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Oil gushes from your Texas well. Daily you convert the black stuff to green stuff, and your pile grows. If you are among the small but growing number of Muslims worldwide who adhere strictly to Islamic laws governing finance, you will need to find a bank that doesn't violate the Qur'an's prohibition on interest-taking (riba) and speculation (gharar). Islamic banking's torrid growth--15 percent annually for the last five years at the leading Islamic banks for which numbers are available--may reflect a resurgent piety among Muslims, set amid the tremendous oil wealth generated primarily in the Middle East. In their new book, Islamic Law and Finance: Religion, Risk and Return, Schiff professor of investment banking Samuel Hayes III, D.B.A. '66, and Frank Vogel '72, Ph.D. '93, the Custodian of the Two Holy Mosques assistant professor of Islamic legal studies, explore how the Qur'an shapes Islamic finance.
Despite the Qur'an's prohibition on paying or receiving interest, Islamic law recognizes the time-value of money and allows compensation for its use. So while some Middle Eastern Islamic banks with vast sums on deposit pay their depositors nothing, others, including Western banks, have pioneered transactions allowed by Islamic law that compensate customers for use of their cash. "The bulk of these Islamic transactions," says Vogel, "are short-term, low-risk inventory markup deals called murabaha." Many of these transactions are instantaneous--the bank never takes physical possession--so some Muslims regard them as little more than sleights of hand. In a legitimate transaction, an Islamic bank might contract with a Japanese automobile manufacturer to take possession at the factory door of cars destined for the United States. At the same time, the bank would arrange to sell the automobiles, with a small markup, once they arrive in this country. The bank owns the cars only while they are in transit from Japan to California, later distributing its small profit to depositors. Muslim investors with longer time horizons can even own shares of common stock. Mutual funds that cater to a Muslim clientele--much like socially responsible funds in the West--typically exclude companies that deal in Islamic taboos like gambling, alcohol, or pork. And because borrowing is frowned on, companies with a low debt-to-equity ratio are considered the most desirable.
Vogel and Hayes report that, during the Gulf War, billions of dollars in savings fled the region: "Most went to Swiss banks, which have long provided wealthy Middle Easterners with safety, discretion, and competitive returns. Little of that money had reportedly returned to the Gulf by the end of 1996." There is "a demand for more than nominal practices," says Vogel, who writes that "these demands are stimulating innovations that promise to make Islamic finance more robust and in step with the requirements of modern commerce." Ultimately, however, the growth of Islamic banking will hinge on its ability to compete with rates of return offered by Western-style banks. Some bankers interviewed for the book believe that only by attracting "the funds of savers and investors who currently opt for the superior returns and risk characteristics of conventional bankers and investment bankers" can Islamic banking continue to grow.
~ Jonathan Shaw