Economics and Business

Islamic Banking

Mervyn K. Lewis and Latifa M. Algaoud, Cheltenham, UK: Edward Elgar, 2001. 274 pages.

Islamic Banking is an outstanding example of collaboration among Muslim and non-Muslim scholars interested in integrating “Western-based literature with that developed in the Islamic tradition.” Stating that Islamic banking, although widespread, remains “poorly understood” in the Muslim world and an “enigma” in the West, the authors seek to clarify many matters. The book’s main themes are Christian and Islamic positions on usury/riba’ (chapter 8); the foundations (chapters 2 and 3), theories (chapter 5), application (chapters 5, 6, 7, and 9), and progress (chapters 1 and 9) of Islamic banking; and an analysis of Islamic banking in light of current theories of financial intermediation (chapter 4) and corporate governance (chapter 7).

The book highlights Islamic and Christian commonalities on issues pertinent to banking and finance. While stating that Christianity, Hinduism, Judaism, and Islam prohibit usury, “Islam is the only major religion which maintains a prohibition on usury” due to its prominence in the Qur’an. The issue of riba’ is perplexing, for despite warnings of severe consequences to those who engage in it, the Qur’an is silent on its exact nature. Unfortunately, successive generations of scholars have so confused matters that no one can say exactly what riba’ is. For example, a majority of scholars regarded bank interest as riba’ and, therefore, made the need for an interest-free Islamic banking system inevitable, whereas 21 jurists at Egypt’s al-Azhar recently proclaimed a ruling that legitimizes interest.

Traditionally, Islamic religious terminology has made no conceptual difference made between interest and usury (high interest). However, a comparison of Christian and Islamic attitudes to the ban shows a striking similarity between the “devices used by Christians” and the “financing instruments used by Islamic banks today” to circumvent the prohibition.

Both groups considered usury an exploitation that lacks scriptural warrant, although in practice many stratagems were adopted to circumvent the prohibition, such as distinguishing between usury and interest (compensating for loss and/or sacrificing the gain due to a loan), and combining a service charge and interest in the bill of exchange transactions to “disguise domestic credit transactions in the form of currency exchange.” Likewise, by using hiyal (legal device), “Muslim merchants utilized the potential of the bill of exchange to (and perhaps beyond) the limits of law.” In fact, the authors conjecture that Muslims conveyed many of these hiyal to medieval Europe through the triangular trade and commerce among the Islamic realm, Byzantium, and Europe. Islamic banking is seemingly a replay of the 700 CE ruses, under the rubric of Islamization, to avoid adopting indigenous Islamic morés. However, while Christians disguised usury (riba’) as interest, Muslims disguise it as profit-sharing.

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