Quora Answer: Why is Islamic Finance Popular?

The following is my answer to a Quora question: “Why is Islamic finance so popular?”

According to Morgan McKinley and others, the Islamic finance sector is expected to be worth US$6.5 trillion by the end of this decade.  This is substantially larger than the approximately US$300 billion or so at the turn of the millennium.  But does this necessarily mean it is getting more popular?  The global financial market itself is projected to be worth about US$900 trillion in 2020.  Going by those numbers, it can be argued that rather than Islamic finance being more popular, the growth of the sector is in line with the overall growth of the entirety of the financial markets.  In terms of global market share, it is still tiny, and it will take a lot more than this for it to be qualified as being “popular”.

Islamic finance is a fad.  What they have done is take existing financial products, and rename them with bombastic Arabic terms to give these products a veneer of religious adherence, that is, in many cases, far from the reality.  These products are based on fatawa, legal opinions, by scholars such as Muhammad Taqi Usmani, which are often impractical, or of questionable intent due to conflicts of interest.  For example, Muhammad Taqi Usmani sits on the following, and gets paid: Chairman, Shariah Board, Citi Islamic Investment Bank, Bahrain; Chairman, Shariah Board, Amana Investments Ltd., Sri Lanka; Vice-Chairman, Shariah Board, Abu Dhabi Islamic Bank, Abu Dhabi; Member, Shariah Board, Dow Jones Islamic Market Index; Chairman, Shariah Board, Al-Meezan Commercial Bank Ltd; Vice President, Darul-Uloom Karachi; Deputy Chairman & Permanent Member of Islamic Fiqh Academy, Jeddah; Chairman, Centre for Islamic Economics, Pakistan; Chairman, Shariah Council AAOIFI; Chairman, Shariah Board, IslamiQ.com; Chairman, Shariah Board, Saudi American Bank, Jeddah; Chairman, Shariah Board, HSBC, Global Islamic Finance, London; Chairman, Shariah Board, Robert Fleming Oasis Fund, Luxembourg.  This is not even a comprehensive list.

He sits there.  He gets paid, and he declares their products halal.  This is the same with all other scholars sitting on these boards.  In normal banking, this would fail compliance, and be a conflict of interest.  Islamic banking has less compliance strictures because it is still new.  People like Muhammad Taqi Usmani claim all “interest-based” banking is haram, because they simplistically declare any and all form of interest is haram.  However, due to the way all banks are structured, in adherence to Basel II and Basel III conventions, they are all lending out funds that are no hundred percent backed.  This is real usury, and they are quiet about this.  If the bank is only backed up to 17%, meaning that only 17 cents out of every dollar lent is “real”, that is massive riba’, usury, according to the principles of shari’ah.  This includes the so-called Islamic banks.  And yet, that 0.017% interest per annum on your savings account is “haram”.

Islamic banking products, whether swukuk, or takaful, underperform the market, and equivalent products.  The proponents of these products emotionally blackmail Muslims by claiming that these losses are God’s Will.  As such, only the gullible and the simple-minded actually buy these products.  Due to the convoluted structure for some Islamic loans, for example, you actually end up paying more, and the bank shares ownership all the way.  This has legal implications that most homeowners never consider.

In summary, many Islamic finance products have serious issues that have yet to be fully addressed; the definition of what constitutes riba’, usury, ins inconsistent; and the products are inferior to the market.  Islamic finance will always be a niche market.  It is a branding, not a viable alternative to conventional ethical banking, with its more robust compliance structure.