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To: The Letters Editor
Financial Times
7 February 2008

Dear Sir,

The esteemed Sheikh Usmani is not the first to cry foul of practices in the Islamic banking industry (Roula Khalaf, Financial Times, 6 February 2008). Sheikh ibn Uthaymeen, Sheikh Haitham Al-Haddad, Professor El-Gamal, Umar Vadillo, myself and others were warning of similar dangers many years ago. However, the criticisms that are currently being allowed to surface by the Islamic banking establishment give the impression that a genuine debate is taking place, when in fact the industry's key failings remain firmly off the agenda.

The core methodology of Islamic banking is to replicate interest-based cash-flows and disguise them as "Shari`ah compliant". Hence, many modern sukuk employ sale and lease-back mechanisms in which the lessee undertakes to repurchase the underlying asset at a pre-agreed price upon termination of the lease. Such products have allowed Islamic banks to adopt the institutional framework and business model of secular banking. The legacy of modern Islamic banking will not therefore be that it helped to build an Islamic paradigm, but rather that it helped to destroy one.

For example, decades of marketing by interest-based banks failed to convince the people of Saudi Arabia to borrow at interest to any substantial degree. The availability of supposedly "Islamic" loan facilities has changed all of that in just a few years, with the result that there has been a huge increase in Saudi domestic consumer debt. No wonder interest-based banks are falling over themselves to promote Islamic banking.

When some of us risked our careers back in the 1990's to urge a more wholesome vision upon the industry, we were met with accusations of extremism and other brush-offs. Meanwhile, AAOIFI, a standards-setter funded by the Islamic banks themselves, was in no position to insist upon the necessary changes. The result has been a products free-for-all in which commercial forces have been uppermost in interpreting religious law. This has never been a healthy thing in any religious community.

So we have arrived at a position in which those who once promoted the industry's legal subterfuges now complain of the consequences. I somehow doubt that scholars who were paid to permit the current range of Islamic financial products will in future be paid to "un-permit" them. Nevertheless, we live in hope that the industry will reform itself. Much of the world is being torn apart by interest-based debt. Genuine Islam has the solution. It's time we had the chance to experience it.


Zest Advisory LLP