Thursday, December 21, 2006

Contradictions in current practices in Islamic finance

Contradictions within Islamic finance

One of the most seemingly intractable contradictions I see within the Islamic finance industry (and, like all the material on this blog, the opinions are mine and do not represent those of the IHI) is the presence of unethical practices within an industry based on the ethical system laid down by Islam. There are two examples of this I see as the most illustrative: non-divestment from Sudan and Islamic banks offering lotteries for participants. The former seems apparent: when a government is enabling the wholesale slaughter of a portion of its population, it is unethical to do business with the government of the country or to be seen as receiving favor from the government of the country. However, that is exactly what Al Salam Bank - Sudan has done. In the announcement they will begin operating in Sudan, they write:
The economic and political situation in Sudan is encouraging a fresh wave of investments. The Sudanese economy is booming and is one of the fastest growing in the region buoyed by increasing oil production. Sudan has become a magnet for investors, businesses and financiers since the signing of a peace treaty between the north and south of the country.

They followed up this announcement (made April 11, 2005) on May 26. 2005 with the opening of the bank "in the presence of President Omar Al Basheer". Both occurred after Tom Eric Vraalsen, Secretary-General Kofi Annan’s Special Envoy for Humanitarian Affairs in Sudan compared (on March 19, 2004) the situation in Darfur to that of Rwanda in 1994 (the U.N. timeline starts in 2003). This seems to be in conflict with the ethical underpinnings of Islamic finance.

There is also the contradiction of Islamic financial institutions offering lotteries in exchange for banking with them. For example, the Al Alhi Bank of Kuwait has a lottery giving away cash and expensive cars for those customers who transfer their salary to the bank and take out a loan from the bank. It is peculiar that an Islamic bank would be tying the use of their product to gambling, which is very explicitly prohibited for Muslims.

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