Journal of Economic Behavior & Organization 76 (2010) 805–820
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Journal of Economic Behavior & Organization
journal homepage: www.elsevier.com/locate/jebo
How ‘Islamic’ is Islamic Banking?
Feisal Khan ∗
Dept. of Economics, Hobart and William Smith Colleges, 300 Pulteney Street, Geneva, NY 14456, United States
a r t i c l e
i n f o
a b s t r a c t
Islamic Banks hold well over US $700 billion in assets and are growing at over 15% p.a. Islamic Banking and Finance (IBF) involves wider ethical and moral issues than simply ‘interest-free’ transactions. Its advocates argue that these make it more economically efﬁcient than conventional banking and promote greater economic equity and justice. To what extent, then, do actual Islamic Banking practices live up to the ideal, and how different are they from conventional banking? A preliminary investigation shows that, three decades after its introduction, there remain substantial divergences between IBF’s ideals and its practices, and much of IBF still remains functionally indistinguishable from conventional banking. This runs counter to claims by IBF advocates that it would rapidly differentiate itself from conventional banking. However, despite not providing an alternative to conventional banking and ﬁnance, IBF does strengthen a distinctly Islamic identity by providing the appropriate Islamic terminology for de facto conventional ﬁnancial transactions. © 2010 Elsevier B.V. All rights reserved.
Article history: Received 3 June 2008 Received in revised form 20 September 2010 Accepted 20 September 2010 Available online 29 September 2010 JEL classiﬁcation: P48 E44 G21 N25 Keywords: Islamic Banking Murabaha ¯ Riba Interest-free ﬁnance
1. Introduction 1.1. Size and extent of Islamic Banking Worldwide Commonly synonymous with ‘interest-free’ banking, Islamic Banking has become a growing force in global ﬁnancial circles over the past three decades, with Islamic Banks found in over 70 countries worldwide (Warde, 2000, p. 1). In 2008 the value of the world’s “Islamic assets” was about US $700 billion (Economist, 2008) and in the 10 years preceding 2005, the growth rate of Islamic Banking assets had been ∼15% p.a. (Benaissa et al., 2005, p. 1). In 1999 Dow Jones created ‘Islamic Indexes’ to offer Shar¯‘a-compliant investment portfolios to cash-ﬂush pious Muslims. Several major Western banks, e.g., ı Citibank, ABN Amro, Bank of America, HSBC, Standard Chartered, and the Union Bank of Switzerland, either have Islamic Banking subsidiaries or offer Islamic ﬁnancial products to their customers. Clearly Islamic Banking and Finance (IBF) has transformed itself from an obscure ﬁnancial experiment to a major factor in global ﬁnance. By some (optimistic) estimates, Islamic Banks could account for 50% of all savings in the Muslim world by 2010 (Zaher and Hassan, 2001, p. 167). There is no doubt that Islamic Banking assets are growing rapidly: in Bahrain, the Muslim world’s money center, between 1998 and 2005, Islamic Bank assets grew at 111% annually versus only a 6% average annual growth rate for conventional bank assets (Bahrain Monetary Agency, 2006). Unsurprisingly, the increase in crude oil prices in the last few years has increased the growth rate of Islamic Bank assets in the Middle East. Although still insigniﬁcant compared
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F. Khan / Journal of Economic Behavior & Organization 76 (2010) 805–820
to conventional banking – the US’s 10 largest banks alone hold over US $4.3 trillion in assets (Mishkin, 2007, p. 262) – the growth of Islamic Banks demonstrates their importance to, and the growing ﬁnancial clout of, the world’s billion-plus Muslims. 1.2. Islamic economics: critics and defenders Contemporary IBF practices have not been without...
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