Islamic banking - the answer to the credit crunch?

Islamic banking - the answer to the credit crunch?

16th January 2009, Comments 0 comments

Islamic banks seem immune from the current credit crisis. In the past few months, the ‘Islamic Dow Jones' has lost just a few percent, whereas the original stock market index has lost more than a third of its value.

Could Islamic banking be a viable alternative to the discredited capitalist system?

Islamic bankingWhile the financial crisis wreaks havoc around the globe, the Islamic banks are increasing their reserves as well as attracting new customers. Against all odds, two new Islamic banks were founded in the European centre of Islamic banking, London, last year.

Abdullah Turkistani, Director of an Islamic economic research centre in Saudi Arabia, says the current crisis has affected almost every financial institution, including Islamic banks. But he adds, "If you want to see the negative effects to Islamic banking, it is almost negligible compared to what happened to other banks."

Justice principle
Islamic banking is based on Islamic law of duties, the Sharia. UK Islamologist Rodney Wilson says Islamic banking is rooted in the principle of justice. "Financial transactions must be fair and parties must treat each other fairly."
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Islamic banks are less vulnerable to the effects of the financial crisis because:

    * The Islamic banking sector is relatively small and young
    * Islamic banks do not make use of the inter-bank money market (frozen because of mistrust between banks)
    * Islamic banks have no money invested in uncovered loans and financial derivatives.

Riba, Arabic for interest, is forbidden. So all transactions involving the charging of interest are taboo.

Emeritus professor of international financing Hans Visser says that in addition, Islamic financing must always be linked to real transactions.

This means money will only be lent for "the purchase and sale of real goods and services. Trade in claims on money not linked to any real transaction is banned, as is the separate trade in risk."

In addition, no money can be invested in activities which are considered impure (haram), such as the production of alcohol, as well as gambling and pornography.


Most people agree that the credit crisis requires a reorientation on current financial practices. The concept of Islamic banking may appear exotic at first sight, but on second thought it may not be all that far removed from ‘ethical banking'.

Islamic banking has failed to take off in the Netherlands, but has grown steadily in surrounding countries.

In the past few years, Islamic banking grew worldwide by 15 percent a year, and today has an estimated value of about 800 billion US dollars.

Islamologist Rodney Wilson says Islamic banks can serve as an example:

"To some extent it is a return to banking fundamentals. So a move away from the reliance on inter-bank and wholesale markets. We may see a model in which banks are much more constrained in what they can do and how fast they can expand by their own ability to attract their resources. I think that is not a bad thing."

However, not everybody is convinced. Professor Hans Visser points out that adopting the Islamic model could block economic developments. Taking out insurance against all kinds of hazards facing international business would become much more difficult.

"The economy would become much more rigid. Greater economic openness has brought enhanced growth but also greater volatility, stronger fluctuations. If you have free markets, you must accept that things go wrong every once in a while."

Laurens Nijzink
Radio Netherlands

Photo credit: RabunWarna

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