Islamic banking in the digital age

Islamic banking refers to a system of banking activities that is
consistent with the Sharee'ah (Islamic law) and guided by Islamic
economics. Thus, bankingprocedures including payment of Ribaa (usury
or interest) is Haraam (Islamically prohibited). Islamic law also
prohibits trading in financial risk (which is seen as a form of
gambling), investing in businesses that includealcohol or pork, or
businesses that produce anti-Islamic media, etc. Inthe late 20th
century, a number of Islamic banks were created, to cater to this
particular banking market.
The first modern experiment with Islamic banking was undertaken in
Egypt under cover without projecting an Islamic image for
politicalreasons. The pioneering effort, led by Ahmad El-Najjaar, took
the form of a savings bank based on profit-sharing in the Egyptian
town of Mit Ghamr in 1963. This experiment lasted until 1967, by which
time there were nine such banks in the country.
Islamic banking has the same purpose as conventional banking except
that it operates in accordance with the Islamic rules, known as Fiqh
Al-Mu'aamalaat (Islamic rules on transactions). The basic principle of
Islamic banking is the sharing of profit and loss and the prohibition
of Ribaa. Amongst the common Islamic concepts used in Islamic banking
are profit sharing (Mudhaarabah), safekeeping (Wadee'ah), joint
venture (Mushaarakah), cost plus (Muraabahah), and leasing (Ijaarah).
In an Islamic mortgage transaction, instead of loaning the buyer
moneyto purchase the item, a bank might buy the item itself from the
seller, and re-sell it to the buyer at a profit, while allowing
thebuyer to pay the bank in installments. However, the fact that it is
profit cannot be made explicit and therefore there are no additional
penalties for late payment. In order to protect itself against
default, the bank asks for strict collateral. The goods or land is
registered to the name ofthe buyer from the start of the transaction.
This arrangement is called Muraabahah. Another approach is Al-Ijaarah
wal- Iqtinaa', which is similar to real-estate leasing.
Islamic banks handle vehicles' trade in a similar way (selling the
vehicle at a higher-than-market price to the debtor and then retaining
ownership of the vehicle until the loan is paid).
There are several other approaches used in business deals. Islamic
banks lend their money to companies by issuing floating rate interest
loans. The floating rate ofinterest is pegged to the company's
individual rate of return. Thus the bank's profit on the loan is equal
to a certain percentage of the company's profits. Once the principal
amount of the loan is repaid, the profit-sharing arrangement is
concluded. This practice is called Mushaarakah. Further, Mudhaarabah
is venture capital funding of an entrepreneur who provides labor while
financing is provided by the bank so that both profit and risk are
shared.
Such participatory arrangements between capital and labor reflect the
Islamic view that the borrower must not bear all the risk/cost of a
failure, resulting in a balanced distribution of income and not
allowing lender to monopolize theeconomy.
Islamic banks have grown recently in the Muslim world but are a very
small share of the global banking system. Micro-lending institutions
such as Grameen Bank use conventional lending practices, and are
popular in some Muslim nations, but are clearly not Islamic banking.
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Today, there are about seventy five (75) Islamic equity funds
worldwide based in Muslim countries and targeted atinstitutional
investors in the Middle East. The growth of the middle class in the
Muslim world is driving the advent of a 'new economic order.'
Some years ago, Dow Jones unveiled the first global stock benchmark
for Islamically conscientious investors. The Islamic market index
follows six hundred and sixty (660) Sharee'ah-compliant companies in
34 countries, including Microsoft, Coca-Cola etc. Brown Brothers
Harriman& Co. and a dozen other banks are introducing funds tracking
the index. Barclays of Britain and Commerz Bank AG of Germany are
nurturing new portfolios for Muslims. In November 1999, Financial
Times (FTSE) International in London introduced its own Islamic
indices.
Islamic scholars are open to creative solutions for the problems
raised by modern finance. Any respectable Islamic fund or financial
institutions has a board of scholars screening its investments and
practices. "Nearly all the scholars now agree, for example that it is
ok for Muslims to buy equities or stocks which are commitments to
responsible ownership", says Virginia-based Islamic scholar and fund
adviser Yusuf Talal Delorenzo. This approval of the scholars is
conditioned to such equities of stocks being Islamically lawful
themselves.
The Dow Jones index excludes hotel chains andairlines which serve
alcohol and pork, but theIslamic funds managed by Saturna capital
corp. do not. A. Rushdi Siddiq, Director of Dow Jones Islamic Index
Group, says: "Sharee'ah Boards are de-facto fund managers".
The strong middle class Muslims in Malaysia helped in producing some
recent innovations in Islamic finance. IslamQ.comwill be launched in
Kuala Lumpur to become the first web site to offer online Islamic
stock trading. It is a virtual bazaar providing many services.
Surfers can check prayer times, plan pilgrimage to Makkah or 'Ask the
scholars' about how to handle finance under the Sharee'ah.
IslamiQ.comhopes to broaden what is possible for Muslim investors
within the bounds of what is Halaal, or permissible under Islamiclaw.
The Western style of banking is shunned by hundreds of millions of
observant Muslims around the world. They were left to invest in real
estate, trade financing, or small business; and to accumulate a pool
of cash that IslamiQ now estimates at US$ 150 billion and growing by
30% a year. "There is a lot of money that has been hidden under the
people's mattresses", saysHasnita Hashim, the Malaysian banker and
IslamiQ CEO and co-founder. IslamiQ.comwill have offices in New York,
London and Malaysia.
As investors' choices grow, Islamic finance is no longer the exclusive
domain of Muslims. Ms Hashim, who ran Islamic funds in her native
country (Malaysia) beforestarting IslamQ.com, saysthat more than half
of her investors were non-Muslims.