Banking that respects the Islamic ban on charging interest is spreading in Islamic countries and the West, but is limited by its need to duplicate Western financial methods, a study published by the US Treasury Department on Friday said.
"One cannot but conclude that the modus operandi of Islamic finance, including the evolving opinions of its professional Islamic jurists, is a prolonged reinvention of the financial wheel," Rice University economics professor Mahmoud Amin El-Gamal wrote in a Treasury Department "occasional paper."
However, demand for such financial products in parts of the Arab and Islamic world is growing with the rise of pro-Islamic sentiment, El-Gamal wrote in "Overview of Islamic Finance." Islamic banking institutions, including the Saudi Arabia-based Al Baraka Islamic Bank, have stepped up their profiles in Lebanon and Syria, he said.
Political calculation may further support Islamic banking, El-Gamal said.
"Depending on political environment, some governments may even opt for Islamization of state-owned banks as a measure to limit capital flight and appease elements within their own borders," he said.
The Treasury said El-Gamal's paper is not a statement of government policy but sheds light on a trend of interest to policy-makers.
Islamic finance is also likely to grow in the United States and Europe, where products are marketed to a relatively well-educated Muslim population, he said. Some products have gained approval from regulators including the US Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp, El-Gamal said.
"It is an industry that is likely to survive in the medium term, due to continued existence of customers who value Islamic jurist approval of its modes of operation," he said.
Islamic financial institutions are able to circumvent the prohibition against interest by such practices as "buy-sell-back" arrangements. In these, a bank obtains a promise that its customer will purchase a property on credit at an agreed-upon mark-up.
The institution then buys the property and sells it back to the customer at the agreed-upon price. The mark-up tracks conventional interest rates.
Insurance is also not permitted according to the interpretation of most Islamic arbiters, who view the insurer-insured relationship as akin to gambling, El-Gamal said. However, an acceptable alternative is marketed as a pooled fund that contributors voluntarily agree to share in case a participant incurs a loss.