Can Islam Save The Economy?: RD

By Nathan Schneider

In the midst of a global financial crisis one sector has yet to suffer the fate of the rest. Islamic finance, or Sharia-compliant banking, offers strict moral guidelines for dealing with money. Trading debt and risky speculation are off-limits, as is investment in immoral enterprises like gambling, prostitution, and war profiteering. It might be time to get the muftis on the phone.

Governments worldwide are struggling to manage the global financial crisis, with no end to the downturn in sight. But at least so far, one sector has been unscathed: the $1 trillion-and-growing business of Sharia-compliant banking.

That’s right, Sharia. The same combination of medieval Islamic law and modern post-colonialism that makes the terrorist clique supposedly so hateful of Western freedoms. Where finance is concerned, most muftis—Islamic religious scholars—agree that God prohibits charging any amount of interest on loans. Trading debt and risky speculation are off-limits too, as is investment in immoral enterprises like gambling, prostitution, and war profiteering. Transactions should be highly transparent and risk, as well as return, should be shared by all parties. You can’t trap people into owing more than they can pay. Basically, most everything that caused the current mess isn’t allowed. “Given their constraints, they actually don’t hold any conventional debt or conventional mortgages,” explains Samuel Hayes, emeritus professor of investment banking at Harvard. “They don’t have any of these derivatives or outright subprime loans. There’s no doubt that they have weathered this better than the conventional banks.”

For a world in need of fast, creative solutions to a cascading crisis, might this financial subculture offer a way out? Duke University economist Timur Kuran calls for caution. “I think it’s going to be a year or two before we have enough data to really know if it is the case that the banks are doing better and what explains it.” One way or another, says Bill Maurer, an anthropologist at UC Irvine who studies alternative economies, “this is a really interesting moment for Islamic banking.”

Sharia-compliant banks began appearing in the 1970s, but the concept dates to mid-century in South Asia and the Middle East, as Muslims newly independent from European rule sought to create an Islamic identity that would permeate all aspects of life, public and private. The first banks were small partnerships and development initiatives. In 1975, the Islamic Development Bank was founded by 23 Muslim countries (now 56), combining a World Bank-style mission with interest-free loans to member governments. It lent legitimacy and visibility to the approach. That decade’s oil boom gave a jump start to a new crop of commercial Islamic banks, particularly in the Persian Gulf states. By the ’80s, Pakistan, Sudan, and Iran were making efforts to Islamize their entire economies.

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