more equitably, rather than the bank always winning?

As a Christian, I’m challenged by this too, because the Bible also forbids usury. ‘If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest’, says Exodus 22, although other passages (see Luke 19) suggest it is excessive interest that is condemned, rather than the interest per se. Either way, where are the Christian millionaires calling for more ethical banking? Where are the theologians sitting down with economists to make sure our banking doesn’t violate the principles of the Kingdom of God?

Update: This was actually discussed in the House of Commons just last week, raised by Labour MP Dr. Phyllis Starkey, who asked: “Last weekend, I was at the big Eid celebration in Bletchley in my constituency. There was a stall there giving information on Islamic mortgages, which are consistent with sharia law. In the current economic climate, such mortgages—which are, of course, available to non-Muslims as well as to Muslims—seem to be quite a good model. Is not this an example of a practice designed for only one community which could benefit the whole community and which could be accommodated in UK law?”


  1. The chance that the religious will control the world is unlikely –

    Neither Christian nor Muslim.

    What we do need to do is to get off this oil – and the growth of Islamic finance depends on this oil money.

    If we are going to support Islam in any way above – basic respect and treatment that all are entitled to – we should take an honest look at the often repressive systems of government and the absence of religious freedom throughout the Islamic world –

    Take Ramadan for example – in the Islamic world people are arrested for not taking part – even in the more moderate Islamic places like Morocco. [And I am not talking about those not taking part in Ramadan because – exceptions such as being pregnant and so on.]

    It has been well documented that many Islamic practices are not voluntary – are punishable under the law – and could lead to penalties of imprisonment, torture and even death if not carried out according to what is deemed as Islamic. Apostasy or the changing of one’s religion away from Islam is a prime example.

    What we must be concerned about in supporting or adopting any Islamic system – is that people within the Islamic world are not being persecuted for not using it.

    In this sense it becomes a ‘religious ethics’ issue – for example Christians love when others share in Christmas – even though they may be Jewish or other – and there is a growing trend for Muslims to try to get others to share in Ramadan or their festive season that follows – with non Muslims – but the difference is that with Christmas – no one is persecuted for not practicing it – where Ramadan people are.

    If we are looking at new system or models – we should not enter into them blindly.

    Compass Direct – highlights a lot of the problems Christians / or those who choose to be Christian (and not Muslim) – face in the Islamic world.
    “Egypt: Father’s Brief Conversion Traps Daughters in Islam” Oct 10 2008

    Human Rights Watch Reports – also covers this topic extensively:

    “Prohibited Identities”
    State Interference with Religious Freedom

    Of the same HRW report see: V. Conversion and Freedom of Religion

  2. Yes, I’m aware of the oppressive nature of some Islamic states, which is why I suggest learning from Islamic finance, not adopting it.
    There is good and bad in every religious structure, including the teachings of the Christian church (and I say that as a Christian – take the fundamentalist line on contraceptives for example, in a world of HIV/AIDS). The key is to see good where it can be found, and learn from anyone who is doing things well.
    Our systems of government and of finance will never be either ‘Muslim’ or ‘Christian’, but they can be more or less fair, more or less just, either oriented towards the rich or the poor.
    I don’t want our banks to become Islamic, I want them to learn from a fairer model, and see what practices they could use or re-interpret.

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