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Home > Capital Markets Viewpoints > Shariah Law—Bringing a New Ethical Dimension to Banking

Capital Markets Viewpoints

Shariah Law—Bringing a New Ethical Dimension to Banking

by Amjid Ali


Amjid Ali, senior manager, HSBC Amanah Global, believes that shariah finance is broadening its appeal and reach—both among Muslims and non-Muslims—as a result of the banking and financial crisis. Recognized as one of the most influential Muslims in the UK by the Muslim Power 100 Awards, Ali has 22 years of branch banking experience with Midland Bank and HSBC in the UK. In September 2003 he joined HSBC Amanah UK as senior business development manager, with responsibility for raising the profile of Amanah Home Finance in the UK. He took over as UK head in January 2005, with responsibility for strategy, distribution, and sales, and was appointed senior manager, HSBC Amanah Global, in August 2008. In this role Ali is working as part of the HSBC Amanah central team headquartered in Dubai.

What are the underlying principles of shariah law from a financial perspective? In other words, what defines the kind of model to which a financial institution that seeks to offer shariah-compliant services to its Muslim customers will have to adhere?

Shariah is the body of Islamic faith and has two main sources. The first is the Qur’an, the sacred book that records the word of God as revealed to the prophet Muhammad, Peace Be Upon Him (PBUH). To quote directly from the Qur’an: “God has permitted trade and forbidden interest,” Qur’an, Chapter 2, Verse 275. The fundamental underlying principle is that interest is prohibited.

The second source is the Hadith, the body of documents that records the sunnah (the practice, or “life example”) of the Prophet Muhammad (PBUH).

From these two sources there are five main prohibitions that must be observed in the creation of a shariah-compliant financial services model. They overlap somewhat and are mutually supportive.

  1. Riba: the prohibition of interest.

  2. Gharar (translated as “uncertainty” or opacity): there must be a full and fair disclosure (e.g., certainty as to the price of a contract before it is concluded.)

  3. Maysair: the prohibition of speculation or gambling (“obtaining something easily or becoming rich without effort”.)

  4. Profit: the Islamic financier should only generate benefit from the project in which they invest and must take some risk, since risk equates to effort and potential loss.

  5. Unethical investment: Islam prohibits investing or dealing in certain products such as alcohol, armaments, and pork, and in activities such as gambling, entertainment, and hotels. (Exactly how this last prohibition is interpreted varies widely depending on where in the Muslim world one is.)

Is this list sufficient to define shariah-compliant financial services?

No, there are other factors to keep in mind when constructing product offerings. Very importantly, one has to keep in mind the Islamic view of money. In Islam money is not a commodity; it has no intrinsic use and it can only be exchanged for the same par value. Also, Islam allows the use of securities to support a transaction, which guards against the wilful wrongdoing or carelessness of partners.

HSBC, Lloyds, and other banks now offer shariah-compliant mortgages for house purchase. How can this be reconciled with the principles you have outlined?

If we are supporting a customer in the buying of a property, it is done under a contract known as diminishing musharakah. This translates as co-ownership. In this transaction, the bank and the customer buy the home jointly, in joint names. As time progresses the customer buys more and more of the property from the bank and the bank’s share in the home diminishes, until the bank no longer has any stake in the home. It is proper for the bank to take a reward for bearing the initial risk, but this reward is not interest on a loan but a rental charge for the portion the asset owned by the bank. This method follows the underlying principle that “you cannot make money on money,” but it is permissible to “make money on the use or the exchange of an asset.”

Can you provide a sense of the growing scale and importance of shariah finance around the world?

Islamic banking is already large and it is growing very substantially. The target market is the world’s 1.6 billion Muslims, who represent 25 per cent of the world’s population, and are largely concentrated in emerging economies. The industry’s total funds under management are estimated to be worth around US$450 billion to US$500 billion, excluding Iran. The annual growth rate for Islamic finance is currently running at 30%, which suggests that the market will reach US$1 trillion in funds under management by 2010. These figures were provided in a recent issue of The Banker.

While the Muslim community in general views shariah banking as the only acceptable method of banking we have to accept that, when viewed globally, shariah banking is an alternative to, rather than a replacement for, the conventional, traditional model of Western banking. The latter has been in existence for centuries and has developed into a very sophisticated global industry. By contrast, Islamic finance is still very much an emerging, developing form of banking, which continues to evolve almost on a daily basis. At this moment, no shariah bank has a complete set of products that would mirror the portfolio of products on offer in a traditional bank.

Following the financial crisis, there have been calls for a more ethical financial infrastructure in the West. Does shariah banking have anything to offer to non-Muslims on this front?

If you look at the ethical platform of shariah banking, it will undoubtedly appeal not only to the Muslim community, but to the wider community as well. The transparency of products and the sharing of risk, together with the emphasis on like-for-like benefits are very appealing universally. What is also very clear is that, with any shariah bank, the principle of treating customers fairly must be at the heart of the bank’s practice or it cannot be shariah-compliant. There are lessons for all from the credit crisis and subsequent global recession. However, I personally do not believe that Islamic financing can be considered a replacement for traditional banking. However, as it stands today, it is a credible alternative for non-Muslims. And for Muslims, it is really the only way for a Muslim to do business and sleep peacefully at night.

The prohibition against interest is not just an incidental or minor detail. It is the only prohibition in the Qur’an which is actually specified that to be in breach of this principle is to “make war on God and on his messenger,” the Prophet Muhammad PBUH. This is a fundamental dividing point between traditional banking practice and shariah banking and it is not something that a Muslim can “fudge” and be happy.

I should point out that both the Christian and the Jewish traditions have a long history of being against usury, or the payment and receipt of interest. So the three traditions are not very far apart on this point.

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Further reading


  • El-Gamal, Mahmoud A. Islamic Finance: Law, Economics, and Practice. Cambridge, UK: Cambridge University Press, 2008.
  • Usmani, Muhammad Taqi. The Authority of Sunnah. New Delhi: Kitab Bhavan, 1998.
  • Usmani, Muhammad Taqi. An Introduction to Islamic Finance. New Delhi: Idara Isha’at-e-Diniyat, 1999.
  • Zarabozo, Jamal Al-Din. The Authority of and Importance of the Sunnah. Denver, CO: Al-Basheer Publications, 2000.

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