On Islamic banking

Ok, it may be acceptable to argue for socially ethical financing (i.e. no investments/clients in the alcohol, tobacco, or gambling industry), and dealings only in productive economic activity (as opposed to economic activity that involves only money – eg speculation on stocks/forex).

But how on earth to justify lending/borrowing at no interest? How about inflation? You need to have an interest rate to adjust for inflation/changes in the real value of money. Why keep money in an Islamic bank if £100 quid I put in there is only worth £90 ten years down the road? If I understand correctly, at present, it is considered haram for banks to charge an interest, even if it were fixed at the current inflation levels.

Ok, maybe it is possible to argue that we do get returns from Islamic banking in the form of dividends (when saving), and our profits get “taxed” when we borrow. So in effect it often works out to be roughly about the same as normal banks with interest rates. This complies with the various Islamic principles like prohibition of riba (interest), and promotion of zakah (alms giving) and hisba (business accountability), thus making it halal in principle.

But this however, does not make it halal in practice. If it effectively makes no difference, then why support Islamic banking? Shouldn’t we call a spade a spade, instead of inventing different terminology to get around it? Some even say they just look at what the market interest rate is and calculate backwards how much of a cut to take off the profits from loans.

On top of that, monitoring in Islamic banks is still quite weak as I understand it. For example, I take a loan to invest in some machinery for the company factory, or education for my kid. I can always bluff my way through and quote figures higher than the actual amount needed and then use that money for other perhaps more questionable purposes (e.g. playing with shares/futures for personal gain).

And there are a couple of other issues too, like who monitors the practices of Islamic banks? Are there international standards? Is Islamic banking compliant with the current capital adequacy framework i.e. Basel II? Will there be problems with the current International Financial Reporting Standards over concepts and terminology? Perhaps someone out there can enlighten me.

There are some good things about Islamic banking though. I’ve heard that your “interest” is charged monthly as opposed to yearly, so if you withdraw money from your savings account midway through the year, you still get whatever “interest” you have earned in the months leading up to the withdrawal. Interest-ing eh? (pun so intended! :p)

So what really is causing the buzz with Islamic banking and financing? Malaysia is going all out with this, and even London is aiming to the international hub for Islamic financing. Perhaps it simply boils down to the need to ease the human conscience by doing what is perceived as right. Kinda like the whole fairtrade industry..