ISLAMIC FINANCE: A GLOBAL OPPORTUNITY FOR MUSLIMS AND NON MUSLIMS

The Islamic banking law serves the interests of the growing number of Muslims who are not comfortable with conventional financial systems which charge interest on capital.

Muslims consider interest as riba, (prohibited by shari’ah law) and that’s an important reason why  Muslims are turning to Islamic banking services and even looking at Islamic investment in the form of sukuk, Islamic bonds.

The passage of the law, however, does not automatically address all the problems currently faced by shari’ah banking and finance. The double taxation issue is one of them. Because shari’ah banking does not charge interest, shari’ah banking transactions often involve selling and buying of assets, which belong to the bank until the end of the transaction, when the client buys the asset back. This selling and buying cycle is subject to taxation, which may mean double taxation, compared to a conventional loan to buy an asset where it is only purchased by the client once.

Another big problem for shari’ah banking is the limited choice of instruments currently available. Many fixed rate instruments currently available from shari’ah banks are not really very different from interest based transactions in conventional banks.

If you want to borrow money from a shari’ah bank to buy a car, for example, you have to buy the car from the bank and not from the car dealer. The bank would charge you a price based on the original price of the car plus management fees and the profit for the bank and its depositors.

Therefore, technically, there is not necessarily a big difference in pricing between shari’ah banks and conventional banks. That’s why even Muslims themselves have expressed some skepticism and even cynicism regarding the present practices of Islamic banking.

There is a challenge for shari’ah finance scholars to devise truly shari’ah banking instruments or investment instruments that would attract more people to put their money in shari’ah banks and be recognized as shari’ah-compliant internationally. These could include fixed cost instruments, where there are fees or charges but not interest, and variable cost instruments where the client may share profits or losses with the bank.

If more instruments are available and attractive and better advertised, then shari’ah banking should serve not only Muslims but also people of other faiths, who are perfectly free to use it. This way, Islamic finance will be able to become a vehicle to develop and empower the economy for Muslims and non-Muslims alike.