RegionsMiddle EastCan Islamic Banking Appeal to non-Muslims?

Can Islamic Banking Appeal to non-Muslims?

Some commentators consider judgements on the potential of Islamic banking to be premature as it is an industry in its infancy, while others consider Islamic financial practice to be the answer to problems created by the conventional debt-based money system. Which group is right? Could they both be right? And how realistic are Islamic bankers’ dreams of penetrating non-Muslim markets as a global alternative to conventional finance?

At the risk of over simplifying, the essence of Islamic finance is that all parties engage in trade without any use of Riba (interest). The Shariah rules governing the prohibition of Riba are well known to most, and the values underpinning the rules are righteousness, benevolence and fair profit. Muslims and non-Muslims alike share these values, with most people wanting to govern their personal and business affairs in accordance with these basic, yet extremely important, ethics.

While the majority of conventional bankers will of course conduct their business in a principled manner, the nature of the interest-based money system is nonetheless at odds with Shariah. Conventional finance models treat money as a commodity, and the global Forex markets see billions of dollars traded every day, but the majority of these trades are speculative and are often underpinned by complex derivative structures. In reality these trades are ‘virtual’ trades and nothing more.

In contrast, Shariah prohibits the trading of money as a commodity for a number of different reasons. Firstly, money is considered not to have any intrinsic value. Secondly, whereas commodities can be of different qualities, the same cannot be said of money. Thirdly, units of money of the same denomination cannot be identified in any given transaction; i.e. the $100 bill shown at the time of negotiating a sale need not necessarily be the same $100 bill that is exchanged to consummate the transaction. In simple terms, Shariah distinguishes between money and commodities because the intended use of money is to act as a measure of value rather than to be the subject matter of a trade.

Imam Al Ghazzali, when discussing the nature of money, commented that “all these commodities need a mediator to judge their exact value…Allah Almighty has, therefore, created dirhams (money) as judges and mediators between all commodities…and their (dirhams) being the measure of the value of all commodities is based on the fact that they are not an objective in themselves”.

Debt begets debt

Goldsmiths of medieval Europe first employed the concept of creating money out of money. Through their simple system of lending gold, the goldsmiths realized that they had the ability to lend more than they actually had. Their lending was therefore increased in the form of gold deposit receipts. It is this basic principle that has been followed over the years, and as we see now, has evolved itself into the modern debt-based money system. Analysis of various economic data shows that the volume of coins and notes issued by some governments as debt-free money is much lower than the money actually in circulation, the balance being ‘virtual’ money that has been created in the form of loans advanced by institutions. In short, the debt-based money system creates money in parallel to an equivalent quantity of debt with interest.

The problem is that the impact of a debt-based money system has been devastating. The World Bank’s Global Finance Development report shows that total debt continues to rise. Despite ever increasing payments, some countries’ debt obligations far outstrip their total income, meaning that citizens of all religions and ethics suffer economically under their national debt burden. The list of shocking statistics in respect of debt and interest payments is long and well documented, yet relatively few alternative solutions have been offered, and often the best creditors can come up with is to restructure repayments or to waive portions of state debt in times of crisis.

The Shariah principles governing financial transactions, on the other hand, promote an equity-based and asset-backed financial system by abolishing the concept of money production and by prohibiting Riba on the advancement of money. Islamic finance is built on the principles of exchange, rather than credit worthiness and the ability to repay loans. This means that a system based on Islamic principles will neither punish people who need access to capital for not having it already, nor allow them to take on the burden of debt.

Non-Muslim support for asset-backed practice

Conventional economists and writers have already recognized the benefits of some of the principles that the Islamic system of finance follows. John Tomlinson, an Oxford-based economist, is Chairman of the Oxford Research and Development Corporation Limited, which explores the use of equity instruments and the development of equity markets for areas of finance currently served by debt. In his book, Honest Money, Tomlinson presents strong arguments for the conversion of the current system to an equity-based system (see In building his case for a change in the system, Tomlinson cites reasons that are similar to the principles present in the rationale employed for prohibiting Riba, not least the value of focusing on real as opposed to theoretical assets.

Kahf, Ahmad and Homud (1998), in their paper ‘Islamic Banking and Development: An Alternative Banking Concept’,conclude that Islamic banking has a wider role to play than merely meeting the needs of the Islamic investor, and that this form of banking can and should be extended to the wider community by its practitioners.

Where to start

Of course while Islamic banking could make excellent sense as the foundation of a new money system, the conventional debt-based system is deeply entrenched in every sphere of life, and an overhaul would take many years and would require substantive reviews of legal, accounting and regulatory structures. That said, if Islamic banks and institutions continue their aggressive growth and development of innovative and competitive products, then it will be difficult for the wider non-Muslim audience to ignore the benefits of such a system. It may be too late to entirely replace the debt system, but on the face of it there is no reason why the Islamic system cannot be offered in parallel and promoted as the preferred system. Non-Muslims who are fed up with punitive interest payments, and who are attracted to a system that imposes ethical practices on business leaders, might well be the first to sign up for such services.

If the Shariah principles employed by Islamic banks have allowed them to be profitable, and more recently to achieve double-digit growth figures, then the argument for expanding the net of Islamic banking to the wider community is a compelling one.


  • The Judgement on Riba by the Shariah Appellate Bench of the Supreme Court of Pakistan.
  • Islamic Banking and Development An Alternative Banking Concept: Monzer Kahf, Ausaf Ahmad and Sami Homud
  • Can Islamic Banking Survive? A Micro-evolutionary Perspective: Mahmoud A. El Gamal.

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