The Long Divergence: How Islamic Law Held Back the Middle East

By Timur Kuran | Go to book overview

8
Credit Markets without Banks

The first two successful banks of the Middle East, the Bank of Egypt and the Ottoman Bank, were founded in the 1850s. In each case, the capital and organizational template came from abroad, and the administration was foreign-dominated. Around the same time, both Egypt, which was nominally under Ottoman suzerainty, and the Ottoman Empire itself established specialized commercial courts that adjudicated essentially according to the French commercial code. These legal reforms restricted the jurisdiction of the Islamic courts on economic matters. Among their novelties was the explicit legalization of interest.1 If it took foreigners to introduce modern banking to the region, the reason is that indigenous financial institutions failed to keep up with the times. In popular discourses this stagnation is commonly traced to Islam’s prohibition of interest. Because of this prohibition, it is said, Muslims had serious qualms about credit markets, requiring foreign intervention to induce financial modernization.2

The premises of this claim are open to question. Never and nowhere did the presumed Quranic ban on interest make Muslims withdraw from credit markets either as borrowers or lenders. From the seventh century onward, Muslims found ways to deal in interest without violating the letter of the prohibition. Only in the late eighteenth century did Christians and Jews start playing a conspicuously disproportionate role in credit markets. In earlier times, the region’s moneylenders included a more or less proportionate share of Muslims. Besides, the financial successes of minorities did not include the development of indigenous banks. When in the nineteenth century Christians and Jews gained prominence as bankers,

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