Islamic Banking: Is It Really Kosher? Muslim Scholars Say the Qur'an Prohibits Collecting Interest on Loans. but Many Banks, Both Global and Local, Have Found Clever Ways to Meet Religious Strictures. It's a System That May Be Hypocritical, but Also Profitable

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THE COVERAGE CAN be a little bit breathless: "La finance islamique en plein boom," Le Figaro reported in September. Yes, Islamic banking, structured along the lines that religion decrees, is in full boom. But is it really banking? And is it really kosher?

Islam prohibits the payment of interest on loans, so observant Muslims require specialized alternative arrangements from their banks. Many of the largest global financial companies, including Deutsche Bank and JPMorgan Chase, have established thriving subsidiaries that strive to meet these requirements. As a result, optimists speculate that the common pursuit of lucre--divinely sanctioned, filthy, or otherwise--will bring bickering civilizations together. They may be right.

The Islamic aversion to interest collection comes from the Qur'an. Not that the term "interest" is ever used: the Arabic injunction forbids something called riba. The Qur'an offers no exact definition of what riba meant in seventh-century Arabia, the time and place of the Prophet Mohammed--let alone what the term should mean today. In particular, the passages are ambiguous on the question of whether riba refers to all kinds of interest collection, or only usurious interest--that is, lending practices that are, according to some ill-defined standard, unfair and exploitative. What is clear in the divine financial critique is that, whatever riba may be, Jews are doing it. At one point God warns that they will face a "painful day of doom" if they keep it up.

This ambiguity was a practical problem for the early Muslim jurists, who formalized religious rules in a code called sharia. They were divided on the subject, but as time went on, the weight of consensus came to rest on the side of prohibiting all interest collection. The financial instruments that 20th-century Islamic theorists championed were updated versions of medieval commercial instruments, still known in the Islamic financial sector by their Arabic names: In addition to bonds, known as sukuk, there are profit-and-loss sharing instruments known as musharaka or mudaraba, Islamic leases known as ijara, and a commercial trade instrument called murabaha, the flexibility of which has made it extremely popular among Islamic financial firms.


The Islamic world witnessed the development of corporate contract law and the European banking system from afar. A mixture of traditional arrangements and, later, imported Western practices prevailed in Muslim countries. But it wasn't until the 1960s that anyone tried to combine the two, governing a modern bank according to Islamic law.

Islamic financial institutions, the argument went, would boost the economic development of Muslim societies. The fraternal style of Islamic banking--with its emphasis on equity financing rather than lending--would enhance social responsibility. In practice, however, Islamic finance has had to bend to the same pressures as any other kind of finance. Social, religiously oriented investment in the development of the Islamic world is something people are more interested in publicly championing than personally doing. Khalid Ikram, who represented the World Bank in Egypt, says of Islamic banking, "It hasn't had a lot to do with development."

Pinning down the growth of Islamic banking is a challenge. Whether a banking system truly counts as halal--that is, compliant with the laws of sharia, or, in another religious context, kosher--is a religious question, hard for accountants to answer. Take Iran: should the country's whole banking system, which is nominally Islamic, be counted as part of the sector even though many experts raise questions about its legitimacy? …