An Untapped Source of Wealth

Due to high gas prices, consumers have paid more attention to the price per barrel of crude oil, as well as the Islamic communities that are reaping the benefits. The massive amounts of wealth stemming from the high price of oil have tremendously impacted Islamic communities. Places like Dubai and Abu Dhabi have come to epitomize the explosion of available capital within the Middle East. As Islamic communities begin to use their capital to invest with other non‐Islamic communities, principles of Islamic law come into play and issues become much more complicated.

In 2007, estimations reported that the American Islamic community, the Muslims living in the U.S. who govern their investments according to the laws of the Sharia and the Quran, had over $170 billion in purchasing power. This niche in American society has recently become a major player in the world of banking and finance due to this enormous wealth.

While firms are scrambling to access this largely untapped resource, they must first overcome Islamic laws that restrict the usage of their capital. Islamic banking operates with the same intentions as standard Western banking, except for one caveat: finance must follow
the rules set forth by the Quran. Under the
laws of the Quran, Muslims are prohibited
from collecting any form of interest. The
problem this created for the traditional
banking world has led to the introduction
of Islamic banking techniques into the
Western world. The following is an
examination of three techniques used
today to help avoid the zero‐interest‐payments rules of the Quran.

The first of these techniques is called Mudharabah. This technique utilizes the principle of profit sharing. While the lender does not charge interest, they do share in the profits and successes of the entrepreneur, similar to venture capital. The second technique is called Wadiah. With this technique, Islamic banks utilize depositors’ funds at their own discretion, and will often reward the depositor with gifts of cash payments for allowing the bank to use the funds. These cash gifts are similar to interest payments, but are not always guaranteed and do not have a set rate of payment. Recently, there has been some controversy in the Islamic community over the issuance of these Sharia‐compliant Islamic bonds, as some religious scholars question whether these bonds adhere to the religious laws outlined by the Sharia. Consequently, the issuance of Islamic compliant bonds has plummeted recently, falling to $14 billion this year from up to $50 billion last year. The third technique is called Ijarah. This practice essentially rents an asset that corresponds to the principal and interest that conventional Western financing would use. In other words, Ijarah is a sale‐leaseback, where the seller begins leasing the asset back and makes rental payments that correspond to the Western concepts of interest payments.

Islamic banking is still in its infancy and has yet to be fully refined. The vast amount of available capital throughout the Islamic communities has created a niche in the banking world that will continue. Large banking firms and even countries like Japan, England, and Malaysia, are catering to these communities by pledging Islamic‐ compliant‐banking‐services. Banks will certainly not forego the opportunity to enter into this competitive market, as the wealth held by oil‐rich American Islamic communities is a perfect target for Western banks looking to utilize their available capital. Islamic banking should continue to be a major factor in the world economy in the future.