NEW YORK — Islamic banking has been hailed as the caring Capitalism of the East. With practices built upon a foundation of integrity and fairness, Islamic finance institutions, or IFIs, have distanced themselves from the banking styles of the European world, providing services in accordance with Shari’ah law.
It is widely known that IFIs are not permitted to sell interest-bearing loans, and banks must be committed to risk-sharing, which means that all parties involved in a given transaction take part in losses as well as profits. These measures work to discourage the types of risky lending that led to the global financial crisis of 2008 while also promoting inclusion and just banking practices.
Unlike Western capitalism, the Capitalism of the East aims to protect the weak and those who are less financially stable. Centered on religious law, IFIs follow practices in accordance with the text of the Hadith and the Quran, namely the prohibition of interest coming from the words of the Prophet Mohammed when in his last speech he proclaimed, “Allah has forbidden you to take riba (interest), therefore all interest obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer any inequity.”
It could be argued that the Islamic world was the first to institutionalize Capitalism, spreading it eventually to the West through the efforts of Arab and Persian traders who traveled remarkably farther than Europeans. Early concepts of credit and checking were instrumental in the development of the exchange economy of the East which was eventually transformed into Islamic merchant Capitalism.
Arab merchants used letters of credit called suftajah in their international transactions. Eventually the hawala was created, a system of money transfers in which suftajah were used. Islamic merchants also developed their own version of our modern-day check called sakk. Upon the establishment of the Ottoman Empire, much of the tradition and religious influence that once defined banking was done away with, and as the European world continued to grow, the old practices of Islamic banking were changed even further.
Although Muslims are obligated by their religion to use banking services that comply with Shari’ah law, the presence of IFIs is varied throughout the Middle East and North Africa region, or MENA. A Gallup poll shows that 95 percent of MENA adults consider themselves to be religious, which provides a demand for IFI services, yet according to the 2011 Global Findex, MENA residents opting out of banking services because of religious reasons totaled more than 19 million.
While there may be some correlation between the availability of Shari’ah compliant institutions and the number of adults without bank accounts, the relationship may not be absolutely direct, a point well-illustrated when comparing Morocco, Tunisia and Saudi Arabia. Nearly 27 percent of the adult populations of Morocco and Tunisia do not use banking services for religious reasons, and both countries are home to little to no IFIs. Morocco has no IFIs and Tunisia has three. However, more than 24 percent of adults in Saudi Arabia do not have bank accounts because of religious reasons, yet there are 14 IFIs in the country, making it third in its IFI presence, right behind Bahrain and the United Arab Emirates. While IFI availability seems to have some bearing on the Muslim population’s participation in banking, there may be other factors at play.
IFIs are not known for their transparency, and the process by which Shari’ah compliance is evaluated is not widely accepted, complicating a potential customer’s ability to differentiate between a halal bank which is in accordance with Shari’ah and a haram bank which is not.
Another reason Muslims may not use a bank is because of a deficient knowledge of the presence of IFIs and a basic knowledge of their practices. The World Bank cites one study of Islamic banking that found that “only about 48 percent of adults in Algeria, Egypt, Morocco, Tunisia, and Yemen have heard about Islamic banks.” Not everyone knows enough about the availability of different institutions to suit their individual needs, which would help to explain the percentages of MENA adults without bank accounts.
One final explanation as to why some may opt out of IFI participation is because it typically costs more than other institutions, making it less competitive even among those who wish to strictly adhere to religious obligations.
Amid all of this, the MENA region has a remarkably high rate of poverty, as it contains “about 70 million of the world’s poor,” as reported by the World Bank. IFIs could help to lower this statistic. Without basic banking services, it is unlikely that MENA’s poor will ever be able to lift themselves from poverty. If IFIs can be made more available to the Muslim population, part of that 70 million could be given the tools to escape an unstable economic situation. Not only must IFIs expand, they must also embrace transparency so that they can build trust among communities and spread awareness of their availability throughout MENA. If these measures can be successfully implemented, poverty alleviation may be seen.
– Amy Russo
Sources: Foreign Affairs, World Bank, World Economic Forum, Ideas