The Politics of Islamic Finance (review)

Clement Henry and Rodney Wilson have assembled twelve essays about Islamic finance—six about thematic issues and six about case studies of Sudan, Kuwait, Jordan, Turkey, Tunisia, and Egypt—plus an introduction and conclusion.

Henry and Wilson's introductory chapter is an excellent summary of the phenomenon of Islamic banks, including their origins, size, and banking practices. The banks largely date from the mid-1970s. Purist Islamic economists thought Islamic banking should be based on profit sharing, in which the depositor's funds are at risk, so as to avoid the Islamic prohibition on interest. However, more practically minded clerics gave approval to a financial instrument called murabaha, which they saw as the sale of a commodity on installment terms. That is, if a bank buys you a car for $30,000, it can require that you pay them $33,000 in a year's time or that you pay five equal annual installments of $7,913.92. To the Western mind, such a murabaha loan looks just like a loan at 10 percent compound interest. As Henry and Wilson note, such instruments appear to comprise 80 to 95 percent of the "investments" (what a Western bank would call credit facilities) of Islamic banks. The major complication for such banks is how to reconcile the Islamic legal requirement that the bank own the commodity against which the loan is made with the requirement of most bank supervisory agencies that banks confine themselves to trading only in financial instruments rather than physical goods.

The wide scope of the essays allows The Politics of Islamic Finance to bring to life the impact of Islamic banks. Monzer Kahf's essay details how Islamic banks have become an important source of income for some Muslim clerics. Both Mohammed Malley's essay on Jordan and Filiz Baskan's chapter on Turkey shed additional light on the connection between Islamic banking and Islamist politics. Samer Soliman chronicles the impressive growth of Islamic banks in Egypt until the spectacular crash of self-styled Islamic investment houses—largely unregulated institutions that paid spectacular returns as long as they were exploiting a loophole in the foreign exchange regulations. When that loophole was closed and the investment houses collapsed, the image of Islamic institutions as a whole suffered.

Both the thematic and case study essays are mostly about commercial banking, though Wilson contributes a chapter about the role of Islamic mutual funds in portfolio investment outside the investor's country of origin. Ellis Goldberg has written an interesting chapter about commodity futures: While his discussion of the pre–World War II Egyptian cotton futures market is fascinating, what it is doing in this book is unclear since, as Goldberg writes, "existing research on Islamic law is fairly clear that futures markets as presently known are not consonant with Islamic law" (p. 83).

Disappointingly, there is little, if any, discussion in The Politics of Islamic Finance about insurance or central banking. A variety of firms attempt to provide insurance instruments that satisfy both Western requirements and Islamic jurisprudence; it would have been interesting to learn how well the two can be reconciled. In Iran, Pakistan, and Sudan the government has mandated that the entire banking system, including the central bank, operate on Islamic principles. In developing countries one of the principal functions of the central bank—if not the entire banking system—is to finance the government budget deficit. It is not easy to come up with ways consistent with Islamic jurisprudence for the government to pay a reward—call it interest, commission, profit sharing, or whatever—to those who lend it money. In practice, Iran, Pakistan, and Sudan have adopted methods that appear at first glance to have sacrificed Islamic principles to practical development needs.

Ibrahim Warde's essay fits poorly with the scholarly articles of this book, being in large part a polemical attack on American policy to stop the financing of Islamist terrorists that, he says, has inappropriately...