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The Failure of Islamic Finance


By John Foster, former editor, Islamic Business & Finance magazine

The Islamic finance industry has often battled with the question: How Islamic is Islamic banking?

The question’s pertinence was raised in March last year, when Sheikh Muhammad Taqi Usmani, of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic.

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Usmani is the granddaddy of modern-day Islamic finance, so having him make this statement is synonymous with Adam Smith saying that free-markets are inefficient.

Because Sukuk underpin the modern-day Islamic financial system, one of its pre-eminent proponents arguing that the epicentre of the system was flawed sent shockwaves through the industry.

It also gave ammunition to the many critics who see Islamic finance as an industry more driven by cultural identity than practical problem solving: as a hodgepodge of incoherent, incomplete, impractical and irrelevant ideas.

Recognisable products

The products that modern-day Islamic bankers have created are very similar to conventional products.

So similar, in fact, that to an outside observer they could be considered the same.

Islamic banks now offer Islamic mortgages, Islamic car loans, Islamic credit cards, Islamic time deposit and guaranteed return accounts, Islamic insurance and some even offer Islamic managed and hedge funds.

This point is conceded by Samir Alamad, Sharia, or Islamic law, compliance and product development manager of the Islamic Bank of Britain.

“The industry does not want to alienate its products,” he says.

“They have to be recognisable, produce the same outcome as conventional products, but remain within the guidelines of Sharia.”

No interest

The core of Islamic economics is a prohibition on interest.

This immediately creates a problem for Islamic banks, as conventional banks charge borrowers an interest rate through which they can reward their depositors and make some profit for being the broker.

With interest ruled out it is harder to make money.

The modern Islamic banker has found a way around this prohibition, however.

As in many Islamic products, the bank enters a partnership with its depositors and invests his money in a Sharia compliant business.

The profit from this investment is then shared between the depositor and the bank after a set time.

In many cases this “profit rate” is competitive with the conventional banking system’s interest rate for savers.

Lease agreements

Alternatively, an Islamic banker might enter into a lease agreement for a car or a house with an individual.

The bank would buy a vehicle outright and then lease it back to the person who wanted it, over a time period that would ensure that the capital was repaid and the bank made a profit.

Alternatively the bank would enter into a partnership with a person wanting to buy a house. The bank would buy 70% of the house, the individual 30%.

The bank then rents its share of the house back to the individual until the house is fully paid for.

The bank makes a profit on the rent, which would be higher than equivalent rents in the area, but on an annualised percentage basis, would look very much like a conventional mortgage interest rate.

To the casual observer, a spade is a spade.

Whether the product is dressed up in Arabic terminology, such as Mudarabah, or Ijarah, if it looks and feels like a mortgage, it is a mortgage and to say anything else is semantics.

Sophisticated finance

The potential wealth locked up in oil-rich Gulf states encouraged the conventional banks to enter Islamic finance.

HSBC established the Amanah Islamic Finance brand in 1998 and Deutsche Bank, Citi, UBS and Barclays quickly joined the fray, all offering interest-free products for wealthy Arabs.

However, this new generation of Islamic bankers had cut their teeth in the City and Wall Street, and were used to creating sophisticated financial products.

They often bumped heads with the Sharia scholars who authorised their products as Sharia compliant.

However, these bankers had a way of dealing with this, as one investment banker based in Dubai, working for a major Western financial organisation explains:

“We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari’ah compliant].

“If he doesn’t give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”

No consensus

This “Fatwa shopping”, which was carried out by some institutions, brings us back to the Sharia scholars.

Even these scholars do not agree all the time, which means that in some cases a product is deemed Sharia compliant in one market and not in another.

This is especially the case with Malaysian products, which are often deemed not Sharia complaint in the more austere Gulf.

“Often no rulings exist for modern day problems, such as use of narcotics,” Alamad explains.

“In Islam intoxication by wine is forbidden, but at the time of the Prophet Mohammed there was no crack cocaine.”

Modern scholars had to interpret the rules on intoxication, and the consensus was that crack should also be forbidden to Muslims, as it is a dangerous intoxicant.

“This is how we make rulings, whether in finance or societal,” Alamad says. “The consensus rules, which usually will become mandatory for all Muslims to follow, but there are some opinions and sometimes scholars are not in the consensus.”

Banking is banking

This makes it more important to be in the consensus, and so getting a favourable ruling from a leading Sharia scholar is important for a product manager.

That is why the top scholars can earn so much money – often six-figure sums for each ruling.

The most creative scholars are the ones in the most demand, says Tarek El Diwany, analyst at London-based Islamic financial consultancy Zest Advisory.

“To date, most Islamic financiers have been looking at examples of financing in Islamic history and figuring out how to apply them to today’s financial products.”

But banking is banking.

It is the taking of a deposit and then using it to finance a purchase or business.

The lender pays the depositor compensation for the opportunity cost of his money, and the person borrowing the money “rents” it off the bank.

The same symbiotic relationship occurs whether it is conventional banking, ethical banking, Islamic banking or Presbyterian banking.

As Majid Dawood, chief executive of Yasaar, a UK-based Islamic finance consultancy says: “Everything that is not forbidden in the Holy Qur’an is OK.

“Yes, the industry has to evolve, but it is only 40 years old and its competing with a conventional finance system that is over 800 years old.”

Source: BBC News

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  1. Dilla

    July 15, 2010 at 3:50 AM

    “The bank makes a profit on the rent, which would be higher than equivalent rents in the area, but on an annualised percentage basis, would look very much like a conventional mortgage interest rate.

    To the casual observer, a spade is a spade.

    Whether the product is dressed up in Arabic terminology, such as Mudarabah, or Ijarah, if it looks and feels like a mortgage, it is a mortgage and to say anything else is semantics.”

    Is it just semantics? Are the consequences of defaulting on one of these loans the same as regular mortgages? I would think it wasn’t, Islamic banks bear higher risks therefore, understandably, their products are more expensive. He hasn’t explained anywhere, specifically, what makes their loans haram? Why does Shaykh Taqi Usmani say most sukuk bonds are un-Islamic, that would be interesting to know.

    I doubt they are haram merely because they imitate regular loans in the rather superficial way he has outlined, it’s like saying halal lamb sausages are dodgy simply because they look like pork sausages. There must be something in the ‘background’ of the loan which isn’t quite kosher.

    • asawb

      July 16, 2010 at 9:47 AM


    • Junaid

      July 16, 2010 at 4:21 PM

      uhhh… did you miss the part about bribing scholars with six figure sums to obtain a fatwa?

    • Yunus

      July 16, 2010 at 6:09 PM

      Banking will always be banking….all based on INTEREST!! Anything based on interest as a foundation is doomed to fail as we have witnessed in the western world over the last few years.

      Islamic banking, I have to say is NOT so “Islamic”, and in my opinion be termed as “BACK DOOR RIBA”….and on riba is where the curse of Allah swt. is.
      South African Ulama have been telling the world about Islamic “Halal” Mortgage as not “Islamic” at all, but the average Joe on the street is made to believe that it is Islamic. Whats so Islamic about a mortgage?? Unfortunately all of us have been fooled so that we partake in this Riba system…remember the hadith ….
      “There will come a time,” he said, “when you will not be able to find a single person in the
      world who will not be consuming riba. And if anyone claims that he is not consuming riba then
      surely the vapor of riba will reach him.” (Abu Daud, Mishkat. In another text “THE DUST OF RIBA WILL REACH HIM.”)

  2. Muhammad Saeed Babar

    July 15, 2010 at 4:40 AM

    “But banking is banking.

    It is the taking of a deposit and then using it to finance a purchase or business.

    The lender pays the depositor compensation for the opportunity cost of his money, and the person borrowing the money “rents” it off the bank.”

    As the above quote from the article very clearly shows that current conventional banking model is to earn an assured sum of money for the lender and making money on the difference of lending and borrowing rates. The same model is being copied as such and is being “Islamized”.

    One can have illegitimate sexual relationship by using the very legitimate contracts of marriage and divorce, the difference is of intention from the very beginning. If there is an intention of marrying for a given period and then divorce, can it be said “legitimate” or “Islamic”? The same is the case with our Islamic banking products. It is “slicing” an Islamic contract and then “dicing” to create an Islamic banking product whose ultimate purpose is an assured return to lender irrespective of any business risk and this is pure “Riba”.

    “Fain would they deceive Allah and those who believe but they only deceive themselves and realize (it) not!” Aya 9 of Sura Al-Baqara

    “And cover not Truth with falsehood nor conceal the Truth when ye know (what it is).” Aya 42 of Sura Al-Baqara

    “And there are among them illiterates who know not the Book but (see therein their own) desires and they do nothing but conjecture.” “Then woe to those who write the Book with their own hands and then say: “This is from Allah” to traffic with it for a miserable price! Woe to them for what their hands do write and for the gain they make thereby.” Ayat 78-79

    Narrated Umar bin Al Khattab

    Allah’s Apostle said, “The reward of deeds depends upon the intention and every person will get the reward according to what
    he has intended. So whoever emigrated for Allah and His Apostle, then his emigration was for Allah and His Apostle. And whoever emigrated for worldly benefits or for a woman to marry, his emigration was for what he emigrated for.” Sahih Al-Bukhari

  3. 'Uthmaan

    July 15, 2010 at 6:03 AM

    How Islamic finance missed heavenly chance:

  4. 'Uthmaan

    July 15, 2010 at 6:07 AM

    I also found this article on a Non-Muslim website:

    I Want The Earth Plus 5%:

    • Muhammad

      July 15, 2010 at 7:31 PM

      Amazing article!

  5. Dubai-M

    July 15, 2010 at 6:23 AM

    Most of the people think that the Islamic Banking is similar to conventional banking and there is not much difference between the two. Even if the people believe that the Banks are not talking any kind of interest from them they still think that the Bank will use the money in a business which is interest based. In my opinion Banks must tell their market where they are going to invest the money and the profit will actually be profit and not the income from any kind of interest. Only then people will start believing that the Islamic Financing is truly great.

  6. Dilla

    July 15, 2010 at 6:46 AM

    Muhammad Saeed Babar, with respect, your analogy to temporary marriage contracts is incorrect. Mut’a marriages are considered haram by Sunni ulema. It is not unlawful for an individual or an organisation to lend/invest money intending to gain a profit. It is only haram if the lending/investing is based on a contract which stipulates a guaranteed fixed return regardless of profit, i.e. interest. riba. Do these Islamic loans contain this type of condition?

    It seems people are more annoyed that Islamic banks are making a profit, or making returns similar to conventional banks, and? What you expect them to make a loss or to be more Islamic they must make less returns than conventional banks? Again, for clarity in this matter we need to be shown how and why these loans are dodgy. Histrionics, quoting Qur’an and hadith to do so, do not help. Makes your argument weaker in fact.

    • RZ

      July 15, 2010 at 9:06 AM


      I agree with you that they do need to go in more detail as to why these Islamic loans don’t play up to a halal level. However I strongly disagree that quoting Qur’an and hadith makes arguments weaker. In fact, I say NOT quoting them makes it weaker. And besides during the detail process, their going to have to quote them in order to make us understand why it is halal/haram. I think brother Muhammad did a good job as I personally believe most Islamic finance systems fall into the categories of those verses. But that’s just my opinion.

      • Dilla

        July 15, 2010 at 1:28 PM

        Quoting ayat and hadith as proof to show how something goes against Shari’ principles is one thing (still problematic for the unqualified still), but quoting ayat and hadith in a threatening manner “you are wrong because I say so and this is what Allah says about you”, and not even explaining how they are wrong…. That is a ploy of people with weak arguments, calling to emotion.

        For example the ayat – “And there are among them illiterates who know not the Book but (see therein their own) desires and they do nothing but conjecture.” Could very well be applied to M Babar, you or me.

  7. Farhan

    July 15, 2010 at 10:19 AM

    I want to drop my two cents as a student of Economics. The US government has historically made various kinds of high yielding securities illegal. But savvy investors have always found ways to earn that rate of return while still following the law. There was no central financial body that taught everyone the proper way to invest, they figured it out on their own. Likewise, all we need IMO is to be clear on what is forbidden by Allah and the market will find a way. And after all, the alternative way to finance (equity financing, not liabilities) is essentially the same as stocks so I’m sure this shouldn’t be too hard. Allahu ‘Alim

  8. Kashif H

    July 15, 2010 at 10:42 AM

    salaam aleikum,

    there is a larger, global dimension to this, which came out in public around the same time that bank bailouts were occuring in the U.S., some of the TARP money was used in bailing out these “shariah-compliant” scams (see below):
    A Financial Mirage in the Desert

    A visitor takes a photograph at Ski Dubai, an indoor ski slope in a shopping mall in the emirate.

    By ANDREW ROSS SORKIN Published: November 30, 2009

    The investments were supposed to be blessed, and the bankers were desperately looking for more people to bless them.

    It was about two years ago, and I was in Dubai to cover an investment conference at a hotel along Jumeirah Beach. Hundreds of Western bankers dressed in Savile Row suits were packed into an enormous room to bone up on the intricacies of the next new thing in financial products: Shariah-compliant investments.

    They wanted to sell them to wealthy, oil-rich Muslim investors who needed a way to increase their fortunes but whose options were limited. Any investment vehicle needed to conform to the spirit of the Koran, which forbids any investments that pay interest. No mortgages. No bonds. No clever derivatives. Just tangible assets in the so-called real economy.

    It was a big honey pot — worth as much as $1 trillion that could yield billions in fees — and the bankers were determined to find a way in.

    One discussion was led by a British banker from Barclays who had moved to the region to create an entire Shariah-compliance team. He shared tips about various ways to create “structured products” that would pass muster with Muslim investors. (To me, the investments looked like bonds, walked like bonds and talked like bonds — but he never called them that.) Some of the bonds that Dubai World is in jeopardy of defaulting on, by the way, are Shariah-compliant sukuk. Just don’t call them bonds.

    He was struggling to hire enough Shariah scholars, he said, and he needed them to bless the investments — apparently there was a shortage of properly trained Islamic scholars who did this kind of work.

    With the benefit of hindsight — and you didn’t need much — there were plenty of other signs back then that Dubai was building a financial mirage in the desert.

    With hours to kill before a late-night flight, I ventured over to the Ski Dubai indoor ski run. It’s a pretty good bet that a city with an average temperature of 90 degrees and an indoor ski slope is probably living a little too large. On one ride up the chairlift, I sat next to a 7-year-old from London who had just moved to town. With a big grin, he proudly told me that his father was in “the real estate business.”

    For the last couple of years, the running joke on Wall Street was “Dubai, Mumbai, Shanghai or goodbye.” If you were the C.E.O. of a troubled investment bank desperately looking for cash, you made a pilgrimage to one of those three cities with hat in hand. They were the places most likely to write a quick billion-dollar check; their eagerness should have also been a tip-off. Now you have to wonder about Mumbai and Shanghai, too. Are they next in line to take a fall?

    Willem Buiter, a former Bank of England official who was hired as chief economist of Citigroup on Monday, says that Dubai’s credit crisis is just the natural progression of “the massive build-up of sovereign debt as a result of the financial crisis.” He wrote on his blog on The Financial Times’s Web site that the contraction of credit “makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral.”

    With all the money pouring into the region, it would have been hard for any doomsday types to make themselves heard. But there were whispers here and there, pointing out the obvious. David Rubenstein, the co-founder of the private equity giant Carlyle Group who was in Dubai at the conference, remarked to me at the time: “You know, they don’t have any oil here.”

    That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.

    That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call. And what became of all those Shariah-compliant financial instruments that were the hot topic of that panel I attended? It turns out that many of them that were sold prior to the crisis weren’t compliant at all.

    The Shariah Committee of the Accounting and Auditing Organization for Islamic Institutions, which is based in Bahrain, ended up changing the rules to make them stricter because of widespread abuse. As Mr. Buiter described them on his blog, “these were window-dressing pseudo-Islamic financial instruments that were mathematically equivalent to conventional debt and mortgage contracts.”

    Blessings, alas, can do only so much.

  9. Mezba

    July 15, 2010 at 12:29 PM

    I have always asked any business – how do you make money? “Islamic” banking should be able to answer that question as well – in very simple SIMPLE terms. After all, the way you make money should boil down to a 30 second explanation that is easily understandable.

    Yet, most of the time it seems they go into complex arguments or mechanisms which to me just sounds like a way to get out of Allah’s laws on a technicality. I had once asked a question on my blog on why ANY one would lend a sizeable sum of money for no return (no interest). Till today I have not got a satisfactory answer.

    At RIS, I actually asked a couple of the merchants in the bazaar section, who were hawking “Islamic Finance Bonds” (now there’s an oxymoron if there was one) as to how it exactly worked. They started to speak, and soon I was left thinking, “Boy, this is just one big scam! They are not dealing with interest, but they just take it and call it something else!”

    • Sidiq

      July 15, 2010 at 12:46 PM

      I had once asked a question on my blog on why ANY one would lend a sizeable sum of money for no return (no interest). Till today I have not got a satisfactory answer.

      There is one I can think of. Allah says that He will multiply the rewards and bounty for those who spend in His Way and give a good loan:

      “Those who give alms, both men and women, and lend to Allah a goodly loan, it will be doubled for them, and theirs will be a rich reward.” (Al-Hadid: 18)

      • Mezba

        July 15, 2010 at 12:48 PM

        With due respect, alms and loans are different. Giving alms is like giving a loan to Allah which is guaranteed return many times over. If you are bank where people have deposited money, WHY would you give someone $200,000 to buy a house?

        • Sidiq

          July 15, 2010 at 1:02 PM

          I think the loan itself would be extortionate unless of course the person taking it is on a six-figure salary. If there is a realistic chance of the person paying it back on an agreed plan or within a reasonable period of time, then there is no harm for the bank in giving such a loan as they are secure. I just thought of a business proposition for a bank, perhaps they can charge those that are depositing, a fixed amount of money per year for their services, that way there is halal income and profits for the bank. As for the loan, I have no idea how that would work, there would need to be some study of Islamic economics to analyze cash flow and profitability from an Islamic perspective. This subject is on the agenda at this year’s ilmsummit, which ironically I had to turn down due to lack of finance.

          Allah knows best.

        • Abu Noor Al-Irlandee

          July 15, 2010 at 1:24 PM

          Mezba, the contracts can be structured in different ways, but the basic idea is that the Islamic financer goes into a partnership with the person who wishes to purchase the house. They make money off of rent payments that the person who wishes to buy the house pays to them for their share of the ownership of the house (since the person gets to live in the house) while at the same time the person is buying their ownership share from them gradually so that at the end of the term the buyer becomes 100 percent owner.

          Unfortunately the process is structured to be able to look the same as a standard mortgage for a variety of reasons including what customers want, what regulators want, what is needed for IRS tax deductions, etc.

          • Mezba

            July 15, 2010 at 1:30 PM

            The problems with these arrangements is that

            1) They combine several transactions into one – something not acceptable in Islam. Is it a sale, lease, purchase, rent, mortgage?

            2) The owner of the house has certain responsibilities under law. Property tax, insurance, utilities, etc. Under the arrangement you mentioned, the bank is part owner of the house – yet in no Islamic finance arrangement does the bank pay for any of these.

            3) What if the owner decides to live elsewhere – can they rent “their portion” of the house? What if they wished to sell?

            4) Why is this “rent” renegotiated every 3-5 years and it also oh-so-surprisingly matches the LIBOR rate in some cases?

          • Abu Noor Al-Irlandee

            July 15, 2010 at 1:36 PM

            Mezba, I’m a bit lost.

            Indeed most of your questions above are precisely the issues that are addressed in the fatawa of the scholars that attempt to determine if the contracts are halal or not.

            I am not interested in defending them, nor am I qualified to give a fatwa.

            I thought you asked, in simple terms, how is the Islamic financier supposed to make money and I answered your question.

    • BrownS

      July 15, 2010 at 7:46 PM


      @Mezba: The answer to your question IMHO is that by investing/lending you avoid paying zakat. So it’s not that you have to create an alternative to a positive rate of return, you’re avoiding a negative rate of return. That’s what’s supposed to motivate Islamic lending, whether it be for banking or for any other investment. In most non-Islamic systems people lend (or deposit) because they want to MAKE money. In the Islamic system you lend because you want to avoid LOSING it. Paying zakah is the default in the Islamic system, staying at zero is the default in other systems (it’s actually not because of inflation, but ignore that for now). This should stimulate economic activity.

      If you think about it this is the only system that makes sense because otherwise you have the bankers getting the world and 5% (someone linked to that great article above).

      • BrownS

        July 15, 2010 at 7:51 PM

        I meant to say that it may not necessarily be a bad niyyah to want to avoid zakah because you’re fueling economic activity and helping someone out instead.

  10. Mezba

    July 15, 2010 at 12:31 PM

    And another question, and quoting from the BBC article ,

    “Yes, the industry has to evolve, but it is only 40 years old and its competing with a conventional finance system that is over 800 years old.”

    My question – why was the industry only 40 years old? If Allah has forbidden interest (and I write ‘if’ because there is some debate on the meaning of the word ‘riba’) then why is the industry not 1400 years old? How were people borrowing 40 years ago?

    • Hassan

      July 15, 2010 at 1:06 PM

      Because people only bought things they could afford? And others, friends and relatives gave qard-e-hasana (to help the brother in need to get reward) to help the person buy/make house.

      Perhaps only 40 years ago muslim people wanted to make money off people need I guess and do it as business

      • Mezba

        July 15, 2010 at 1:22 PM

        A simple wiki search will tell you it’s not true – muslims engaged in commerce since the earliest times. In fact, the word cheque comes from the Arabic word ‘sakk’.

        • Hassan

          July 15, 2010 at 1:30 PM

          I am talking about loans/finance, not trade.

        • Abu Noor Al-Irlandee

          July 15, 2010 at 1:31 PM

          Mezba, it is precisely the type of contracts that were used by Muslim traders and merchants in the medieval period that modern “Islamic financers” attempt to emulate, since those contracts were approved by fuqaha of the time.

          I’m not a finance expert, but it should go without saying that the pre-Industrial revoution economy was drastically different from what exists in the world today. Through most of Islamic history, Muslims lived in economies where wealth was based almost entirely off agricultural surplus. although there were always traders and merchants there was nothing like the modern financial industry.

          Allah knows best.

    • Dilla

      July 15, 2010 at 1:40 PM

      I think he meant 40 years since Islamic banks entered the Western financial system, not literally when Muslims started buying, selling and lending. These transactions have been going on for longer than 800 years.

  11. Abu Noor Al-Irlandee

    July 15, 2010 at 2:24 PM

    As a larger point, I want to say that I think scrutiny for the Islamic Finance Industry is good. Let’s make it constructive scrutiny designed to find out who’s doing the best job, who’s working hard to make true shari’ah compliant finance a reality and how we can support that as a community. Or examining what are the steps we need to take, what questions should be being asked? Those are good approaches too.

    What I really really don’t like is the response which seems to say, see look how Islamic Finance is corrupt, see look how it is no different than conventional banking, see look at these scholars, they’re getting paid, etc etc. which seem then to lead to an attitude of either Islamic financing will never work and we should give up trying or we should all go ahead and engage in straight up riba since Islamic financing is just a scam.

    • Middle Ground

      July 15, 2010 at 4:26 PM

      Salam Bro,

      Totally agree with you there. For people who want to buy a house and avoid riba, a solution really needs to be found, rather than dismissing all efforts as scams.

      • Dilla

        July 15, 2010 at 6:01 PM

        Agree with Abu Noor and MG, people are too quick to dismiss, without even really knowing anything about Islamic banking (I mean its not that difficult to find out the business model of Islamic banks which some people commenting on here don’t seem to understand), and most of these people don’t have any solution to offer either.

        The reality for a lot of Muslims settling in the West is they are taking out interest bearing mortgages. If Islamic banking is an attempt to alleviate this then it is a benefit for the whole community to make it a system that is both halal and successful.

        A perfect system won’t be built overnight.

  12. Shahzad

    July 15, 2010 at 2:58 PM

    The key statement was:”It also gave ammunition to the many critics who see Islamic finance as an industry more driven by cultural identity than practical problem solving: as a hodgepodge of incoherent, incomplete, impractical and irrelevant ideas.”

    The statement applies not just to finance. Islamic thought and leadership these days is completely superficial and not confronting the real issues that effect this ummah in 21st Century. We’re happy in our masjids, in halaqas and wearing our nice thobes. But solid Islamic thought in the areas of society, politics and economics is completely under the mark. Islamic finance is nothing more than “Islamicized” greed. We want to make our money grow with the least guilt as possible.

  13. Asiya

    July 15, 2010 at 4:49 PM

    I think the part where they go Fatwa shopping is the scariest. In the Quran we were told of how the Jews and Christians took their rabbis and priests as rabbabiyeen (plural of Rabb – Lord, Cherisher, Sustainer). A sahabi asked how they took them as rababiyeen because they did not worship these priests and rabbis, so what did Allah ‘azzawajal mean by this? The Prophet salallahu ‘alaihi wa salaam said, Did they not take what they said to be haraam as haraam, and what they said to be made halal as halal? This is how they worshipped them.**

    This is indeed scary to see so-called “Islamic” banks to be acting in a very unIslamic way! Allahu musta’aan. May Allah ‘azzawajal grant us understanding of the religion.

    **I am paraphrasing the hadith. Please refer to the tafseer of ayah 31 of surat at Tawbah.

  14. abu Rumay-s.a.

    July 15, 2010 at 5:25 PM

    some resources that I’ve come across on the topic…

    Could one of the shuyookh recommend for us a list of qualified scholars to whom we (laymen) could refer to regarding these issues?

    Here are some names that I am familiar with??

    Dr. Abdulaziz bin Fawzan Al-Fawzan
    Dr. Yusuf bin Abdullah Al-Shubaili
    Dr. Mohammed Hashim Kamali
    Shaikh Taqi Usmani

  15. Saad

    July 15, 2010 at 6:49 PM

    Salam guys,

    I have been very confused with Islamic banking. I get the whole profit-sharing thing with the bank but what I don’t get is how the bank makes money in halal ways. To my understanding, most islamic banks (90%) use an instrument called ‘murabaha’ or mark-up purchase. This has always appeared very shady to me. To give you an example:

    If you want to buy a house on the market that costs $100k, you go to the islamic bank and they will say, okay: We will the buy the house for $100k but only if we can sell it immediately to you for $120k. Oh and don’t worry you can spread the $120k payment out over a bunch of years.

    Intellectually, I just don’t understand how something like this could be legal in Sharia’. It really seems like the sort of logic reformed Jews apply to get out of their own restrictions on Sabbath. It doesn’t make sense. I think the historical context where a lot of scholars permitted this transaction of mark-up purchase was when someone needed something from foreign lands. Given that it was risky transferring goods from one country to another, they would hire someone to buy a particular good for them from another country, transfer it and sell it to them. The mark-up price actually represented actual service, as in transport, risk and handling charges. In the case of a house I need to buy in the same city perhaps even next-doors, I really don’t see the difference between murabaha and riba (btw, same root).

    Another shady example is ‘tawaruq’ or reverse murabaha which is allowed by a lot of scholars. Here say someone desperatley needs some cash. He goes to person A and buys an object from him, say it’s a piece of metal for 120$ that he will pay back over five years. Then he goes to person B and sells the piece of metal for cash on the spot for 100$. Result is he has 100$ but owes someone 120$ over five years. This hanky panky was also used by Jewish scholars and at that Christians. I believe ibn Taymiya ruled it haram but that was a minority opinion.

    As an economist though, I really don’t see how islamic finance has any strong intellectual, or for that religious, basis. It seems like a thoroughly corrupt and hollow system. Or perhaps, I’m missing something if anyone would like to point that out. I think though the time has come for the scholars on this blog to write something cohesive because at this point I really don’t understand the logic.

    Salam all.

  16. Khan

    July 15, 2010 at 7:25 PM

    I do not think it is fair to put this article up without giving an alternative.

    Allahu alam.

    • Abu Aaliyah

      July 15, 2010 at 8:57 PM

      Asalaamu Alaikum,
      I do agree with you bro. but is there an alternative in U.S.? That is why we need Scholars of both the secular and Sharia’ to guide us in this regard.


      • Middle Ground

        July 15, 2010 at 11:39 PM


        In the USA we have Guidance Financial, which is approved by Shiekh Taqi Usmani himself.

  17. abuabdirrahman

    July 16, 2010 at 12:30 AM

    Murabaha is a sharia compliant finance method, with which you can buy a local commodity, owned by the Bank. Under the Murabaha Loan Finance technique, the Bank buys and owns the commodities and cars requested by the customer, and then sells to the customer by installment at a PREFIXED profit margin.

    Tawarruq is a sharia compliant finance method, with which you can raise loan finance through buying installments in a local commodity, owned by the Bank. The applicant then authorizes the bank to sell his share in this commodity, on his behalf, to a third party for cash and then deposit the proceeds into his account.

  18. Muhammad Saeed Babar

    July 16, 2010 at 2:06 AM

    Thanks Dila for comment on my comments but I think you got the point as you said “It is only haram if the lending/investing is based on a contract which stipulates a guaranteed fixed return regardless of profit, i.e. interest. riba.” This is exactly what the Islamic banks are doing.

    Here is a very good article on the subject

  19. ishfaq

    July 17, 2010 at 11:50 AM

    Let me tell you that what goes on as Islamic Banking in Bangladesh is nothing but fraud in the name of God. For example, my organization used to keep FDR in an Islamic Bank because one of my Board member was also a Director in that bank. Now the Manger would put the profit (not interest)% at the back of the FDR and sign. How does he know, in advance, what profit he would make at the end of the year? What is the difference between what he promises as profit at the back of the FDR, versus what a commercial bank declares up front as interest? The difference is between transparency and deception, between honesty and cookery.

    In Bangladesh, I often see Islamic Banks giving notice of auctioning off property that was mortgaged to them against a loan – how come? They were supposed to have monitored the investment and share the profit or loss. They skim the profit but share no loss. In fact, they are just like others, in fact, worse. Islamic Bank here only does safe trading, short term loan with high interest. They do not reach the poor, what to speak of the ultra-poor.

    They have on their pay roll a bunch of Mullah, who are called for Board meeting, paid handsomely after the group photo is taken and they then certify, “All’s well”. What do they know where the depositor’s money is going or where from the money coming? In fact, there are lot of allegation of money laundering, dubious financing charges against these institutions. I for one stay away from them.


  20. Ibn Al-Rawandi

    July 17, 2010 at 1:36 PM

    The only reason there is ANY need for Islamic Finance is a result of Islam’s prohibition of interest. Without that, Islamic Finance would be indistinguishable from non-Islamic finance.

    There is nothing wrong with interest. If you wanna use a house that I OWN, you pay rent. If you wanna use a car that I OWN, you pay rent. Likewise, you want to use my OWN money, you pay rent. Interest is nothing more than rent on money and Islamic prohibition of rent is premised entirely on religious dogma. And we should all know now, in the 21st century, that religious dogma is never a good guide for sound decision making.

  21. sebkha

    July 17, 2010 at 11:18 PM

    Far greater minds than Ibn al-Rawandi’s recognized the inherent wrong in usury, centuries before the last Messenger (peace be upon him) was even born.

    The cultures of ancient Greece and Rome likewise denounced usury. Aristotle called it the most unnatural and unjust of all trades. Money, he said, was to be used for exchange, not the breeding of money from money. Plato condemned it on the grounds that it set one class against another and was therefore destructive to the state. In Rome Cicero, Cato and Seneca made similar censures.

    It sure has worked out well in Haiti, sub-Saharan Africa, etc. Kids die from vaccine-preventable diseases, have no access to schools or clean water, but by golly the First World gets to collect their debt interests.

  22. popt

    July 18, 2010 at 1:25 PM

    The Title should be changed.

  23. Ibn Hajr

    July 20, 2010 at 3:19 PM

    “To my understanding, most islamic banks (90%) use an instrument called ‘murabaha’ or mark-up purchase. This has always appeared very shady to me.”

    Think of wholesale vs retail. Is Walmart allowed to buy goods from China for $X and charge you $X+$1? That’s the concept of mark-up. Without it, there would be no retail or wholesale industry.

    Riba (interest) is forbidden in Islamic finance, but that doesn’t mean that the time value of money isn’t recognized. The sale price has to be stated upfront, though. You can’t charge someone $X + 5% until you pay for the item in full. Instead you agree to a sale price upfront which already takes into account the payment time frame. And you can’t increase the amount if the person takes longer to pay. That’s just a risk of doing business (as there are risks in all things).

    Do you think it’s fair that I give you a $1000 gold bar now, and you pay me back $1000 10 years from now? Hardly (unless I’m doing you a favor). We have to remove our biases from the equation and study Islamic finance from ulema that know what they’re talking about. Too many people assume no riba = no time value of money. Giving uninformed opinions on Islamic matters is not the way of the believer. If you don’t know, seek knowledge from someone who does. Don’t try and figure out why you “think” something seems shady to you.

    Money is a concept, an abstraction. Money should not be a means to make more money in and of itself. So I can’t lend you money and make money off of that transaction. I can, however, sell or rent something to you or invest with you and make money that way.

  24. fshareef

    July 20, 2010 at 3:47 PM

    Is anyone working on creating an actual Bank (physical or online [similar to ING]), based on Islamic values, in the United States? Not a financial institution, but an actual bank that has checking accounts, investments accounts, etc…?

  25. fshareef

    July 20, 2010 at 8:23 PM

    Does anyone know of any US based Muslim-owned Islamic Bank (like one that offers checking accounts, FDIC backed, etc), or know of anyone who is working on such a project?

  26. Muhammad Saeed Babar

    July 21, 2010 at 11:53 PM


    Thanks Ibn Hajr for elucidating what should be the “Islamic banking”. There is no prohibition to making money in Islam but one has to share the risk. By “slicing and dicing” Islamic banks absolve themselves from sharing the risk with the borrower. The practiced Murabaha transactions are very much akin to “temporary marriage” or “Halal Adultery” as in both cases the intention is quite different than what it should be. One can’t marry temporarily i-e marrying for a period and then divorce and similarly one can’t pre-arrange a mark up transaction and then call it a Murabaha.

  27. Habibi

    July 23, 2010 at 1:39 AM

    Assalamu Alaikum,

    Here are the 2 cents from someone who has actually worked in a So called No Interest house financing . Heard of LARIBA ? well, here’s the concept ( or at least was initially the concept ). Company and you purchase the house together. Each owns the % of house based on who puts what. Now , the company then find outs the rental in the neighborhood ( 3 quotes ) and assign you that rent. Over the period of time you pay that rent. A FIXED amount. Every month a portion of which goes towards the rent and portion of which goes towards buying the % of house, and over the period of time the portion of rent you are paying towards buying the % of house goes up ( sounds familiar ?). If the rent in the neighborhood is such that company would end up losing money , then no deal. My understanding of Islam says that there is no interest in islam. Either you give Qard Hasana , i.e. give someone loan with literally no expectation of getting it back or invest together ( i.e. sharing profit AND loss ) . Now in above model if you want to sell the house ( once you have more than 50% ownership ) , and house is selling at loss , both the company and yourself should share the loss , correct ? here comes the twist. In company’s many years history there wasn’t a loss recorded. Though in paper they show that they tried to find out the rentals in the neighborhood but there isn’t a real search for that ( at least I never saw one ) . Wait a sec, then how do they come up with the amount of rent ( read monthly payment s ) well , every morning the VP sends an email telling you about the rate from which you calculate that payment. Where does he get that % ? Fannie Mae or Freddie Mac, depending on who is financing the loan.
    Management criticizes other so-called islamically financed companies using different argument e.g Jews owners or Fatwa shopping or comments of such sort and you might have analyzed their model and respective implementation yourself.
    I am not sure about all this. Since we are supposed to go where there is no doubt or clarity is higher , as long as I can live without buying a house or investing in funds, I would rather remain on the safe side for risk of involving in riba is pretty scary.

    And surely Allah Knows Best .

    • Sarah J.

      July 23, 2010 at 5:46 AM

      This is disillusioning. In Bernard Lewis’s book on Islam, he favorably compares Islamic Mortgages with Western-Style Mortgages, including a little chart that shows everything you just described, only without the % increases. He seems to be/ to have been genuinely sanguine about the future of all Muslim countries under this sort of banking.

      Human beings have got to stop and listen for Shaitan’s whisper in their ears (in this case, “Who cares if it’s forbidden? Who’s going to notice the hidden interest-gathering?” I think we all know Who is going to notice. Nothing gets past Him.) before they do this sort of thing. He often slips in His whispers at the same time as God is speaking plainly to us through His writings, so that if we do not think first, we may put into practice everything we heard in that session of study, including the unwanted “footnotes.”

      • Mezba

        October 25, 2010 at 8:54 AM

        Five more questions about this rent to own thing.

        1. So who owns the house? Bank, homebuyer or both? If the bank owns a part then should they not share in the cost of utilities, insurance, property taxes etc.? Yet these costs are all borne out by the homebuyer. So why is the homebuyer paying “rent”? According to law these should be borne out by owners only in proportion to their ownership.

        2. If every year, more of the title goes to the homebuyer, then should not the Islamic bank pay the City of Toronto a Land Transfer Tax every year because every year the title is changing in composition?

        3. If a fire destroys the house after first year who collects the insurance money? (Again goes back to the first question: who is the owner).

        4. So what transaction is this? Is it a lease, a loan, a purchase? I thought uncertainties were NOT allowed in an Islamic transaction?

        5. Why does the Islamic bank re-evaluate the market price of the house every year to determine the rent? According to Ontario Law, rent can only grow by a fixed percentage every year. Yet suspiciously most Islamic financier’s reevaluation of the market price of the house to determine the “rent” is surprisingly close to Bank of Canada’s financing rates or the international LIBOR rate.

        I put some more questions about Islamic financing here: but the above questions are relevant to this post.

  28. Rose Anderson

    September 24, 2010 at 3:43 AM

    As I see in your post there is lots of good information available on Islamic finance. Islamic finance has change a lot in the recent few years. Rest of the world specially American and European countries want to get advantage of these change in there own interest. Innovation of sukuk also one of the big reason that non Islamic countries look on the Islamic finance market.
    Sukuk is an alternate way of investment where the investor get the benefits of investment and its treated as rent on investment, to avoid the interest on investment which is strictly prohibited in Islam.I have also some site and blog ,I have write on same topic check my post :
    I want to write on guest post for your blog based on change on the Islamic debt market.If you agree than contact me at


    February 25, 2011 at 3:58 AM

    Personally, I don’t think that Islamic Banking will sustain further future, IF there is no SIGNIFICANT DIFFERENCE between Conventional and Islamic Banking. They only change the terms into Arabic words, but apparently they still collect “RIBA'” in other way, @ by charging indirect charges to the people, whereby Islamic Finance principle forbidden Riba’.
    That’s what really happen in Islamic Banking nowadays.

    But if you have anything to share, I would certainly happy to discuss. Learning is important in life..

  30. Sabir

    March 29, 2011 at 2:32 AM

    Salam, This article is very useful 4 Muslims and non Muslims. It has many information about Islamic life, I Expect more from this author.

  31. Pingback: Halal Mortgages: Alleged Misuse of Taqi Usmani’s Fatwa and 3 Important Questions -

  32. rb

    January 16, 2013 at 11:20 AM

    We bought a land two years back in a location we really liked and convenient for us. Since this was in a subdivision they said they have a right to buy it back if we don’t start building in 3 years.
    We already have a house and we want to do Islamic financing but none of the Islamic financing companies( Lariba, Guidance) do construction loans. Since the land is already bought and since we are planning a custom home, all builders can only do constructing loans. They are not ready to pay from their pockets or take loan by themselves (mostly due to not having money or bank not lending them any more money)

    The builders (and surprisingly one Islamic financing institution) asked us to go with construction loan and then change to Islamic financing after the house is build. We do not like the idea of paying interest during the 9-10 months building period. One builder said they will pay the interest during the construction but I am not very sure if this is a halal option for us. I would like to hear some opinions here

  33. Ushi

    January 8, 2014 at 4:14 PM

    I actually went through the process, for me it just one more way to make money.
    1. application fee $99.00 to 199.00
    2. Appraisal fee 300 to 650
    3. At the end is DENIAL or come up with 35k upfront
    Big Scam for me

  34. Robert Hannah

    September 27, 2014 at 12:00 PM

    As a financial analyst and having worked in some Islamic countries, I developed an interest in the foundations of Islamic finance. My conclusions are as follows:

    1. “Riba” is indeed banned in the Koran.

    2. There is a debate regarding the meaning of riba – does it mean “interest” or “excess interest” – that is, usury. The “consensus of Islamic scholars” (Ijma) is said to agree that all interest is riba and is banned. However, Al Azhar University (Cairo) issued a 2002 fatwa approving bank deposit interest, which resulted in considerable debate among scholars pro and con. Also, Yusuf Ali, author of a well known Koranic translation, translates riba as usury, not interest, and provides a discussion of the subject in his commentary (see Abdullah Yusuf Ali. The Holy Qur’an: Text, Translation and Commentary [Tahrike Tarsile Qur’an, 2nd ed., 1988] footnote #324.) Consequently, I do not see how one can claim that there is a consensus on the subject.

    3. There is little attempt by scholars to interpret the prophet’s prohibition on riba in in its context (it is often said that we should not focus on individual Koranic passages, but that one should interpret them in context). The context at the time of the prophet was one in which basic arithmetic was rudimentary or unknown, so that borrowers were easily cheated, lenders were unregulated, and debtors could be sold into indentured servitude (slavery). The prophet, being a social reformer, understandably wanted to remedy these social ills. Such elementary concepts as the time value of money, the risk free rate of interest, and risk premia, were unknown or not clearly defined. We now have a legal framework regulating limited liability, bankruptcy and usury, and an obviously imperfect but improving institutional and capital markets regulatory framework. I would conclude that prohibiting riba, casting out the money-lenders, and capping interest rates had their historical place, but have been superceded.

    Two American scholars of Islamic finance, Timur Kuran and Mahmoud Gamal, take a very dim view of the whole Islamic finance industry indeed, and their arguments ring true to me. A large part of their argument is that the promotion of Islamic finance is an assertion of cultural and ethnic identity and a rejection of western values. I would invite serious sudents of Islamic finance to google them and read their work.

  35. Ihaveanidea

    April 11, 2015 at 8:42 AM

    The price of car or house is obviously beyond the ability of a consumer earning monthly salary/would take 10 years or more to save full amount of just a car. The answer is to go to the source. Skip the market. If I want to buy a car, then go to the manufacturer, buy car directly using an agreement. Retail value is inflated value of car, need to find true value and then set up payment arrangements on that value. Enter a lease-to-buy agreement, pay car over time. There need not be a “profit” on buying a home. Government should be the one to sell me the home, not a bank. Deal directly with land owner, which is the Government. Lease-to-buy with no profit because there should be no middle-man seller.

  36. Donald

    May 12, 2016 at 4:28 PM

    While you say that conventional banking is 800 years old,Islam is more than 1400 years old. In those 1400 years how was banking practiced, what were some the largest banking institutions. Perhaps, banking, as we understand it today, was never practiced in those 1400 years of Islamic history.

  37. Abdul Razzak

    January 18, 2018 at 1:58 AM

    I am an Indian Muslim age 71. I have exhausted all my savings. Now I am left with my residence only where I live. To survive either have to sale residence. I am against riba and will pay zakah on sale proceeds every year. According to calculations I will finish the sale amount in 7 years. After that if I live I will have to bag and live on streets. One of my friends has suggested to go for reverse mortgage to a bank, which will enable me to live in my house as long as I live. Besides bank will pay me substantial sum for 20 years. Please kindly advise me what shall I do.

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