A young man chooses his career and decides to become a successful banker, just like his father. He wants to prepare for the role and asks his father “What do I have to do to become a successful banker, like you?” “Son,” says the father, “you must follow these three simple rules: first, do not lend money to those who do not have it; second, do not lend money to those who urgently need it; and third, most importantly, do not lend your own money. “. Good advice in these difficult times. It is a shame that many of today’s bankers have never received this good advice or have ignored it!

In a previous article I made the argument that Islamic banking institutions were weathering the current financial crisis comparatively well, as they were, or indeed should be, protected from disasters in the interbank market and disorder in the derivatives markets. Several readers raised the logical question of how Islamic banks manage to stay in business without charging interest.

In short, one of the basic principles of Islamic banking is the prohibition of riba (usury or interest). Until the 1980s, riba was generally interpreted to apply only to usury, but it is now accepted practice to refer to all interests. Other principles are based on simple morality and common sense, which are by no means unique to Islam. For example, usury was also prohibited in both the Old and New Testaments. Even literary heavyweights like Shakespeare opposed the practice.

Islamic banking is not a recent phenomenon either. The basic practices date back to the early parts of the 7th century. Some experts even claim that many of the concepts and techniques that are so familiar to us today were later adopted by European bankers. Its fairly recent revival coincided with rising oil prices in the mid-1970s, providing significant financial resources to parts of the Muslim world. The other crucial element was the accompanying pursuit of ethical values ​​in the management of their financial affairs, something that many of the traditionally Western financial organizations could not provide. Since this is a trend that does not only apply to the Muslim world, emerging Islamic banks are increasingly being accepted by non-Muslims who do not wish to invest, or even deposit their savings, in companies involved in unethical and socially harmful activities, such as dealing in alcohol, gambling, pornography and tobacco.

The Islamic economic system is concerned with social justice to ensure that neither party involved in a transaction is exploited without at the same time inhibiting individual enterprise. Extended to the Islamic financial system, this means that the funds that individuals and/or companies put at risk share in the profits or losses resulting from the undertaking. This concept of sharing the joys or sorrows of business outcomes is progressive. Paraphrasing Charles Darwin “It is not the strongest financial system that survives, nor the most intelligent. It is the one that is most adaptable to change.” Islamic banking encourages better resource management, particularly as Shariah, ie Islamic law, does not allow open speculation. Participants keep pace with sophisticated techniques and have developed products that are not only ethically motivated but also profitable.

Islamic finance solutions often have Arabic names, which intimidates many potential buyers into saying that everything is too complicated. In essence, most of these products are essentially the same as their conventional counterparts. The main differences are the lack of interest and the often complicated procedures to ensure compliance with Shariah law.

For example, in Islamic housing finance, the risks involved are shared between the bank and the borrower, rather than transferring all the risk to the latter. The most widely used contract is the decreasing musharaka (association) contract. In this case, the bank and the borrower form a partnership, with the bank providing up to 95 percent of the purchase price and the borrower 5 percent.

The borrower buys the ownership interest from the bank, which derives its benefit from the rent paid by the customer for the interest owned by the bank. This happens over a period of usually 15 to 30 years.

If the borrower defaults on rent or principal, the bank may advance the borrower an interest-free loan to allow them to continue their payments in anticipation that they will pay in full when they are able to do so. The good news is that during this time of distress, the borrower keeps his home rather than face eviction.

Having said that, Islamic banks still assess credit risk and are, in fact, more cautious about who they finance than conventional banks.