What is Islamic banking and finance?
Islam is not monolithic. The Islamic world is diverse, with numerous traditions — Indonesian/ Malay, Indo-Pakistani, Persian,Turkic — that have little in common with the experience of the Arabian Peninsula. There is therefore a great deal of geographic heterogeneity in how Islam is practised and how communities interpret the sharia (Warde 2010). Islamic banking and finance (hereafter IBF) is less diverse; nonetheless, it is a market in formation with factious voices claiming certain economic activity as “sharia compliant” or “Islamic”, while other voices claim the same economic activity to be outside of, if not contrary to, Islam. Describing Islamic finance as a discordant chorus is a trivial claim. After all, for over half a century, Islamic scholars have engaged in print (Siddiqi 1983 ) in intense debates regarding how to interpret contemporary financial practices (Pitluck 2013).
IBF postdates the conventional banking sector. It originated in the early 1970s, fuelled by the increased political economic power derived from oil revenues to many Muslim-majority countries. Its principal intellectual and institutional support arose from debates within the Organization of the Islamic Conference (OIC) to reform the monetary and financial system to conform with Islamic ethics, as well as in larger debates within the United Nations for a New
International Economic Order (Warde 2010: 70—113). IBF is a project that is often associated with postcolonialism, the slow shifting of the worlds hegemonic centre from a North—South axis to a multipolar East—South arrangement (Imam and Kpodar 2013; Nederveen 1’ieterse 2011 ; Pollard and Samers 2007).
IBF is an “elusive, contested, evolving and heterogeneous set of practices that defies simple description or conceptualization” (Pollard and Samers 2007: 314). Nonetheless, IBF tends to be distinguished from conventional finance based on three broad criteria. First, finance must be cognizant of the objects being financed. Islamic financial institutions are prohibited from purchasing equity in or providing credit to products and activities prohibited by the religion. Secondly, riba and gharar are prohibited. As a working translation, riba is associated with interest, usury, and financial transactions untethered to the nonfinancial economy (El-Gamal 2003). Gharar is associated with unproductive risk and exploitative information asymmetries (El-Gamal 2001).Thirdly, and more broadly, Islamic economic activity must not involve products or services prohibited by the religion (e.g. alcohol or pork), and should be conducted transparently and with fully informed mutual consent by all parties. Charity is obligatory. Debt is broadly permissible within the above parameters. And although most of the IBF sector is profit-seeking, for some IBF also entails promoting equity and social justice (Vogel and Hayes 1998: 53—69).
Notwithstanding these broad principles, the precise operationalization of IBF varies across financial institutions within the same country, and across legal jurisdictions. This partly reflects the institutional structure of the religion. Sunni Islam has four distinct schools of interpretation of sharia. Legal interpretations (/i/i) evolve as sharia scholars draw on the consensus interpretations within particular schools and time periods (ijma), interpret via careful reflection and devout effort (ijtihad), reason by analogy from primary sources (qiyas), or depart from tradition because of local custom (utfl, public interest (maslaha), or overriding necessity (durnra) (Vogel and Hayes 1998: 23—47). Consequently, when a sharia scholar or sharia supervisory board issues a fatwa (authoritative legal opinion) that permits transaction X,
one should not conclude that transaction X is “Islamic” for all parties and for all time. The ijtihads of different scholars may legitimately vary. Moreover, if the fatwa is based on utilitarian choice, assessments of utility can change with place and time. And lastly, a fatwa might rest on nothing more than temporary, and changeable, necessity.
(Vogel and Hayes 1998: 41)