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Profit versus the prophet

Islamic law has transformed some Muslims into creative bankers.

February 10, 2008|Joshua Kurlantzick | Joshua Kurlantzick is a visiting scholar at the Carnegie Endowment for International Peace and the author of "Charm Offensive: How China's Soft Power Is Transforming the World."

On a humid morning in downtown Kuala Lumpur, women wearing patterned head scarves and long skirts walk in groups to work, strolling beneath a futuristic, Epcot-esque monorail and past neatly trimmed coconut palms. One cluster of women stops for lattes at a Starbucks, one of many cafes blossoming on the ground floors of new glass-and-steel corporate skyscrapers in the Malaysian capital. Young male information-technology workers sit in shorts at the Starbucks' outdoor patio, furiously typing on computers. When the call to prayer rings overhead, several of them quickly down their espressos, pack up their laptops and hurry to the mosque.

Since 9/11, Muslims -- and many Westerners -- have wondered if Arab Muslim nations can reconcile Islamization and globalization. To some, Malaysia has found the balance of the two, creating a country comfortable for pious Muslims and for a company such as Intel, which has built a huge microprocessor plant in the northern city of Penang. The White House has praised the small Southeast Asian nation as a model of moderation. Malaysia has benefited enormously from globalization, throwing itself open to trade, building a high-tech corridor and growing into one of the wealthiest nations in the region. Yet it has boomed in part by embracing one of the oldest concepts in Islam -- Islamic banking.

Islam has had its own concepts of banking and finance for centuries. The Koran, striving to promote equity, prohibited the charging of interest on loans because poor borrowers and wealthier lenders did not face equal risks. It also barred Muslims from making money off such products as alcohol because Muslims are not allowed to drink alcohol.

Over time, scholars in some Arab Muslim nations deemed a small number of investment practices as Sharia-compliant. In an Islamic financial transaction called musharakah, for instance, the lending Islamic bank and the borrowing company pool their capital, rather than the bank providing the loan at a fixed rate. The bank and the company jointly manage the money, so both profit or lose equally from the investment.

Before 2001, most Arab Muslim investors did not use transactions like musharakah. Instead, they placed their savings in Western banks. But that has changed over the last six years. One reason is the skyrocketing price of oil, which has fattened the coffers of many Arab governments and investors and given them more money to invest, including in Islamic banks. After 9/11, many leading Muslim investors also pulled out of the United States because they feared their money would be targeted. Finally, the growing power of Islamists put pressure on Muslim investors to save according to Koranic principles.

And these investors have. In 2006, there were 250 Islamic mutual stock funds worldwide with combined assets of $300 billion, according to Moody's. Overall, the Islamic finance industry may be growing as much as 15% annually. Deutsche Bank, HSBC, UBS and other banking giants have established Islamic finance subsidiaries or separate Islamic banks that offer products that comply with Sharia.

But it is Malaysia that stands at the forefront of this industry, which was virtually nonexistent before 9/11. Malaysian leaders recognize that Islamic finance allows Muslims to assert their religious identity without having to become involved in poisonous Islamist politics. Malaysian Prime Minister Abdullah Ahmad Badawi says as much when he embraces "civilizational Islam" -- Islam expressed through economics, science and culture, not just politics.

Malaysia's relative religious moderation and its progressive government, which is less focused on religious issues than some Arab regimes, have allowed it to push the limits of what is permitted in Islamic banking. Its central bank has established a national Sharia board of scholars to approve banking products. The board has established the benchmarks needed to standardize the industry, ensure that Islamic banks meet international financial rules and reassure customers that they are getting truly Islamic products. But it also has been progressive enough to consider how Malaysia could adapt Islam to such cutting-edge financial ideas as derivatives.

In just the last five years, Malaysian banks have introduced a staggering range of Islamic financial products. One of them was the world's first Islamic interest-less bond, or sukuk. Other products include Islamic mortgages, Islamic leases and Islamic funds that do not bear interest. Malaysia even has created a kind of Islamic ATM network so devout Muslims can withdraw money across the globe without worrying whether the banks collected interest from their deposits.

As Islamic finance has become a pillar of Malaysia's economy, some moderate Middle Eastern states have tried to copy its successful model. Dubai is attempting to establish itself as an Islamic banking hub.

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