Why "Islamic Finance"?

I would like to preempt two opposing reactions that many readers may have once they recognize that "Islamic finance" is in many ways very similar to (and at times identical with) conventional finance. Some may feel that this similarity is an attempt to dilute the Islamic teachings to simplify our lives, while others may feel that the Islamic Legal distinctions between Islamic and regular finance are artificial means of creating an industry where none is needed. I will be among the first to admit that the terms "Islamic banking" or "Islamic finance" can be quite misleading given the many similarities between Islamic and conventional financial contracts. To explain my point of view about this issue, let me use a good analogy: the issue of "Islamic marriage".

There are no obstacles that prevent Muslims in North America from having an Islamic marriage, a contract that adheres to the legal requirements of the state as well as the Islamic legal requirements. In certain respects, "a marriage is a marriage'", but in other respects, to abide by all the requirements of the Islamic marriage contract, the Muslim man and woman need to do some extra work. Local Islamic centers, as well as continent wide organizations like ISNA, provide information and contract forms to help potential Muslim families abide by both sets of laws (e.g. providing local religious "marriage services", providing forms for an "Islamic will" to ensure abidance by Islamic inheritance laws, etc.).

Similarly, the notion that "a marriage is a marriage" may be applied in the realm of finance, e.g. "a lease is a lease". In this domain also, the Muslim needs to ensure that the contract he signs with the lessor or lessee agrees with the conditions of the lease contract (`aqd al 'ijarah or `aqd al 'ijdr) in Islamic jurisprudence. Those conditions are put in place to ensure that the contract would not contain elements of Riba or Gharar, which are forbidden in Islam.

In this sense, "Islamic banks" or "Islamic financial institutions" try to ensure that all their contracts adhere to Islamic legal requirements as well as state requirements. As with marriage, the outer form of an Islamic lease may seem to a. casual observer to be identical to a regular lease. Recognizing the differences requires alertness to some of the legal requirements that may seem subtle to the casual observer. I hope that this primer will wet the readers' appetites to educate themselves regarding those important Legal financial requirements of Islam.

Abuses of the terms "Islamic banking and finance" in a number of Islamic countries have precipitated a degree of skepticism among the Muslim population. The view that the field consists of nothing more than mere nomenclature has become too deeply rooted in the minds of many sincere Muslims because of those abuses. That skepticism turned cynical when educated Muslims examined careless statements by early proponents of the field of Islamic banking in those countries. Those statements suggested that the differences between the Islamic model of finance and its conventional (western) counterpart should be obvious without any need for further education. Since the behavior of early Islamic banks seemed to casual observers to be very similar in function and form to conventional banks, the field was summarily dismissed as window dressing.

Those early tactics were particularly ill advised given the fact that Allah (swt) did not deny the similarity between Islamic and conventional (or western) finance. When the Arabs argued that "trade is but like riba" [2:275], Allah (swt) did not deny that apparent similarity, but decisively informed that "but Allah has permitted trade and forbidden riba' [2:275]. The legal differences between the two are clear, and have been detailed over the centuries by capable Muslim jurists. However, the fact remains that the sophisticated Arab traders of Makkah did not at first see any discernible difference between the Islamic model and the one based on riba. [Note: Al 'hnam Al Tabari (1992, vo1.3, p.104), Al Qurtubi (1996, vol.3 4, p.230) report in the exegesis of (2:2751 that the Arabs before Islam knew only one type of riba: Once a person's debt was due for payment, the creditor gave him the choice "either you pay, or you increase the debt". They argued that there is no difference between this type of increase and the increase in the price of a credit sale over the price of a cash sale is identical to what they were doing. However, Allah (swt) made the fundamental distinction, which was later explained by the Prophet (pubh) and analyzed by Islamic scholars.] Therefore, the reader seeking to understand this difference should expect that understanding the difference is a non trivial process. My hope as stated in the preface is to dispel some of the misconceptions about this area, and encourage the reader to seek more requisite Islamic knowledge.