Islamic banking is highly lucrative. No surprise then that it is now attracting the likes of Citibank. When banks make money, it can only come from one source their customers. These Islamic banks are unnecessarily charging more for their services, with the Islamic cachet being used to gouge Muslims. Bluntly put, Islam sells.

Islamic banks must be rigorously scrutinised on whether they provide better, safer and cheaper services than traditional institutions, and on how effective and efficient they are as intermediaries linking owners (savers) and users (investors) of capital.

Banks are the foundation of a modern economy. The remarkable economic achievement of the West today is attributable to its sound banking system. Show me an economically stagnant nation, and I will show you a nation without an efficient banking system. Malaysian leaders attributed the1997 economic crisis to currency speculators; in reality it was the consequence of a weak and inefficient banking system.

Consider a housing loan from an Islamic bank in Malaysia. It can be as high as 200 basis (or two percentage) points higher than that from a traditional bank. Islamic banks also provide no safeguards.

Variable-rate mortgages in America are limited to the number of times they could be adjusted in any 12-month period, and the increases are capped for the entire period of the loan. For example, if the initial rate is eight percent, the maximum it could be increased is by 400 basis points (to 12 percent), and the rates could only be adjusted not more than twice annually.

No limits

In contrast, Islamic banks in Malaysia have no such limits. Their mortgages could easily rise to usurious heights. This is dangerous and unfair to the consumer, and certainly not Islamic.

Further, in America all mortgages for personal homes (in contrast to rentals) have a 'non recourse' clause. Thus if you cannot repay your loan because of job loss or illness, the bank cannot extract more from you beyond what it could get through selling your house.

If the house has declined in value, then the bank would be stuck with the loss. Bad for the bank, but good for the customer. Mortgages from Islamic banks by contrast have no such 'non-recourse' clause, and the borrower is liable for the whole balance.

A stumbling block for Muslims in understanding modern banking is the concept of interest or ribaa . Yes, ribaa

is haram (forbidden) in Islam. It says so clearly in the Quran and the hadith .

What is at issue is what exactly is the meaning of ribaa

? Does ribaa mean excessive interests? And does it apply to sophisticated financial instruments like bonds that were not yet invented during the prophet's time? Is there a difference between interests accrued in consumptive loans (for a fancy car or expensive wedding) versus productive ones (for higher education or building a factory)?

Words have a way of changing their meanings. During the prophet's time poets were regarded as whores, today they are adulated as practitioners of the finest literary form. We must be careful and not blindly extrapolate ancient concepts into their modern forms.

Capital, whether cash, car or castle, has costs associated with it. If I borrow a car I pay rental fee; similarly if I stay in your castle. So why not a similar rental fee for liquid capital (money), which is what interest is all about.

An example

Consider this example. There was a drought one year and I borrowed a gantang of rice. Because of the scarcity, rice was expensive, with a gantang costing RM15. The following year the rains came and the rice fields became bountiful. I returned that gantang of rice to repay my loan. Technically I have repaid my loan in full and without ribaa

one gantang for one gantang . But have I?

Because of the bountiful harvest, my one gantang of rice now costs only RM5, not the RM15 of the earlier year. To repay fully and properly I should give three gantangs , based on the current market price. The prophet recognised this very issue, as related in this hadith . A man borrowed a sack of dates early in the season when the fruits were sweet and delicious but also scarce. He returned the sack of dates late in the season, but by this time dates were plentiful, dried up, and not so sweet.

The lender demanded more but the borrower refused, claiming ribaa

. They agreed to let the prophet adjudicate their dispute. The prophet replied that the borrower must go back to the marketplace and find out how much is the value of a similar quality of dates that was borrowed (as in the early harvest), and then repay the lender that equivalent.

The point here is simply that when things are nominally

the same, in reality they are not. One ringgit in August 1998 is not the same value as the ringgit in September 1998 (after the devaluation). How to define ribaa or to discern its actual meaning is the crux of the issue. Mindlessly chanting that ribaa is haram is not particularly enlightening.

Definition problem

Many of the services provided by Islamic banks (leasing, forward purchase, installment sales) should properly be not under the purview of banks rather that of other financial institutions. We needlessly confuse the public in using terms like 'banks' when we mean finance or leasing companies. In America banks are not allowed to participate in such 'non bank' activities for good reasons: How to regulate them and prevent abuses. Hence there is no Islamic bank in America.

There are companies that provide those services offered by Islamic banks in Malaysia, but they exist under names other than banks. I have not used them because they cost considerably more.

The bulk of the literature on Islamic banking is written primarily by ulamas woefully ignorant of modern economic realities. Their treatises are heavy on quoting the Quran and hadiths but have little relevance to modern economic or financial realities. Fortunately today we are seeing works by the likes of Timur Kuran and Mahmoud El-Gamal, competent economists who are also knowledgeable in Islam and literate in Arabic. They elevate the debate considerably.

Credit, the flip side of lending, is a basic human right, claims Grameen Bank's Muhammad Yunus. The bank's 'micro credit' lending has done much to alleviate poverty in economically desperate Bangladesh. In any religion, that is considered very meritorious.

I am neither an alim nor an economist but as a businessman, I consider myself an informed consumer of financial services. Simply claiming that something is Islamic would not cut it for me. Proponents of Islamic banking must prove that their products are safer, cheaper, and better than those currently provided by secular banking, and that they are in compliance with the intent of ribaa

.

Fancy semantic gymnastic in labeling interests as 'service fees' would not do it. Even with simple leasing, a high school student could easily calculate its imputed interest rate. The bottom line must surely be the total cost to the consumer. In all instances that I have explored, the products of Islamic banks cost considerably more.

In trying to camouflage the cost of capital by re-labeling it as service charge and profit sharing, these Islamic banks have made it difficult if not impossible for customers to comparison-shop.

And to suggest, as proponents of Islamic banking do, that a farmer seeking a loan from a bank is in effect in 'partnership' with that bank is simply disingenuous.

Were such a 'partnership' to lose money, the poor farmer is no position to challenge the bank's accounting. Such grossly lopsided 'partnership' is nothing but a sham.

To reiterate, there is no merit, religious or otherwise, in gouging the consumer.