Islamic Banking: Posing a substanial poltical danger

September 27, 2007, 6:30

The folly of 'Islamic economics'

The National Post

Though few in the West have noticed the phenomenon, a significant and rapidly growing amount of money is now being managed in accord with Islamic law, the Shariah. According to one study, "by the end of 2005, more than 300 institutions in over 65 jurisdictions were managing assets worth around US$700-billion to US$1-trillion in a Shariah compatible manner."

Islamic economics increasingly has become a force to contend with burgeoning portfolios of oil exporters and multiplying Islamic financial instruments (such as interest-free mortgages and profit-sharing sukuk bonds). But what does it all amount to? Can Shariah-compliant instruments challenge the existing international financial order? Would an Islamic economic regime, as one enthusiast claims, really help end injustice by ensuring "the state's provision for the well-being of all people"?

To understand this system, the ideal place to start is Islam and Mammon, a brilliant book by Timur Kuran, written when he held the Saudi-sponsored position of King Faisal Professor of Islamic Thought and Culture at the University of Southern California.

Now teaching at Duke University, Kuran finds that Islamic economics does not go back to the time of Muhammad, but is in fact an "invented tradition" that emerged in the 1940s in India. The notion of an economics discipline "that is distinctly and selfconsciously Islamic is very new." Even the most learned Muslims a century ago would have been dumbfounded by the "Islamic economics."

The idea was primarily the brainchild of a South Asian Islamist intellectual, Abul-Ala Mawdudi (1903-79), for whom Islamic economics served as a mechanism to achieve many goals: to minimize relations with non-Muslims, strengthen the collective sense of Muslim identity, extend Islam into a new area of human activity, and modernize without Westernizing.

As an academic discipline, Islamic economics took off during the mid-1960s; it acquired institutional heft during the oil boom of the 1970s, when the Saudis and other Muslim oil exporters, for the first time possessing substantial sums of money, signed on to the project.
Proponents of Islamic economics assert that the prevailing capitalist order has failed and that Islam offers the remedy. To assess the latter assertion, Kuran scrutinizes the actual functioning of Islamic economics, focusing on its three main claims: that it has abolished interest on money, achieved economic equality, and established a superior business ethic. On all three counts, he finds it a total failure.

"Nowhere has interest been purged from economic transactions, and nowhere does economic Islamization enjoy mass support," he writes. Exotic and complex profit-loss sharing techniques such as ijara, mudaraba, murabaha and musharaka all involve thinly disguised payments of interest. Banks claiming to be Islamic in fact "look more like other modern financial institutions than like anything in Islam's heritage."

In brief, there is almost nothing Islamic about Islamic banking-- which goes far to explain how Citibank and other major Western financial institutions host far larger ostensibly Islam-compliant deposits than do specifically Islamic banks.

"Nowhere," Kuran writes, has the goal of reducing inequality by imposition of the zakat tax (a form of tithing) succeeded. Indeed, the author finds this tax "does not necessarily transfer resources to the poor; it may transfer resources away from them." Worse, in Malaysia, zakat taxation, supposedly intended to help the poor, instead appears to serve as "a convenient pretext for advancing broad Islamic objectives and for lining the pockets of religious officials."

In the final analysis, Kuran dismisses the whole concept of Islamic economics. "There is no distinctly Islamic way to build a ship, or defend a territory, or cure an epidemic, or forecast the weather," so why money? He concludes that the significance of Islamic economics lies not in the economy but in identity and religion. The scheme "has promoted the spread of anti-modern ? currents of thought all across the Islamic world. It has also fostered an environment conducive to Islamist militancy."

Indeed, the conceit behind Islamic economics possibly contributes to global economic instability by "hindering institutional social reforms necessary for healthy economic development." In particular, were Muslims truly forbidden not to pay or charge interest, they would be relegated "to the fringes of the international economy."

In short, Islamic economics has trivial economic import, but poses a substantial political danger.