Islamic banks and interest

As most of us know, Interest is strictly forbidden in Islam. And one would think Islamic banks would refrain from using interest in their products. One would be wrong in doing so.

But, before you go ranting and raving at islamic banks for charging interest, please give me a moment to explain several things.

Little bit o history

First, and foremost is that the concept of interest has been emeded in modern culture. In fact, it's been embeded for quite some time now (the advent of interest into economics coincided with the birth of Keynesian economics, which you can read up yourself).

Now, prior to this both judaism and christianity regarded interest as wrong and impermissable, with the latter religion suggested charity to be a better alternative (the backing was from Jesus himself) and for a while that was the norm. But, eventually, some bright spark challenged the Jesus quote and managed to convince others that interest was freaking awesome for businesses (technically speaking he is right, but we'll come to this again later). And since then the world has just rolled with it (because interest plays on our greed emotion [something for nothin!] and we like money).

Present day
Interest has since then evolved into stuff like credit cards (both as a muslim and a student of finance, I urge people not to use these!), sly and dubious loans (with retardedly huge apr) and various other forms of "easy to pay in installment" nonsense (add up the payments, you're paying at least 20% more than the price you should be paying ---> interest).

See, interest is not only part of the system, it actually IS the system. You cannot escape from it. You can go your entire life without charging anyone a dime or dollar of interest, but you will have to pay it at some point in your life because you are part of the system that interest has been upon.

Islamic banks are the same. They operate in the same markets, take money from the same people. The bank itself probably was bought with an interest baring loan, so at even a foundation level it's doing haram (note this is most likely true for any building, bank or not).

Now, they could just turn around and say ok cool we won't charge interest, but Islamic banks are not in that position. I went into my local IBB couple of months back, the manager himself told me even if they had all the muslim customers in the UK, it still wouldn't be enough to lend out halaal money to those looking for non-interest baring loans. They just don't have that finance yet, and this is because of two things:
1) there is no real benefit to non-muslims using an Islamic bank (limited customer base)
2) Islamic banking products are often overpriced because they are new to the industry and need to make their money (I'm sure many of us would like to use a sharia compliant product, but I think there will be reservation when you find out it is a lot more expensive than conventional...)

As a rule of thumb for all businesses, number 2 won't be a problem (if the Islamic banks can stay operating long enough), but number 1 will always be a problem, for reasons I will cover in another article (Islamic banks and product innovation).

Until that time, ponder on the following: Which is more halaal? The slaughterhouse that stuns but looks after the animal; or the slaughterhouse that follows 100% sharia compliant methods when it comes to killing but mistreats the animal whilst in it's care?