Islamic banking and finance is a new phenomenon in the International financial circles. It has aroused some interest, more suspicion. Sometimes one hears about the emergence of an Islamic financial industry. As for suspicion, it may be described in certain prototype sentences like “Arabs are coming”, which reminds one of the crusades. Some protagonists of this view may argue that now “Clash of Civilizations” would take place in the financial market rather than in the battlefield. Some others even argue that these institutions “finance” the terrorist activity. On the other hand, the protagonist of Islamic banking and finance see it as a way of emancipation of the Islamic world from the yolks of neo-colonial west. They also hope that Islamic banking and finance would be able to pull the Islamic countries out of the abysmal poverty which is plaguing most of these countries. Where does lie the reality? Probably, it lies somewhere in between. Is Islamic banking a boon or a bane? Probably, neither, if it is a form of banking. It becomes what you wish to make of it.
First, let us talk about the size of the Islamic financial industry. The pundits estimate that Islamic financial industry handles close to 150 billion dollars annually all over the world. It is also claimed that it has been growing at a robust growth rate of 15 per cent per annum. Compared to the size of the international financial market, this is just a drop in the ocean. Even a growth rate of 15 per cent per annum would not be sufficient to allow for an “Islamic takeover” of the “system”. So, it appears that apprehensions of “Arabs are coming” are rather unfounded. Even, if some “takeover” happens somewhere, it may be taken as a sporadic event and not a manifestation of any consistent trend. A supposedly Islamic takeover of International financial system may require centuries to materialise.
Now, let us examine the other side of the picture. Those who pin high hopes with the emergence of Islamic banking and finance are also in for some surprise. Islamic banking and finance is no magic wand. It cannot be panacea for all economic ills of Muslim societies. Banking and finance is just one sector of economy. Its activities, though pervading every nook and cranny of economy, cannot be an agent of change by themselves. In fact, the social, economic and technological problems of the Third World countries, among which most of the Islamic countries are counted, are so pervasive that no piecemeal solution would suffice.
Further, if one looks at the geographical distribution of the so-called Islamic financial institutions, one would discover that these are highly dispersed to the extent that many countries do not have more than the numbers which could be counted on fingers. To expect that such a small number of financial institutions shall be able to bring about some structural transformation in the society would be expecting that the tail would wag the dog.
So much about the apprehensions of and expectations from the Islamic banking and finance! But the question remains what is Islamic banking and finance anyway?
Islamic banking and finance is the product of Islamic reservations against the permissibility of bank interest. The Arabic word, commonly known in the Arab world and also used in the Qur’ān is Riba, which literally means growth or addition over a principal.
When modern banks appeared on the scene, most of Islamic countries were under colonial subjugation. However, most of Islamic jurists decided that bank interest is Riba, which is prohibited in the Qur’ān. Hence, commercial banking as we know did not make much headway in Islamic countries. Many pious Muslims prefer to hide their wealth rather than put it in the bank. Many, who dealt with the banks under the force of circumstances, did not claim the bank interest. Some, who did claim interests on their deposits, did not use it, considering it Haram (Prohibited). There was near consensus in the Muslim World that interest and Riba are one and the same thing. All this retarded the progress of commercial banking in the Islamic world but did not lead to establishment of such financial institutions that could work on interest-free basis.
There was not much intellectual fervour either, which is a necessary condition for the emergence of a new institution. It was an Indian economist, Mr. Anwar Iqbal Qureshi, a professor at the then Jamia Osmania (now, Osmania University), who first posed the question how an economy would function if interest rate is taken to be forbidden. That was way back in 1930s. Since then, the Islamic financial institutions have come a long way.
[The author, a former professor of economics, lives in Noida and could be contacted at ausafahmad2007@gmail.com.]