Understanding Islamic Finance

During Elena Kagan's confirmation hearings, conservatives accused Kagan of being sympathetic to imposition of strict, Taliban-style Islamic law in the United States because an Islamic-finance study program was established at Harvard University during her time as dean.

The American Prospect caught up with Frank Vogel, an Islamic legal scholar who helped establish that program, at a recent forum on Islamic finance being held at George Washington University Law School by the Qatar Business Council and Arab Bankers Association of North America. When it comes to Islamic Finance, Vogel says, Americans have nothing to worry about.

What is Islamic/Sharia-compliant finance?
Islamic finance is conducting finance in compliance with the rulings of the traditional Islamic law as to commerce and investment and property.

Where does Islamic finance come from?
Well, in the '50s, people were thinking as Muslims about how they should engage with modern finance. So a number of theories came out about what Islamic law's requirements are as to finance. These were inspired mainly by the prohibition on collecting and charging interest in the Qu'ran.

How is it different from secular finance?
The difference is, for example, that they don't charge interest. They can't indulge in some particularly risky or speculative transactions. There's actually a whole long list of requirements, such as not selling debt, that are derived from these basic prohibitions against interest taking and against excessive risk. So because of those specific rulings, they have to design the transactions in slightly different ways.

For example, rather than borrowing money to buy some goods, they'll have the bank buy the goods and then resell the goods to the customer, so the bank becomes involved as an owner at one stage of the transaction. That makes it lawful, from the Islamic perspective. Whereas if the bank lent the money to the customer, that's an interest-bearing loan, and that's not allowed. So they use slightly different routes, typically involving ownership of goods at some point, to achieve finance.

Why is it important for Western institutions, for example GWU, to teach Islamic finance?
Islamic finance is becoming extremely important in various parts of the world. It's shaping economies. Islamic finance is the most rapidly growing part of the finance industry throughout Southeast Asia, throughout the Arabian Gulf region, throughout the Arab world. Islamic banks are cropping up everywhere, in the UK, France, Germany. In fact, Europe is far ahead of the United States in this respect. There's been very little action in the United States. It's a lucrative field in finance, and it's rapidly growing. And many, many people want to get involved in it.

Why would, say, a non-Muslim American or student want to learn about Islamic finance?
Well, he would one day, perhaps, be advising an American company interested in developing business or investing abroad, and the foreign party wants to finance it by Sharia-compliant, Islamic-compliant banks, so he needs to have some idea of what Islamic-compliant investment is. Particularly if you're going to work in the Arabian Gulf, you have to know something about Islamic finance.

Is Islamic finance compatible with secular finance?
Totally. In fact, one of the criticisms of it these days is that it's too similar. Most financial transactions can be Sharia compliant with just a few changes and slight difference in the structuring. They're becoming closer and closer and closer to conventional finance.

Does America have to change its finance laws in order to deal with Islamic-finance companies?
No. There are many Sharia-compliant companies operating now within the United States. Most spheres of finance are quite possible according to Islamic principles already. There are a few areas where it poses a bit of a difficulty. For example, deposit insurance as a requirement for banking in the U.S. Islamically, it's difficult to arrange insurance deposits.

You mentioned that a lot of non-Muslims are starting to invest in Sharia-complaint finance products. What is it that interests people?
People were interested, first, in the good returns that some of these funds have had, and second, I think that they're interested in the social-investing part. Islamic funds cannot invest in alcohol, gambling, arms, a list of objections. And because of that, they really are classified as social-investment vehicles.

You mentioned earlier that Islamic-finance companies suffered less during the financial crisis.
Yeah, if Islamic law was applied pretty strictly, it would have been impossible for Islamic banks to be involved in any kind of derivatives, any seriously speculative transactions, in debt securitization, in the pyramiding of debt, in the credit-default swaps; all these things would have not been possible at all for Islamic banks. Although practices were beginning to head in that direction, they hadn't gone very far. So Islamic banks, basically, were still banking quite conservatively and came through relatively unscathed.

Can an Islamic-compliant bank function in the U.S.?
Yes. Well, as a bank, not yet. We were discussing this earlier, and apparently there are no Islamic banks as such yet in the United States. And I suspect the problem is as much as anything the deposit insurance requirement -- the Federal Deposit Insurance Company insurance requirement. But there are a lot of banking activities going on, on both the deposit and investment sides in the United States, and there are a lot of non-bank or investment-company activities going on. So there's a lot of Islamic finance happening.

In establishing a study program for Islamic, Sharia-compliant finance, are you trying to facilitate an Islamic takeover of the United States?
[Laughs] No. Islamic finance is one of the most opportune ways to engage with the Islamic world right now if you are concerned about terrorism. It strengthens economic links, it is being put forward by sort of the most Western-leaning individuals throughout the Muslim world, it draws them closer to the Western financial system. There are many, many aspects of it that are extremely favorable to a Western point of view. It's worlds apart from anything related to terrorism.

Why should we believe you? I have no particular stake in the matter! [Laughs] I'm not a practitioner of Islamic finance; I have no interest in it financially or personally. I just happen to be a student of Islamic law, and I see the virtues of Islamic law to a great degree. And this is a particularly opportune development of Islamic law. It leads to successful application of Islamic law in today's world. As it develops and becomes better adapted to the modern world, we could hope for similar developments in areas like family, family law, international law, human rights, and things like that.

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