Banking on Allah


ISLAMIC FINANCE



Banking On Allah

Devout Muslims don't pay or receive interest. So how can their 

financial

system work?



FORTUNE

Monday, June 10, 2002

By Jerry Useem



http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=208088



There's nothing in Osman Abdullah's bearing to suggest an Islamic

fundamentalist. He's a businessman, sober in dress and political 

outlook.

Ask him about America, and he'll talk fondly of his time at the 

University

of Wisconsin, where he earned his MBA. But when it comes to his banking

habits--and the Koran's ban on giving or receiving interest--Abdullah

turns deadly serious. "Allah gave us very clear instructions: Don't 

make

money on money," he says. The words from Chapter 2, Verse 278 of the 

Koran

are, in fact, quite specific: "O you who believe! Have fear of Allah 

and

give up what remains of what is due to you of usury.... If you do not,

then take notice of war from Allah and His Messenger." "If I break 

that,"

says Abdullah, "I'm dead sure that I'm going to get very bad results in

the hereafter. I believe it as I believe in talking to you now."



We are talking, just now, outside Shamil Bank in the tiny Persian Gulf

state of Bahrain. It's the bank where Abdullah keeps his money, and,

except for the tellers' untrimmed beards and the section for ladies'

banking, it looks much like any other: customers standing in line, an 

ATM

machine, a hum of efficiency.



But Shamil is not like any other bank. For starters, Abdullah's savings

account isn't really a savings account at all, but something called a

mudarabah account: Instead of earning fixed interest, his savings are

invested directly in a range of ventures, such as construction projects

and real estate. "In Islam, money has to work," Abdullah explains. "If 

it

works, we have to share the profits. If it doesn't, you don't owe me

anything else." That means his nest egg could shrink if enough of those

ventures fail. But, he says, "I'm willing to take the risks."



So, it turns out, are an increasing number of Muslims. At a time when 

the

words "Islam" and "finance" are more likely to conjure the association

"terrorist money laundering," the Muslim world has quietly embarked on 

a

very different sort of jihad: building a financial system where

interest--a phenomenon as old as money itself--does not exist.



Spread across the Middle East and beyond are more than 200 Islamic

financial institutions: banks, mutual funds, mortgage companies, 

insurance

companies--in short, an entire parallel economy in which Allah, not 

Alan

Greenspan, has the final say. Industry growth has averaged 10% to 15% a

year. Sniffing opportunity, conventional banks like Citibank and HSBC 

have

opened Islamic "windows" in the Gulf. And while the industry's market

share is still modest--about 10% in Bahrain--its very existence 

challenges

the modern assumption that global capitalism flattens all before it.



Which leaves just one question: How on earth can it work?



This spring, Shamil Bank helped Abdullah buy a car through a 

transaction

known as murabaha, which is more distinct from mudarabah in function 

than

in spelling. In a deal you'll never see from GMAC, Abdullah identified 

the

Toyota Corolla he wanted, then asked the bank to buy it from the dealer

for roughly 3,600 dinar (about $9,500). At the same time he agreed to 

buy

the car from Shamil for 4,000 dinar, to be paid in monthly installments

over three years. The two sales were executed almost simultaneously, 

but

because Shamil Bank took possession of the car for a brief period of 

time,

everything was kosher. Or rather, hilal.



The result looked a lot like interest, and some argue that murabaha is

simply a thinly veiled version of it; the markup Shamil charges is very

close to the prevailing interest rate. But bank officials argue that 

God

is in the details. For example, any late fees Shamil collects must be

donated to charity, and the bank cannot penalize a borrower who is

genuinely broke.



Mortgages, meanwhile, are out of the question for Abdullah. That's why 

a

house he's building in his native Sudan sits unfinished near the Nile

River. "I started it four years ago," he says. "Sometimes I stop the

construction until I collect enough money."



Given the inconveniences, you might ask: What's the point? Can earning 

a

little interest really be such a big deal? Bahrain's most eminent 

Islamic

scholar provided some answers.



I found Shaykh Nizam Yaquby at the back of his family's store in 

Bahrain's

humming market--a diminutive, robed figure partly obscured by the piles 

of

papers and books on his desk. They include both the hadiths, or sayings 

of

the Prophet, and Inside Secrets to Venture Capital, which more or less

capture Yaquby's eclectic background. He is trained in both economics 

(at

McGill University in Canada) and in Islamic sharia law (in Saudi 

Arabia,

India, and Morocco). During its heyday many centuries ago, sharia was 

the

world's most vibrant body of commercial law, its contracts recognized 

from

the Arabian peninsula to the Iberian peninsula. Then it fell into a 

long

decline, which Yaquby and other Islamic scholars are doing their best 

to

reverse.





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