Issue Date: November 30, 2009
Sami Ibrahim's letter is very interesting (C&EN, Aug. 31, page 4). It parallels other systems—Halakha (Jewish law), in particular, which also forbids taking interest on a loan (see, for example, Leviticus, chapter 25, v.36–37). In both cases, however, the need to provide money to promote commerce has caused the people involved to devise workarounds.
I don't know the details of how Islamic banks are run, but I do know something about Halakha. It gets pretty complicated but basically works like this: The two entities involved agree to go into partnership. A contract is drawn up whereby the lender makes an interest-free loan to the borrower for half the amount required. According to the contract, the lender then pays the borrower the other half of the amount required for buying into his share of the partnership.
There are a lot of other detailed provisions specifying, for example, what happens if the partnership should go bankrupt and also what happens in case any of a large number of other contingencies occurs. The really interesting part is that, while according to the letter of the contract, and in compliance with Halakha, there was never any money lent with interest and the net effect of the contract with all its provisions is indistinguishable from what happens when money is lent with interest. Nevertheless, everything is in technical compliance with the requirements of the letter of the law.
I would be interested if Ibrahim would let us know how the corresponding workarounds in Islamic law actually operate in practice. I tend to suspect, however, that principles of good banking have more to do with the solvency of the Islamic banks than do religious principles.
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