Shari’ah-Compliant Finance

Photo of HSBC (Dubai) courtesy of Council on Foreign Relations

COUNCIL ON FOREIGN RELATIONS: There are few principles more central to modern economics than interest, the fee charged for the opportunity of borrowing money. Interest spurs economic efficiency and creates wealth by helping borrowers and lenders make exchanges to their mutual advantage. Islamic law, or sharia, forbids either paying or charging interest. For decades this theological ban has had limited effect on international economics, given the feathery relative weight of Middle Eastern investors and businesses in global markets. But now, an influx of oil money is bulking up Middle Eastern financial influence and giving rise to a new boom industry: sharia-compliant financial services.

In order to win the “sharia compliant” seal of approval, businesses must adhere to all theological requirements of the Quran. Jawad Ali, a partner at King & Spalding, a law firm that assists businesses in structuring sharia-compliant deals, explains in an interview that this means not only shunning interest but also adhering to a host of other requirements. A real estate firm, for instance, cannot rent property to banks, casinos, businesses that deal in pork or pork products, or any other business that itself doesn’t follow sharia.

Still, Ali says, the most complicated compliance standard is commonly the interest ban. Businesses work around this restriction by developing creative ways to substitute fees for interest. Say, for instance, a business is interested in purchasing a property. Instead of borrowing money to make the purchase, the business can structure a transaction such that a bank acquires the property and leases it out for a set fee. This primer by the Institute of Islamic Banking and Insurance outlines other similar sharia-compliant financial arrangements. Yet there is no absolute standard for sharia compliance beyond meeting the subjective demands of would-be investors, and there is no governing body overseeing Islamic banking, so standards vary region-to-region and firm-to-firm. Banking on Islam (more) Prepared by Lee Hudson Teslik

Mark Alexander