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What’s Wrong with Sharia Compliant Finance?

What’s Wrong with Sharia Compliant Finance?


Sharia Compliant Finance (‘SCF’) is a growing area of finance which many UK banks and financial institutions have bought into uncritically. The UK Government has also jumped on the bandwagon and announced that the UK will be the first non-Muslim country to issue lunch a sharia bond. Last year London was the first city outside the Islamic world to host the World Islamic Economic Forum and the government released a document in which David Cameron says: “The future of Islamic Finance in the global economy looks bright. With 10 of the world’s 25 fastest growing markets in Muslim majority countries, industry forecasts estimate that Islamic investments might grow to £1.3 trillion by 2014. This brochure profiles several legal, financial and education institutions that are offering SCF services of different kinds. With so many people seeing this as an attractive growth market, are there any reasons for caution? We think there are many and this article seeks to expose some of the pitfalls and problems of Sharia Compliant Finance.

Problems with Sharia Compliant Finance

  1. SCF is promoted by and associated with Islamic Extremists. Shaikh Muhammad Taqi Usmani the chairs the Sharia Standards Board of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) which aims to set up international standards for Sharia finance. He is a Sharia advisor to several banks and was chair of the HSBC Amanah Sharia Advisory Board, chair of the Sharia Board of the Dow Jones Islamic Index, and chair of the Sharia Board of Citi Islamic Investment Bank. Usmani’s book “Islam and Modernism” has been translated into English and relevant pages are available online here. In this book he responds to a question about whether Jihad needs to be waged in a country like the UK where Islam can freely be preached. He responds by quoting the Quran: “Killing is to continue until the unbelievers pay Jizyah after they are humbled or overpowered.” (Usmani p131) Jizyah is the subjugation tax imposed on non-Muslims under Islamic rule. He was subsequently been removed from the HSBC and Dow Jones advisory boards, but still sits on several other advisory boards and is regarded as a leading Islamic authority on SCF. It stretches credibility to assume that the other sharia advisors sitting under Taki Usmani’s chairmanship of various boards were unaware of his fundamentalist views. Patrick Sookhdeo in his book “Understanding Shari’a Finance” (Isaac Publishing, 2008) points out the many connections with fundamentalist groups that members of Sharia Advisory Boards in the UK have (p81-88). The McCormick Foundation Report gives detailed profiles of several Sharia Advisory Board members showing their links with extremist groups and in some cases statements in support of terrorism. Former Malaysian Prime Minister Mohamed Mahathir told a banking conference in Kuala Lumpur in November 2002 that: "A universal Islamic banking system is a jihad worth pursuing.” So why is it that such extremists are so keen to promote SCF?
  2. SCF lends credibility to Sharia Law which is illiberal, undemocratic and discriminatory. This is one of the key aims of SCF. As leading scholar Timur Kuran puts it in his book “Islam and Mammon” (Princeton University Press, 2006): “Successful Islamization in one domain lends credibility to Islamization attempts in other domains. So a significant consequence of the economic activities undertaken in the name of Islam is the support they give to the broader Islamist agenda” (p62). Once people are comfortable with Sharia Finance, they will find it harder to criticise Sharia Law more generally. Sharia becomes part of the economy with jobs and government loans affected by it.
  3. The ban on interest is a modern radical interpretation of the Qur’an. Muslims throughout history have borrowed and lent money with interest. The idea that this is banned in the Quran is a modern fundamentalist interpretation. As Timur Kuran says: “The alleged antiquity of the doctrine is a myth. ... even the concept of Islamic economics is a product of the twentieth century.” (Kuran p83) Mahmoud El-Gamal is a Muslim scholar himself. He writes: “Islamic finance was conceived in the 1970’s.” (“Islamic Finance” Cambridge University Press, 2009 p137). Sookdeo explains: “The drive for the establishment of an interest-free Islamic economic system was started by Abul A’la Mawdudi (1903-1979), founder of the militant Pakistani Islamist Jama’at-i Islami movement.” (Sookdeo p13) Timur Kuran notes: “At least initially, the economics of ‘Islamic economics’ was merely incidental to its Islamic character.” (Kuran p82) So why are Western financial institutions, and the UK government, so keen to promote a modern fundamentalist interpretation of the Quran?
  4. The removal of interest in SCF is cosmetic / deceptive. SCF products are marketed as being interest-free. In fact the net result is a product with charges that look a lot like interest. This is not a coincidence. It is a deliberate deception which raises questions about the system. Timur Kuran explains: “Murabaha, the most popular lending mechanism of the Islamic banks, is simply an ancient ruse. It consists of several interest-free transactions that together amount to interest.” (Kuran p15) “Khurshid Ahmad, a prolific writer who has held influential positions on key government commissions charged with steering the Islamisation of Pakistan’s economy, has publicly criticised his country’s Islamic banks, saying that ’99 percent’ of their business is still based on interest.” (Kuran p16-17) El-Gamal cites a comment in Fortune magazine: “The result looked a lot like interest, and some argue that murabaha is simply a thinly veiled version of it; the mark up [bank’s name] charges is very close to the prevailing interest rate. But bank officials argue that God is in the details.” He also cites a Reuters report of a sukuk bond issue which is described as “interest free”, but with “4 percent annual profit.” (El-Gamal 2009 p2) “Almost all contemporary writings in Islamic Law and/or Islamic finance proclaim that Islamic Law (Shari’a) forbids interest. This statement is paradoxical in light of the actual practices of Islamic financial providers over the past three decades. In fact, the bulk of Islamic financial practices formally base rates of return or costs of capital on a benchmark interest rate such as LIBOR, and would easily be classified by any MBA student as interest-based debt-finance.” (El-Gamal 2003 p1) Muhammad Saleem is a Muslim critic of this system. In his book “Islamic Banking - a $300 Billion Deception” (Xlibris, 2005) he writes: “In their murabaha transactions (the dominant mode of financing), the difference between the purchase price and the selling price recognises the time-value of money in the same way that charging interest does. Put more bluntly, Islamic banks charge interest on 95% of their financing transactions, but concealed in Islamic garb. By charging interest in various guises, essentially designed to obfuscate products, Islamic banks engage in deception, duplicity and thus promote dishonesty. The real question is: in the eyes of Allah which is a greater sin, charging interest openly or engaging in dishonest practices.” (Saleem p68-9)
  5. There are a limited number of Shari’a finance advisors to sit on advisory boards. “The top five scholars make up almost a third of all the 956 sharia board positions, a recent report by Funds@Work says, and the top three each sit on more than 60 boards each. Meanwhile, the industry has ballooned to more than $1,000bn, stretching their capacity to examine every product and instrument.” (Financial Times, 8 Dec 2009) Remember that many of these advisors have fundamentalist links and they are all getting paid for this valuable advice.
  6. Governance of SCF products is often poor or non-existent. There remains no mechanism by which fatwas can be challenged under English law. The Financial Services Authority (FSA) regards itself as a financial, not a religious regulator and therefore does not have jurisdiction in such matters. (CCFON Paper p18) One man on a Shari’a Advisory Board may be the controlling person. Shari’a advisory boards have no accountability. (Andohni cited in CCFON Paper p17). FSA has ruled that deposits in Shari’a banks can be viewed as risk sharing and loss bearing and thus decline to have deposit protection, thus disadvantaging accountholders in the event of a collapse of the bank. (Sookdeo p53-54).
  7. Zakat is paid in some cases – where does it go? The payment of zakat is one of the five pillars of Islam. It is described as charitable giving of 2.5% of profits. Sheikh Yusuf Al-Qaradawi has ruled that zakat can be used to finance Jihad – the war against disbelievers. An internet questioner asked if he can pay zakat to UNICEF. He received the answer “No”, followed by a list of possible recipients of zakat money based on the Qur’an. Point 7 includes: “propagation of Islam, Jihad etc.” Sookdeo quotes a terrorism financing report when he writes: “The largest single source of funds for Islamic terrorism is zakat which typically goes through the Islamic banking system. Using the system of zakat ‘al-Qaeda was able to receive between $300m and $500m’ over a decade ‘from wealthy businessmen and bankers representing 20% of Saudi GNP, through a web of charities and companies acting as fronts, with the notable use of Islamic banking institutions.’” (Sookdeo p42) Timur Kuran notes that: “In countries with obligatory zakat, a significant portion of the proceeds are allocated to religious schools dedicated to the dissemination of Islamist views.” (Kuran p6). A Centre for Security Policy Paper puts it this way: “Financial jihad through zakat, of course, is nothing particularly new and has been carried out for a long time. Zakat committees in Gaza have been a prime transfer mechanism of funds for Hamas, for instance, and the radical jihadist madrassas in Pakistan have been partly funded from zakat for decades. What’s new with Islamic finance is the sheer volume of potential zakat collections and a move afoot to centralize both collections and distribution under one central authority that almost certainly will be controlled by committed Islamists. Every bank offering Islamic products appears required to donate 2.5% of revenue generated from them to zakat and with some 400 banks in 75 countries and a trillion dollars in Islamic financing currently the potential zakat sums are staggering.” (Alexiev p13-14)
  8. SCF reduces economic efficiency by increasing transaction costs thereby disadvantaging Muslims. SCF products are more complex than equivalent normal financial products in order to comply with the demands of the fundamentalist view that the Quran prohibits interest. This additional complexity incurs additional costs. El Gamal writes: “Islamic finance as it exists today has been shown to reduce economic efficiency by increasing transaction costs, without providing any substantial economic value to its customers.” (El-Gamal 2009 p190) “Where the substance of contemporary financial practice is in accordance with Islamic law, adherence to pre-modern contract forms (with or without modification) leads most often to avoidable efficiency losses, thus violating one of the main legal objectives that defined classical Islamic jurisprudence.” (El Gamal 2009 pxii)
  9. SCF is vulnerable to money laundering and fraud due to the lack of transparency. This additional complexity lends itself to abuse in various ways. El-Gamal explains: “The ‘degrees of separation’ utilised by Islamic bankers to camouflage an interest-bearing loan as commodity or asset trading bear a striking resemblance to the ‘layering’ techniques used in financial crimes.” (El-Gamal 2009 p176) “Since financial criminals have expertise in utilising similar methods, it would be easy for them to abuse the mechanics of Islamic financial Shari’a arbitrage to reach their criminal ends.” (El Gamal 2009 p177)
  10. SCF aims to create a separate, rival financial system. Timur Kuran states: “The real purpose of Islamic economics has not been economic improvement but cultivation of a distinct Islamic identity to resist cultural globalization. It has served the cause of global Islamism, known also as “Islamic fundamentalism,” by fuelling the illusion that Muslim societies have lived, or can live, by distinct economic rules.” (Engel) He further describes the emergence of Islamic economics as: “a weapon of civilizational resistance.” (Kuran p98) Robert Spencer cites examples where Muslims have successfully refused interest payment to IRS, Mastercard and other creditors. (Spencer “Stealth Jihad”, p185-6)
  11. SCF is supply driven rather than demand driven. Before the creation of the modern fundamentalist concept of SCF there was no demand for it. Muslims have been happy to use normal financial products for centuries. “In fact, however, Islamic finance has been largely a supply-driven industry, with jurists who participate actively in Shari’a arbitrage helping to expand the industry’s customer base through indirect advertisement (at various conferences and publications), as well as religious admonishment that Muslims should avoid conventional finance.” (El Gamal 2009 p190)
  12. Moderate Muslims do not want SCF Most Muslims see the problems with SCF and do not want to participate in a fundamentalist, deceptive, disadvantageous system. “Where Islamic banks operate alongside conventional banks, their share of Muslim deposits has remained under 20 percent; in some predominantly Muslim countries, the figure is as low as 1 percent.” (Kuran p73) Sookdeo cites a 2004 survey which found that 75% of the Muslim population in Britain was indifferent to sharia finance and that there was no automatic demand for it. 83% of Muslims questioned the necessity of shari’a-compliant Islamic financial products approved by Islamic scholars. (Sookeo p78-79) The Islamic Bank of Britian expected huge demand, but as one of their founders writes, the reality was very disappointing: “So, as we now approach the sixth anniversary of IBB’s launch, I’m sad to finally have to admit that Islamic finance in the UK has been a huge flop. IBB may still be limping on as probably the last bastion of the cause, but it’s difficult to imagine it holding out for much longer. It’s a dramatic turnaround from those heady summer days of 2004 when we received the news that the government’s regulator, the Financial Services Authority, had agreed to provide us with a banking licence. IBB was the first entirely new UK bank for almost a century! We imagined we’d be overwhelmed by customers and enjoy accelerating growth for years to come. And I can’t begin to describe my pride when I became first official customer of IBB and opened account number X0000001 – an account I still hold today. Flash forward five years since its inception and IBB has never made a profit. Not once, not ever. Rather, the company has reported combined losses of almost £45 million pounds, and its shares have lost more than 95% of their value since the highs enjoyed during the early years. But at least it’s fared better than many of its contemporaries in the industry.”



There are many problems with SCF. So far they seem to have gone completely unheeded as we have witnessed the growth of this industry. Indeed, it is remarkable the extent to which Western financial institutions have pandered to a modern fundamentalist interpretation of the Quran and given fundamentalists and their sympathisers positions of influence in their organisations. This is a prime example of the ever increasing influence of Sharia law in the UK.

Further Information:


  • "Shariah, Law and ‘Financial Jihad’: How Should America Respond?" McCormick Foundation, 2009.
  • Alexiev, Alex. "Islamic Finance or Financing Islamism?" Center for Security Policy, 2007.
  • Bhatti, Junaid, ‘Why Britain’s Islamic Finance Industry Flopped’, Series Why Britain’s Islamic Finance Industry Flopped (Publisher, 2010)
  • El-Din, Gamal Essam. "A Financial Jihad." Al-Ahram Weekly.
  • El-Gamal, Mahmoud. Islamic Finance: Law, Economics, and Practice: Cambridge University Press, 2009.
  • Kuran, Timur. Islam & Mamon: Princeton University Press, 2006.
  • Saleem, Muhammad. Islamic Banking - a $300 Billion Deception: Xlibris, 2005.
  • Sookhdeo, Patrick. Understanding Shari'a Finance: The Muslim Challenge to Western Economics: Isaac Publishing, 2008.
  • Spencer, Robert. Stealth Jihad: How Radical Islam Is Subverting America without Guns or Bombs. Washington: Regnery Publishing, 2008.
  • Usmani, Taqi. Islam and Modernism. Translated by Dr. Mohammed Swaleh Siddiqui. New Delhi, India: Adam Publishers and Distributors, 2006.