Islamic banks

The Muslim faith forbids charging interest, sow how do Islamic banks stay in business?

The bank invests the deposits. The bank and the depositor go in together on investments; both share the profits and both share the risks as well. The same goes for the bank and the borrower; the borrower repays the bank a share of his profits. The point of the prohibition on charging interest is that the lender shares the same risk as the borrower, and is not guaranteed a return simply for having money. In this system, merely owning capital is not enough to guarantee a reward; you have to become a partner in investment along with the borrower.

I have seen arab banks in other countries and they operate like every other bank. I believe they get around the usury thing by, instead of calling it interest, calling it something else.

Nota bene: Arab =/ Islamic ; Islamic =/ Arab.

Most banking in the Arab world operates more or less on international banking standards, since about the turn of the century or so. These are ** not ** Islamic Banks ™, but rather operate on some “exceptional” bases, revolving around some ‘interpretive gymnastics’ as my Leb apartment mate calls it and some post-facto religious decisions in re competitivity.

Wrong, they either operate as normal banks with the above provisios – note the specifics may vary from country to country, but even in Saudi Arabia some banks are constituted on “western” standards, or they operate on the shared risk framework as described above. Now, the detials of the shared risk framework vary according to the scheme and actual operation in banking terms IMHO really ressembles standard banking with some ineffciencies built in, however if you want religiously pure money, the system is there. Mind you, Islamic Banks are a minority of all bank holdings in the Middle East but to my understanding obtain something around 50% of the Pakistani market.

I was in Pakistan recently and met with a senior VP of Habib Bank, which is one of the bigger banks there. (although it’s actually incorporated in Switzerland). They pay interest, but I’m not sure how it’s rationalized. I’ll email him and post.

On a side note, in the startup world, there is an investment known as a bridge loan, which is a loan that converts into an equity ownership. While it’s a loan it accrues interest. This issue comes up occasionally with Islamic investors, and in those cases, bridge loans are written up so that interest is effectively paid, but it isn’t referred to as such.

What does a bank charging interest have to do with one’s faith?
Just wondering.

The Qur’ân makes charging interest unlawful.

*Those who devour usury will not stand except as stands one whom the Evil One by his touch has driven to madness. That is because they say “Trade is like usury,” but God has permitted trade and forbidden usury. Those who after receiving direction from their Lord desist shall be pardoned for the past; their case is for God (to judge); but those who repeat the offense are companions of the Fire: they will abide therein.

God will deprive usury of all blessing, but will give increase for deeds of charity: for He loves not creatures ungrateful and wicked.*
(2:275-276)

If a debtor is in difficulty, grant him time till it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew.
(2:280)

The point of this was to establish a social order where lenders could not oppress debtors.

Back six hundred years ago, when Christian dogma prohibited interest on loans, lenders masked loans as currency exchanges. Let’s say the Florin was worth two Ducats; if you were converting 1000 Florins at market rate you’d receive 2000 Ducats. But you’d find a dealer who’d offer you 1500 Ducats for 1000 Florins. However this dealer would offer to give you the 1500 Ducats now and you wouldn’t have to give him the 1000 Florins until next year. If you accepted his offer, you were in effect borrowing 1500 Ducats at a 33% annual interest rate.