Sharia Banking Is Growing Fast and the Mainstream Banks Are Starting to Offer Islamic Accounts. Its System of Shared Risks and Profits Could Offer a Model for the Financial Services of the Future
For progressives seeking a modern, reformist, progressive alternative to our failed banking system there is a system of finance that has proved so far to be a model of probity and transparency. It is a system of finance that happily avoids the extremes of right and left, preferring to marry the freedom and innovation of the market economy to the fairness and balance of social democracy. It is called-take a deep breath-"sharia-compliant" finance, but has nothing to do with the beheading, amputations and stonings that some of us here in the west automatically associated with Islamic sharia law.
Sharia-compliant, or Islamic, finance is committed to promoting goals any proud progressive would recognise: equity, moderation, social justice. It is system that revolves around prudent lending, the reduction of risk, the sharing of profits and an absolute ban on speculation and the short-selling of stocks. Debt is actively discouraged and so dealings with any organisation that has balance sheet more than a third of which is debt (which is to say, all banks!) are forbidden, as are investments in enterprises deemed unethical by Islamic scholars, such as casinos or weapons factories.
Perhaps the rearest feature, however, is the prohibition of interest-or making money out of money. As it is not permissible for banks to charge interest on their loans, sharia-complaint deals are usually structured so that the bank ends up leasing the property to the homeowner, who essentially ends up paying rent until ownership is transferred. Critics charge that the rent seems suspiciously similar to interest payments. They also point out that it ends up costing homeowners more to set up and pay off Islamic mortgages than conventional products, like with all other niche products and, in particular, ethical investments: the so-called "piety premium".
Islamic financiers disagree, stressing the joint-ownership and profit-sharing aspects of the sharia model. "The relationship between us and the customer is based on sharing risk and sharing the rewards from the financing and investments we make on their behalf," says Sultan Choudhury, commercial director at the Islamic Bank of Britain, this country's only stand-alone, sharia-compliant retail bank. "The returns are based on the amount of profit realised from each transaction."
Let me declare an interest here (in case you had not already noticed the name on the byline): I am a Muslim myself, a practising, believing Muslim. Yet, to my shame perhaps, I own not a single sharia-compliant financial product of asset. Until the recent implosion of the banking system, I had paid very little attention to the Islamic finance industry, assuming it was simply a niche activity at best, or a gimmick at worst. As a result, my own current account, pension, mortgage, loans and credit cards are all as traditional, conventional and mainstream as the next (non-Muslim) man.
Yet the reality is that Islamic finance is growing faster than any other subset of world banking, at an average annual rate of between 15 and 20 per cent. the IMF says the number and reach of sharia-compliant financial institutions worldwide has risen from one institution in one country in 1975 to more than 300 institutions operating in more than 75 countries today. Over the past year alone, sharia-compliant assets across the globe have grown by almost third to more than $639bn, according to the latest analysis of the industry from the Banker magazine. If the current trends continue, Islamic finance will have broken through the $1trn mark by 2010.
Here in Britain, the Financial Services Authority has licensed five stand-alone Islamic banks-including the Islamic Bank of Britain, which has been reporting as significant increase in the number of non-Muslim customers applying for accounts since the start of the financial crisis. Bank officials say the numbers are growing because Islamic finance offers a "safer option" for savers and investors, regardless of faith. …