Islamic Banking Hits the Web

A jaunt to now-Muslim-majority Bethlehem, in the Palestinian Authority, reveals a thriving city: renovated, bustling, affluent. When I remark on the profusion of late-model European SUVs, my Palestinian host shrugs: “Like in the West — they live beyond their means.”

This was echoed by a report in the Israeli press, which stated that “Palestinian and Arab banks in the West Bank are offering… incentives to draw the average Palestinian into purchasing a car… by paying 10% of the new car’s value and slowly paying off the rest to the bank, with interest…” (my translation, Haaretz, July 16, 2010).

 Islamic Banking Hits the Web

Islamic Banking Hits the Web

With interest?

Strictly speaking, Muslims are forbidden to charge or pay interest — by the Qur’an, the hadith(sayings of the Prophet and his followers), and contemporary rulings based on these. Islamic banking does not in fact permit the charging of interest, but Islamic banking is relatively new. The first Islamic bank appeared in Egypt in 1963, and the sector only began to gather steam in the 1990s.

Unlike conventional banks, Islamic banks use a complex mix of banking and investment vehicles to comply with religious dictates. Examples include home financing through declining rent schedules and offering investments in real estate and other sectors that offer non-interest income.

Several factors have strengthened the Islamic banking sector. Foremost among them is the rapid growth of the world’s Muslim population — by over 235 percent in the past 50 years. Second, this population is increasingly demanding shariah-compliant banking services. Last but hardly least, Islamic financial institutions have weathered the recent credit crisis with relative success.

The result? By 2010, more than 500 institutions worldwide were providing Islamic banking and financial services, solely or alongside conventional ones, managing an estimated $1 trillion in assets.

One might reasonably expect these institutions to have a sizeable presence on the Internet. Yet this is not the case. Those Arab banks that offer online services, such as Arab Bank Palestine, often do so solely for their conventional services. Exceptions are Habib Bank Ltd. and Dubai Islamic Bank, which launched e-banking in 2002.

More notable in a global context is HSBC Amanah’s premier online service, launched this August and aimed at “internationally mobile, affluent consumers.” HSBC Amanah also offers its regular customers Islamic e-banking services.

Yet until quite recently, these banks were the exception, not the rule. One study found that, of 24 institutions offering both Islamic and conventional services, only eight offered Islamic e-banking, while 17 offered conventional e-banking. Among the reasons cited for this, the most plausible is also the most interesting: that e-banking’s advantages — speed, efficacy, convenience — are less valued in a region where “a visit to the bank… might be… an opportunity to socialize.”

However, as Internet access increases in the Middle East and the Muslim middle class expands, so will the presence of Islamic online banking. One sign of this is the online Dow Jones Islamic Market Indexes. Another is Failaka, a research and advisory fund in Islamic financial investment established over a decade ago.

That Failaka’s Website lists more members on its shariah advisory board than it does professional staff may obliquely highlight why there’s a lag in Islamic banking’s online parity with its conventional peers. The imperative that an Islamic financial institution have an advisory board of shariah experts may slow decision-making and, hence, transactions, making them no match for Internet speed. Moreover, until recently, there has been a shortage of professionals who are experts in both Islamic law and economics.

Yet this, too, is bound to change, as institutions and programs such as The Global University of Islamic Finance — which, saliently, offers study online — proliferate. It is their graduates who will provide the innovative products on which the future of Islamic banking depends.

For now, no doubt, some of Bethlehem’s stylish, hijab-clad soccer moms are relying on iPhone4 access to the impressive, successful Palestine Exchange as they squire their children to practice in SUVs.