Contradictions in Islamic Banking

What makes Islamic banking unique to its Muslim customers and endemic to the Muslim world, according to its proponents and defenders, is its alternative form of financing that is “more ethical and more equitable” because it is informed by the teachings of the Koran and the Sunna. It offers interest-free transactions on loans and home mortgages as it channels penalties on late payments to religious charities in the form of donations. In this Washington Post article, a Meezan bank officer, Irfan Zulqemain, an MBA degree-holder and who has “a vision of Islam as a socially transformative force,” views interest as a curse: “We don’t treat money as a commodity, which just makes a few people richer and everyone else poorer. Our way generates economic activity and spreads money throughout society.” With religion as its selling point, Islamic banking is rapidly spreading in countries like Pakistan where to be financially successful should also mean to be religiously correct.

According to Prof. Timur Kuran, professor of economics and political science at Duke University, Islamic banking is part of an intellectual tradition called “Islamic economics” that seeks to give the economy an Islamic character. It promotes among other things a form of banking that offers an interest-free alternative to traditional savings accounts and a wealth-redistribution process called zakat -- Islam’s tax on wealth and income -- that would help solve inequality and poverty in society.

In his scholarly and voluminous work on Islamic banking and economic development in the Middle East, Kuran argues, however, that Islamic banking has not made significant achievements because its emphasis on economic morality runs contrary to human nature. He also argues that wealth-redistribution based on zakat has not reduced inequality and that in fact the direction of the distribution of wealth is going away from the poor. He is also worried that charitable-giving only leads to the strengthening of Islamic fundamentalism.

Revisiting Prof. Kuran’s work will help shed light on the Muslim world’s perceptions of Islamic banking. His article on“The Economic Impact of Islamic Fundamentalism (in Martin E. Martyand R. Scott Appleby, eds. Fundamentalisms and the State: Remaking Polities, Economies, and Militance (Chicago: University of Chicago Press, 302-341) is especially enlightening as he traces the intellectual and historical traditions of Islamic economic thinking.

Such knowledge is what Naeem Bumey, a Meezan Bank client, needs. During an interview for this Washington Post article, Naeem says, “Most of us don’t have detailed knowledge of what is Islamic or un-Islamic. . .There may be a gray area in how a bank determines its profit, but if the scholars have declared this to be Islamic, then at least you don’t have any doubt.”