Ethical Consumer Magazine: Is Islamic Banking an Ethical Alternative?

Arwa Aburawa explores whether a religious take on banking offers any alternative for ethical consumers.

In 2008, as the world slid into what is now known as the ‘Great Recession’, Islamic finance was witnessing something of a resurgence. This faith-based banking hit the headlines as an ethical and sustainable alternative to the conventional, profit-driven banking system. If the financial crisis was caused by irresponsible banking, then Islamic finance – which is risk-averse and anti-speculation – could be the solution went the logic.

But is Islamic finance really the answer to our banking prayers?

In some aspects, Islamic banking does follow more ethical guidelines. It forbids what it calls effortless profit (interest) and generally prohibits investment in activities such as gambling, tobacco, pornography, pork, alcohol, military armament and speculation. It is asset-based which means that wealth can only be generated through legitimate trade and investment in assets. Making money from money is forbidden and it is this principle which has been highlighted by Islamic financial experts as creating a more stable and transparent system of banking.

Another principle at the heart of sharia-compliant finance is the notion of profit and risk-sharing between the bank and the customer. This means when a customer wants to buy a house, the bank buys it outright and then sells it back to the client at a fixed higher price. They both share the risk and any profit made by the bank is deemed reward for the shared risk taking.

Drawbacks

There are however some distinct downsides to Islamic banking. When it comes to environmental responsibility, the Islamic finance sector still has a long way to go. Many of the UK-based Islamic banks are as happy to invest in polluting industries such as oil and gas as they are in relatively low-risk commodities and the banks have strong connections with the oil-producing Middle East. There are also no Islamic mutuals or co-operatives despite many experts stating that these models could better serve the spirit of Islamic banking.

Another downside is that some banks don’t offer loans or credit cards. Due to the principle of not making money from money, the regulations make it almost impossible to give money to people who aren’t going to put it directly into a tangible product like a house. Many of the banks also focus on businesses and high-income individuals rather than the average customer. In fact, the Islamic Bank of Britain is the only sharia-compliant retail bank in the UK. Many Islamic banks were set up in the last 10 years and struggle to make a decent profit. Saying that, all the banks are authorised by the Financial Services Authority and are covered for £85,000 per person if they go under.

UK role in Islamic Banking

Outside of the Muslim world, the UK is considered the centre of Islamic finance. There are three conventional banking institutions that offer Islamic banking services – HSBC, Lloyds TSB and the United National Bank – and four sharia-compliant banking institutions. Islamic banking is open to all customers, Muslim and non-Muslim alike.

The Islamic Bank of Britain was founded in 2004 and has branches in Manchester, Birmingham, London and Leicester. It was bought out by the Qatar International Islamic Bank in 2010. It has no environmental policy and does not offer credit cards or loans. Its Home Purchase Plan, which is the Islamic alternative to a mortgage, operates at a 4.19% rental rate and its target profit rates (interest) for saving accounts are around 0.1% and up to 3% for fixed terms deposit accounts.

The Bank of London and the Middle East which was authorised in 2007 is an independent wholesale bank which focuses on businesses and high net-worth individuals. It doesn’t invest in the arms and military industry, pornography, alcohol; take excessive risks or speculate with their investments. The bank is involved with petrochemical projects and provided a £10 million leasing facility to Ocado, the UK independent online grocer.

Authorised in 2005, the European Islamic Investment Bank doesn’t invest in alcohol, tobacco, pork, most conventional financial services, much of the defence/weapons sector or the entertainment sector. Instead, it focuses its investment in energy and natural resources through companies such as TriTech which represents oil and gas assets in Texas and DiamondCorp which mines diamonds in South Africa. At the end of 2010, their oil and gas assets were valued at £26.4million.

Gatehouse Bank plc was approved in 2008 and is another sharia-compliant investment bank which is involved in oil and gas drilling, this time in Kuwait. It is however marketing itself as the UK’s leading Islamic real estate investment provider and has invested in numerous student accommodations, hotels and commercial properties across the UK.

Whilst the Islamic finance sector didn’t emerge unscathed from the banking crisis, it is now being considered as a viable alternative to conventional banking. Its aversion to excessive risk and speculation as well as its focus on assets means it is seen as a more responsible and ethical banking option – something that many in the post-financial crisis world are keen to embrace.

::Originally published at Ethical Consumer Magazine. See their full report on banking more ethically as part of the UK-wide Move Your Money campaign here.

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One response to “Ethical Consumer Magazine: Is Islamic Banking an Ethical Alternative?

  1. Islamic Banking is still a very young industry, which sort of still have to find itself yet. According the enviromental issue, which you mentions it must be said, that a experst are currently developing an framework, which should help to strenghen the role of Islamic Investors in renewable energy projects…

    In Germany, Islamic Banking is a very, very small industry, with just a handful of players currently. One of them is offering an sharia compliant opportunity to invest in photovoltaic projects in Germany.

    Great Article, nonetheless

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