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Washington Post: Islamic Banking: Steady in Shaky Times

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Tue, 2008/11/18 - 14:08 by Muslim Investor

As big Western financial institutions have teetered one after the other in the crisis of recent weeks, another financial sector is gaining new confidence: Islamic banking.

Proponents of the ancient practice, which looks to sharia law for guidance and bans interest and trading in debt, have been promoting Islamic finance as a cure for the global financial meltdown.

This week, Kuwait's commerce minister, Ahmad Baqer, was quoted as saying that the global crisis will prompt more countries to use Islamic principles in running their economies. U.S. Deputy Treasury Secretary Robert M. Kimmet, visiting Jiddah, said experts at his agency have been learning the features of Islamic banking.

Though the trillion-dollar Islamic banking industry faces challenges with the slump in real estate and stock prices, advocates say the system has built-in protection from the kind of runaway collapse that has afflicted so many institutions. For one thing, the use of financial instruments such as derivatives, blamed for the downfall of banking, insurance and investment giants, is banned. So is excessive risk-taking.

"The beauty of Islamic banking and the reason it can be used as a replacement for the current market is that you only promise what you own. Islamic banks are not protected if the economy goes down -- they suffer -- but you don't lose your shirt," said Majed al-Refaie, who heads Bahrain-based Unicorn Investment Bank.

The theological underpinning of Islamic banking is scripture that declares that collection of interest is a form of usury, which is banned in Islam. In the modern world, that translates into an attitude toward money that is different from that found in the West: Money cannot just sit and generate more money. To grow, it must be invested in productive enterprises.

"In Islamic finance you cannot make money out of thin air," said Amr al-Faisal, a board member of Dar al-Mal al-Islami, a holding company that owns several Islamic banks and financial institutions. "Our dealings have to be tied to actual economic activity, like an asset or a service. You cannot make money off of money. You have to have a building that was actually purchased, a service actually rendered, or a good that was actually sold."

Via Washington Post. Also on ISNA news briefs, authored by Faiza Saleh Amba.

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