KUWAIT — The modernistic skyscraper of the Kuwait Finance House has all the trappings of a major bank's headquarters, from the low-key architecture that speaks of imposing wealth within to the highly polished marble floors of the branch office on the street level.
The only signs that this is not an average bank is the absence of women, who must use a "female branch" around the corner, and the lack of boastful announcements about high interest rates paid on deposits.
In fact, the Kuwait Finance House, with more than $2 billion in assets, makes a point of bragging that it pays no interest at all to depositors. Yet the money keeps flowing in.
Like a dozen similar financial institutions that have sprung up in the Arab world in the past decade, the Kuwait Finance House is an Islamic bank, attempting to extend religious principles to the management of money.
The idea of banks operating on Islamic principles has been around since the 1950s. But it was put into practice only in the late 1970s, when many Muslim countries were flush with cash from the oil boom and there was a resurgent interest in Islam after the revolution in Iran.
Now there are Islamic banks throughout the Muslim world and in such far-afield places as Denmark and Switzerland.
Although conventional banks have been particularly hard hit by the Persian Gulf region's economic slump resulting from the worldwide decline in oil prices, Islamic banks are bucking the trend and growing every year.
Jordan's Islamic Bank, for example, has gone from assets of 15 million Jordan dinars (about $45 million) in 1980 to 152 million dinars ($456 million) in 1986, becoming the country's fourth-largest bank.
"We've passed the stage when we were testing a new idea," said Adnan Bahar, general manager of the Kuwait Finance House.
Islamic banks work on a basic principle that is laid down in the Koran, the holy book of Islam: "God hath permitted trade and forbidden usury." In practical terms, this has been interpreted as banning all forms of interest payment and also requiring an element of risk in a transaction.
The idea of an Islamic bank conjures up visions of mullahs behind tellers' windows, but most of the bankers interviewed were hard-nosed financial experts with extensive commercial banking experience.
Rather than being promised a fixed rate of return, as occurs at most commercial banks, customers at Islamic banks sign a declaration that they are sharing the risk that the bank assumes in the projects it invests in. Rather than getting interest, the depositor receives a share of the bank's profits, which vary every year depending on performance.
At the Jordan Islamic Bank, depositors in 1986 were paid 5.1%--more than 3 percentage points below the interest rate paid out by most other banks there. Still, deposits soared.
"People prefer to adhere to their religious beliefs," Mousa A. Shihadeh, general manager of the bank, said. "The bank is meeting the needs of the country, where 90% of the people believe in Islam."
In Kuwait, 1984 was something of a watershed year because the Kuwait Finance House, which had invested heavily in real estate, paid no return to depositors.
"People were shocked, and it scared off a lot of investors," a prominent Kuwaiti commercial banker said. "People who had gotten religion in 1980 suddenly became distinctly un-Islamic, and the money flowed from Islamic banks back to the commercial banks."
Because the banks cannot make any investments that produce interest, such as bonds or U.S. Treasury bills, they must be creative in their use of capital. Trade is specifically approved in the Koran, and many Islamic banks have plunged directly into the import-export business or have opened shopping malls.
The Kuwait Finance House has financed everything from the import of cars from Europe to the sale of frozen chickens. It is opening a chain of supermarkets in coming months.
Because of religious precepts, the bank does not invest in any company dealing in liquor, pork or military hardware, according to bank management.
Some Islamic banks, like the one in Kuwait, are so strict in their observance of Islamic tradition that they segregate men from women, including customers and employees. That is why the Kuwait Finance House has a separate branch for women.
Profit, Not Interest, on Loans
Islamic banks also make consumer loans, such as those for cars and houses. Rather than charge interest, the bank agrees to a schedule of payments that includes a "profit" to the bank.
While some doubters in the commercial world said that this is really another name for interest, Islamic bankers emphasize that what distinguishes the deal is the degree of risk assumed by the bank.
Even commercial bankers acknowledge that Islamic banks are good at keeping track of their customers because, as partners in many ventures, they have assumed a greater risk. So most Islamic banks are labor-intensive, employing engineers and retailing experts to keep watch on their investments and to assess new ventures.
Sami H. Homoud, general manager of the Albaraka Islamic Investment Bank in Bahrain, said in an interview that the major failure of the banks has been to come up with a short-term investment device able to absorb the huge sums of cash in the banks. At the moment, money not invested in long-term projects lies idle.
Although not engaged in traditional lending, a number of the banks make special, interest-free loans for projects with social merit, in keeping with the religious precepts that guide the banks. Most also have religious advisers on their boards of directors.
At the Jordan Islamic Bank, a special fund is available for loans for emergency medical care, school fees and even wedding payments.
Asked about the latter, Shihadeh, the bank's general manager, replied, "We feel it helps cut down on adultery. And that's certainly Islamic."