So have many others. Islamic banking, due to high levels of liquidity and a growing sophistication in investment products, is on the rise. Two hundred Islamic financial institutions–including banks, insurers and mutual funds–now dot Asia and the Middle East. Western banking heavyweights like HSBC, Standard Chartered Bank and BNP-Paribas have launched a full line of products to serve moneyed Muslims from the middle class to the super affluent. And if the field continues on its impressive upward tick–it’s said to have been growing at 15 percent a year for nearly a decade–the pious will soon have many more investment vehicles at their disposal.
Malaysia has become a leader in the world of Islamic banking by choosing the most practical interpretations of the term. It has invested heavily in developing a Sharia-friendly financial system–one that forbids charging interest, but that has the regulatory, accounting and compliance standards any investor would expect. The country’s Islamic financial institutions–which make up about 8 percent of the banking sector–offer services that mirror and compete with conventional banks. So much so that some question if there is any difference at all. Such is the overlap that more than half of Malaysia’s Islamic loans go to non-Muslims. “Islamic banking in Malaysia comes to exactly the same thing as conventional banking,” says one Kuala Lumpur-based banker. “You cannot operate without a differential between today’s money and tomorrow’s money.”
Of course, that does, Islamic bankers admit, take a little finesse. Say, for example, a customer in Malaysia wants to buy a house. Under the Islamic option, the bank would purchase the house and sell it to the customer at a higher price. The customer then pays back the higher price to the bank in installments, in a transaction that effectively amounts to a fixed-rate mortgage. “From the surface, it looks the same, but in principle it is different,” says Wan Ismail Wan Yusoh, general manager at Malaysia’s Bank Islam. “From an Islamic perspective we cannot charge for a loan, but profit is allowed on a buy-and-sell transaction.”
That’s one definition. The problem is that across the Muslim world there is vast disagreement about what Islamic banking actually is. The Turks, for example, cannot even bring themselves to call theirs Islamic banks, opting for “special finance houses” instead. “Interpretation is the most controversial point in developing Islamic banking,” says Mohd Daud Bakar, a professor at the International Islamic University in Malaysia. “Different perceptions and interpretations can cause unease.”
Purists think schemes like Malaysia’s housing “loans,” for instance, violate the spirit of Sharia banking. Shahid Hasan Siddiqui, a Pakistani banker and critic of the system, recently wrote, “It must be kept in view that the Islamization of the banking system is a part of the overall Islamic value system and is not merely refraining from interest-based transactions.” Siddiqui and other strict Muslims would have Islamic banking remain true to Muslim values, such as the promotion of socioeconomic justice and the fair distribution of wealth. They reject the sleight-of-hand accounting that allows institutions to claim they are not charging interest, preferring schemes where two parties simply share the profits or losses of buy-and-sell transactions.
In the end what will determine the future of Islamic banking is whether it’s consistently profitable. Again, the doubters say high transaction costs and low levels of capital will keep the banks from being competitive with conventional market players. “Their rates are about half to 1 percent higher than the current [conventional] rate,” says Lie Hiong Lauw, an accountant at Deloitte & Touche in Jakarta. “That’s why I think it’s going to be tough for them.”
Still, Islamic banks proved to have some structural advantages over their conventional competitors during the Asian financial crisis in 1997. “The Sharia banks survived because they did not have to pay such a high interest rate to their customers, since the return on deposits always reflects the profitability of the bank,” says Dadang Muljawan of Bank Indonesia’s Islamic banking bureau. Clearly it’s sometimes wise for investors to take an interest in more than interest.
