Islamic Banking Bilks the Pious, Critics Say

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c. 2007 Religion News Service

(UNDATED) Rizwan Kadir liked working in finance, but when he read a verse in the Quran that said engaging in usury was the same as “waging war” against God and Islam’s prophet Muhammad, fear struck him.

“When you come across an aya (verse) like this, it makes you start wondering what you’re doing with your life,” said Kadir, an investment banker in Chicago.

He started reading about Islamic views on interest and talking to workers at Islamic banks that offered interest-free finance as a foundation of their business.

Kadir eventually concluded that the prohibition on interest didn’t jibe with Islamic logic and that the “interest free” arrangements touted by Islamic banks were just usury under another name.

“What they’re doing is calling the same thing with a bunch of different names,” said Kadir, who has a mortgage, auto and student loan payments.

The prohibition on charging and paying interest is a cornerstone _ along with withholding investments from trades like alcohol and pornography _ of the rapidly emerging industry known as “Islamic finance.”

There are some 270 Islamic banks with more than $265 billion in assets, according to sponsors of the International Islamic Finance Forum, a semi-annual industry conference that meets in Switzerland this fall. Most of the banks are found in wealthy Muslim nations like Saudi Arabia, Bahrain, Dubai and Malaysia. In addition, many Western banks, such as industry giants Citibank and HSBC, have established Islamic finance departments.

But a growing chorus of critics say the idea that Islamic law forbids all forms of interest is incorrect. Moreover, they argue, some of the bankers, lawyers and clerics who draw up and bless “interest free” transactions are profiting off the pious with arrangements that look a whole lot like usury.

Islamic scripture condemns riba, an Arabic word meaning “excess,” which is commonly interpreted as usury. Some Islamic law scholars assert that all interest is prohibited. Others say only excessive interest is prohibited, and that interest is an indispensable part of society that a logical God wouldn’t condemn.

“The notion that the spirit of the Quran is against modern forms of interest, like on a mortgage or a consumer loan, this to me makes no sense,” said Timur Kuran, chairman of Islamic studies at Duke University.

Throughout history, interest was common in the Islamic world, in places such as the Ottoman Empire, Kuran said. Controversy over the practice only emerged during the 1940s when Indian Muslims cited the need for an interest-free banking system as one reason they needed a homeland separate from Indian Hindus, the scholar said.

Since then, the Islamic finance sector slowly developed, before taking off in the last 20 years, with Islamic financial institutions offering a growing number of transaction models, such as profit sharing, that avoid interest.

One example is a “murabaha” mortgage. Say a Muslim family wants to buy a home for $100,000. It might go to an Islamic bank, which would buy the house and sell it to the family for $120,000. The family would then have a certain amount of time to repay the bank. A similar practice was common in medieval Europe when interest was prohibited by the Roman Catholic Church.

Mahmoud El-Gamal, chair of the Islamic economics department at Rice University, argues that such transactions amount to a “bait and switch.”

“The whole is, I want to lend but I don’t want to call interest, `interest,”’ said El-Gamal. Such transactions cost more than other financial arrangements and hurt Muslim consumers, according to El-Gamal.

“They’re trapped because they’re told they’ll fry in hell if they go to regular banks,” he said.

El-Gamal said obedience to the form of the contract often supersedes the spirit of Islamic economic values, such as serving the poor.

Industry advocates counter that even if some financial transactions serve the same purpose as interest that doesn’t mean they are forbidden by Islam.

“It’s possible, as it is in many ethical and legal systems, for two different actions to have the same outcome but because of the way they’re done _ for one to be wrong or illegal in that ethical or legal system, and for the other to be permissible or lawful,” said Taha Abdulbasser, an Islamic law scholar with the Islamic Finance Project at Harvard Law School.

Hussan Qutub, a spokesman for Guidance Financial Group, an Islamic bank based in Reston, Va., that offers interest-free mortgages, said Islam draws a difference between monetary lending agreements and agreements based on commodities.

“We’re trying to reach the same end result that other financial organizations are trying to reach, which is putting people in homes,” Qutub said. “But how are you going to get me there, that’s where we differ.”

Skeptics like Kadir remain unconvinced. “For me, Islamic finance is nothing more than affinity marketing, you market your services to someone who you have an affinity with,” he said.


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