“The literal meaning of interest, or Al-riba as it is used in the Arabic language, is to excess or increase. In Islamic terminology, interest means effortless profit or profit which comes free from compensation or extra earning obtained that is free of exchange.” This interest, or riba, specifically applies to the collection of interest on loans. In Islamic law, also called Sharia, it is forbidden to collect interest, but with the current banking system in America and most  other countries, it has become an increasingly difficult law to abide by.

Recently, banking firms rooted in the Western, capitalist tradition, namely JP Morgan, have now adapted their policies to make it possible for clients to adhere to Sharia law.

The Islamic banking system functions in a fundamentally different way from mainstream banking systems. For example, a store owner must take out a loan in order to buy supplies. In a typical banking scheme, the bank would give a loan, and charge interest. In a “halal,” or Islamically permissible, banking system, like the one offered by JP Morgan, it’s all asset-based. Instead of the bank providing the money, they would instead purchase the supplies, and buy it back at a markup rate. Additionally, in sharia the beneficiary must undergo a credit check to ensure that they are qualified to take out a loan,  and they cannot have any outstanding debts.

Traditional banks also pay interest on money sitting in a savings accounts. When money is deposited into an Islamic bank, however, it is pooled with the money of other members of that bank, and then used to run its business. At the end of the year it will calculate its profits, and it will pay you, for example, 6 percent, more or less, depending on how well the bank grossed that year. A traditional bank will pay you a fixed interest, but if an Islamic bank has a bad year, they could pay you nothing.

Since Islamic banking’s emergence throughout the gulf countries in the 1970’s, it has rapidly spread. “Japan is planning to become the first non-Muslim country to issue sharia-compliant bonds; former UK Prime Minister Gordon Brown announced last summer, is revising its laws to make London the ‘gateway’ for Islamic finance in Europe; and Malaysia has proposed substantial tax incentives in its 2007 budget for its Islamic financial sector.”

JP Morgan is making the greatest effort to meet the demands of customers that desire Islamic banking practices. In January of this year, they announced Hussein Hassan as the new Global Head of their Islamic Finance practice. JP Morgan is a multinational corporation, therefore it will only be focusing its efforts on countries with a higher concentrated Muslim population, such as Saudi Arabia and Malaysia. It has been over 50 years since the bank opened its first branch in Beirut, Lebanon, 35 years in Bahrain, over 30 years in Cairo, Egypt, and in 2007, they set up a new company in Riyadh, Saudi Arabia and opened an office in Dubai, United Arab Emirates.

Recently, JP Morgan, along with three other Islamic banks, have been mandated by the International Bank of Azerbaijan to arrange a $100 million syndicated loan for funding its Shariah-compliant financing activities in the country. The country of Azerbaijan has a predominantly Muslim population, over 90%, which renders Islamic banking crucial in the country. The plan was launched in May, and will take 18 months for execution. Although JP’s practice of Islamic banking is fairly new, they are already greatly expanding to fit the needs of all their customers.

These innovations allow banks to develop financially, without forcing their customers to sacrifice their religious values.

2 COMMENTS

  1. Given its rapid growth and relative stability, are there lessons we can garner from Islamic finance? Three years after the onset of the global financial crisis — as regulators are still grappling with how to deal with predatory lending practices, opaque derivatives, and overly leveraged financial institutions — can shar’iah -compliant finance challenge our notion of conventional banking?
    The industry likes to argue that Islamic banks are somehow more closely entwined into the “real” economy as opposed to the “financial” one. They require real, physical assets to back all transactions and eschew the socially useless financial wizardry that their conventional counterparts routinely dabble with. Yet it is hard to fathom how Islamic banks – as they currently operate across the Muslim world – are “better” for the economy and Muslim customers than conventional ones.
    Still, the industry has its detractors. Some Muslim critics feel it is merely a means to give conventional finance a veneer of shar’iah , following the letter of Islamic law rather than its spirit. Critics charge that the industry fails in the area that some proponents like to hold up as its prime selling point: Islam’s injunction for profit-and-loss sharing equity investments, rather than usurious debt. In practice, however, Islamic finance often deviates little from its conventional counterpart.
    Despite these setbacks, Islamic finance has continued to mature and swell in size. Heated arguments over its religious credentials are natural and unavoidable, given the breadth and diversity of Islam. Even though there have been a number of successful efforts to harmonise shar’iah interpretations, there will probably always be differences of opinion between regions, countries and clerics, experts say.
    Proponents are loath to admit that there have been any compromises with shar’iah along the way but like to point out that adhering to Islam’s financial values is a process, not an absolute yardstick.

  2. I would like to clarify that JP Morgan Chase is offering Islamic banking for US market? I have few questions regarding this how can I find out?

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