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
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
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.