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Islamic Banking in the Global Financial CrisisThe Value of “Banking Rightly”

In addition to prompting discussion among scholars, politicians and the media, the current economic crisis has also dramatically impacted daily life around the globe. Here we present a series of case studies examining how particular populations are experiencing the economic crisis, what we can learn from past crises, and how local situations relate to broader discussions about rethinking contemporary understandings of how economic systems can, do and should (or should not) work.

E C O N O M I C C R I S I S : C A S E S T U D I E S

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In late 2008, the US Treasury Department hosted the first training seminar for US government employees on Islamic banking. A few months later, the Vatican newspaper, L’Osservatore Romano, indicated that conventional banks

should look to Islamic banks in order to restore confi-dence among their clients in this time of economic crisis. Most

recently, French Finance Minister Christine Lagarde announced France’s intention to make Paris “the capital of Islamic finance.” These unexpected events reflect a heightened attention to Islamic banking, advanced by the intersec-tion of the economic crisis with ongoing Muslim reconsiderations of piety and religious observance.

During my fieldwork in Amman, Jordan, from September 2007 to June 2009, the effects of the current economic crisis hit world-wide, and the Islamic banking sector appeared to have suffered fewer negative outcomes than competing commercial banks. The primary factor that gives Islamic banks their proclaimed resilience in this economic crisis—while providing services that are strik-ingly similar to those offered in competing commercial banks—is a series of Islamically-informed guidelines that create a “more ethical” and less-leveraged invest-ment approach than conventional banks, thereby limiting their expo-sure to the kinds of investments that have been heavily hit in this economic crisis.

According to contemporary interpretations, the most vital criteria that the Islamic banking and finance industry must adhere

to is an oft-repeated, and strongly-worded Quranic injunction against receiving or paying interest: “God has permitted sale and forbidden interest… [T]hose who repeat [the offence of interest] are compan-ions of the fire. They will abide therein” (2:275). Additionally, there are prohibitions against speculative lending, which effec-tively limit the kinds of invest-ments you might find in deriva-tives or futures markets. Finally, within each Islamic bank is the presence of an Islamic law, or Shari’ah, committee typically comprised of Islamic scholars. The aim of the committee is to implement Islamic law in banking methods and services as well as in the general ethics of investments, avoiding items and services anti-thetical to contemporary inter-pretations of Islam such as invest-ments in pork, alcohol, gambling, pornography, tobacco and weap-onry. In this way, Islamic banking moves from a financial institu-tion practicing lower-risk invest-ments to a moral institution that promotes a certain ethos of correct practice for Muslims.

Within the current atmo-sphere of uncertainty and inse-curity prompted by the finan-cial crisis, the success of Islamic banks is attributable to a gener-alized risk-aversion in the tech-nical arrangements of banking and financial organization as well as in terms of investment. At the same time—and most notably—these successes have become testaments to the preeminence of Islam for some people. Islamic banks, their employees and their customers

now hold up the promoted resil-ience of Islamic banking as powerful evidence of the value of “banking rightly.” This position provides a platform for the legiti-mation of Islam as guiding both

the best (most successful) way and the right (most ethical) way of living in contemporary society.

Interpreting Religious AuthenticityIn this contemporary context Islam is understood as a “total way of life,” which includes prescribing a moral code for financial prac-tices. With the relative success of Islamic banking in the midst of the economic crisis, the notion of Islamic law as the means for prof-itable banking—both financially and spiri-tually—has become elevated. Shari’ah committees’ guidance of Islamic banking is upheld as enabling banks and their clients to avoid the current crisis, due to their moral and religious purity. As one infor-mant stated plainly, “The Islamic banks are doing well because they are following the laws of Allah and the real Islam.” Any fail-ures on the part of Islamic banks are attributed to failure in prac-ticing the religion in its authentic form. Furthermore, given Islamic banks’ combined esoteric knowl-edge of finance and highly revered knowledge of Islamic law, average Muslims can feel compelled to become clients to elevate their own religiosity, even if they are uncertain about how the banks work. As one informant described, “They [Islamic banks]

say they’re Islamic so that’s it, they are.” However, the accep-tance and promotion of Islamic banking as better banking is not without negotiations, complica-tions and criticism.

Islamic banks in Jordan, and throughout the Middle East, present themselves as providing services for Muslims who seek to fulfill religious obligations through everyday economic practice. The publics they serve perceive them in a variety of ways, from providing a discursive justification for religiously satisfactory banking to having the power to end poverty on a large scale. The banks meet

client demand for most finan-cial services by “Islamicizing” the same kinds of services and prod-ucts clients receive at conventional banks, with methods as basic as taking on an additional, contrac-tual risk for a fraction of a second. Additionally, as risk-averse finan-cial institutions, Islamic banks often rely on well-established, well-financed clients rather than provide new opportunities for the poor, causing some to question whether they are really Islamic.

One of the most problem-atic aspects is the fact that each Islamic bank has its own Shari’ah committee, which prevents the establishment of system-wide standards and regulations.

C O M M E N T A R Y

With the relative success of

Islamic banking in the midst of

the economic crisis, the notion

of Islamic law as the means

for profitable banking—both

financially and spiritually—has

become elevated.

See Islamic Banking on page 14

October 2009

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Individual banks in this decen-tralized network must indepen-dently determine how to best meet their own needs, to both compete against other Islamic and conventional banks and meet localized understandings of Islam. Shari’ah committees regu-larly legitimate new banking and finance methods as “Islamic” in order to meet client demand for services. For example, Islamic banks in Jordan are considered to be more conservative than those in Dubai, as the Dubai banks have devised methods to lend cash to clients and other liquidity-raising activities that Shari’ah committees in Jordan have deemed not “sufficiently Islamic.” Further, Dubai Islamic banks have allowed the creation of secondary bond markets, which the Shari’ah committees of Jordanian Islamic banks have also prohibited due to localized understandings of speculation.

In this second year of the finan-cial crisis, the attention that Islamic banking has received ulti-mately speaks to the hope for a kind of banking that can effectively manage client accounts and port-folios in a crisis. Balance sheets aside, however, Islamic banks have also provided a means for some Muslims to find a kind of spiritual satisfaction and fulfillment in their economic practices. Furthermore, the financial crisis has created a space in which the relative success of Islamic banks (compared to conventional banks) is justified in both financial and religious terms, and serves as a springboard for the further growth of Islamized practices in fora and institutions previously perceived as outside the realm of religion. As this economic crisis resolves, it will be impor-tant to observe how Islamic banks and their proponents will carry this new moral opportunity (and burden) into the future.

Sarah Tobin is a PhD candidate at Boston University (degree antici-pated in 2010). She conducted her fieldwork in Amman, Jordan, from September 2007 through June 2009, focusing on Muslim identity in the economy, particularly in Islamic banking, finance and consumption.

Islamic Bankingcontinued from page 13

Foreshadowing Global BankruptcySouth Korea’s Credit Card Debacle

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As we face a financial crisis related to widespread credit industry weaknesses, the experiences of South Korea a decade ago may provide some guidance, and even some hope. South Korea has one of the world’s largest and most dynamic economies. Yet until the mid-1990s, only a small fraction of consumer purchases were made with plastic; the domestic economy was shackled to cash. This was the result of long-standing govern-ment policies restricting consumer spending to encourage savings that were channeled to support export-oriented industrial growth during the 1960s, ’70s and ’80s, combined with market condi-tions that allowed South Korean financial institutions to earn more money with commercial and mort-gage lending than by lending to consumers. The Asian Financial Crisis of 1997 was the turning point. Slammed by the crisis, South Korea had to submit to an IMF-funded bailout to avoid total collapse in late 1997. The South Korean currency, stock market and real estate asset values plunged; corporations were dismantled, restructured or sold off. Unemployment rose dramat-ically, customary job security promises were abandoned, and the percentage of contingent and part-time labor increased significantly. With the weak job market and eroding savings and asset values, consumer spending contracted by 7.5% in one year.

To stimulate the domestic economy, South Korean policy-makers encouraged citizens to shop. Americans may recall a similar message in the immediate post-9/11 period. South Koreans are accustomed to government marketing campaigns intended to foster behaviors in the national interest—one of my favorites from the early 1990s was the suggestion to “Use our national tobacco with love,” to help save the government’s tobacco monopoly after the South Korean cigarette market opened in 1989. Most people recognize these campaigns as propaganda,

but this sophistication in percep-tion has not always led to immu-nity from their messages. Many South Koreans believe that they are all in the same boat. In fact, another campaign from the 1990s showed an image of several people with paddles in a boat and the warning, “If one person rests, forty million will be late.” The sense that the nation shares a single destiny is both a threat and an ideal. So, as several people told me, when the government began exhorting people to spend money to buoy the economy, they felt that resisting their impulse to be frugal in hard times was the patriotic thing to do.

Creating LiquidityRegardless of popular will to increase spending, in the wake of the Asian Financial Crisis many people experienced real liquidity constraints. To facilitate spending, South Korean policymakers expanded consumer credit access. Policy changes included relaxed restrictions on credit card issu-ance and utilization: issuers were not required to check the credit-worthiness of applicants; credit delinquencies were uncapped; cash advances on cards were unlimited; and restrictions on the involvement of large corporations (chaebôl) were lifted. Beginning in 1999, banks and other finan-cial institutions began for the first time issuing large numbers of charge cards, which were hawked like snacks treats on street corners. Applicants were asked to provide little other than a name

and address. Signing gifts, product discounts and bonus points lured consumers to enroll with multiple corporate credit card programs at once. By 2002, more than 100 million credit cards were in circu-lation, a number more than twice the population of the nation, or approximately four cards per working person

Up until this time, however, South Korea lacked both the infra-structure and the economic culture to support credit card transac-tions. Although stores, restaurants and hotels catering to foreign visi-tors or to the South Korean elite generally accepted credit cards,

elsewhere cash was essential. Businesses generally preferred cash because they could selec-tively report transactions on their tax returns and did not have to pay service charges to credit card companies; customers (partic-ularly businessmen spending money on “entertainment”) appre-ciated the anonymity of cash transactions. To facilitate charge card utilization, the government offered generous tax incentives to card users. The National Tax Service saw plastic transactions as a way to flush out undeclared sales income by checking credit card company reports against sales reports submitted by individual merchants, and merchants were ordered to install card readers or face tax audits. To further encourage credit card utilization, the Tax Service offered a lottery with cash awards of up to 100

Street vendors are remnants of South Korea’s pre-2000 cash-only economy. Photo courtesy Laura Nelson