Shariah banking.

It is often said that Islamic law does not allow the charging of interest on a loan. This is a somewhat abbreviated description of shariah banking and riba, the Arabic term for "interest."

The Institute of Islamic Banking and Insurance defines riba as follows:

Riba

This term literally means an increase or addition. Technically it denotes any increase or advantage obtained by the lender as a condition of the loan. Any risk-free or "guaranteed" rate of return on a loan or investment is riba. Riba, in all forms, is prohibited in Islam. In conventional terms, riba and "interest" are used interchangeably.

Thomas A. Timberg, Small Scale Credit Advisor at Bank Indonesia, explains this in more detail:

"In keeping with the general desire for a more just, Islamic economic order, those creating shariah financial institutions are concerned that the funder and the funded share risk equitably. Fixed interest is believed to overburden the funded party. This view has long been expressed in classic Jewish and Christian commentary on interest, and has only been modified in recent years."

In other words, if a bank approves a loan to a farmer who later has to declare himself bankrupt, the bank will not repossess everything he owns but will come to a burden-sharing agreement. Obviously such regulations make banks much less aggressive in pursuing loan offers that drive people into ruin.

According to Timberg (2000) Islamic banking has been practiced in Islamic Africa for centuries, is becoming popular in countries such as Indonesia and Malaysia and is even developing in Islamic communities of the USA.

References

The Institute of Islamic Banking and Insurance, Shariah Rulings,
http://www.islamic-banking.com/shariah/glossary.php
(accessed 7 December 2003)

Timberg, T. A. (2000) Islamic Finance and International Donor Policy; the Example of Indonesia, Bank Indonesia, Partnership for Economic Growth (PEG) Project, in February 2003. pdf file for download at http://www.pegasus.or.id/public.html (accessed 7 December 2003).

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