A Modern Comparison of Western Banking to Islamic Banking

by Alison Lake
Western and Islamic banks structure their financial products differently.

Western and Islamic banks structure their financial products differently.

Islamic banking, which adheres to Shariah, or Islamic, law, has become more popular and available in North America as Muslim immigrant populations increase and assimilate. Muslim-American bankers are importing some financial practices commonly used in Muslim-majority countries, providing more diverse banking and home ownership options to Muslim clients. Shariah law prohibits charging or paying interest, called riba in Arabic, and also discourages investments or banking that is connected to products or industries that Islam considers sinful, or haram. Credit card services and any situation where interest is paid and/or charged to benefit one party and not the other are not permitted.

Islamic vs. Western Banks

Islamic banking resembles conventional Western banking with its overall objective of making money by lending capital. Like conventional banking, it focuses on ethical investment and non-predatory lending. However, to avoid interest, an Islamic bank and client share a proportion of the risk and profit in a joint venture. Shariah-compliant finance creates its own financial products based on Islamic contracts and profit-sharing. Islamic banks offer loans based on a project's viability and contracts signed by both parties. Islamic financial products include investment accounts, portfolio management, commodity and equity-based fund management facilities and mortgages as well as investment banking and corporate finance.

Haram Industries

Islamic banking, in comparison with Western banking, conveys an intent to accomplish a moral purposes through financial services. The goal of the Institute of Islamic Banking and Insurance (IIBI) is "a financial system based on Islamic belief that truly embodies the concept of socio-economic justice in commercial dealings." Companies considered to be dealing in haram, or sinful products, services or sectors include those that produce, use or deal with alcohol, pork or pork byproducts, pornography, gambling or interest-based finance. So-called Shariah-compliant assets are structured to follow Islamic law in the content and structure of their enterprises, and typically are governed by an Islamic council.

Islamic Business Ethics

Shariah-compliant banking ideals derive directly from the Quran and from the life and statements of the Prophet Muhammad, sources that also drive Islamic law regarding diverse issues. Ethics, justice, equity and truth are mentioned frequently in the Quran. Muhammad proclaimed extensive rulings and laws regarding business ethics, trade, pricing and financial transactions, as well as admonitions to avoid debt. The Prophet ruled that anyone incurring debt is morally compelled to repay it before his death. Islamic scholars also ruled that debtors should in most cases pay zakat, or charity to the poor, when they owe a debt. These rulings demonstrate Islam's moral imperatives behind financial dealings.

Cross-Cultural Influence

Islamic banking is not limited to Muslim-owned companies. Western banks have been responding to the demands of many Muslim clients by incorporating and offering Shariah-compliant services. By the same token, Islamic banking is influenced by Western banking. Research in Islamic banking incorporates lessons and successful components from Western financial systems. Shariah banking organizations review and adapt Western techniques focused on business ethics and codes of conduct. For example, they use the U.S. Department of Commerce's Model Business Principles and research produced by The International Society of Business Economics and Ethics. Such cross-pollination between Western and Islamic banking institutions is producing more hybrid financial products.

About the Author

Alison Lake has been a journalist and editor since 2001, working with numerous newspapers and magazines. She has served on the world news desk of the "Washington Post" and contributed to The Atlantic, Foreign Policy Online, Al Jazeera English and GlobalPost.

Photo Credits

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