• Book Title:
 Islamic Finance In The Global Economy
  • Book Author:
Ibrahim Warde
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Islamic finance can no longer be dismissed as a passing fad or as an epiphenomenon of Islamic revivalism. Islamic financial institutions now operate in over 70 countries. Their assets have increased more than forty- fold since 1982 to exceed $200 billion. In 1996 and 1997, they have grown at respective annual rates of 24 and 26 per cent.1 By certain (probably overly optimistic) estimates, up to half of the savings of the Islamic world may in the near future end up being managed by Islamic financial institutions.2

The first Islamic banks were created in the 1970s, at the time when the aggiornamento of Islamic doctrine on banking matters was taking shape. At the time, Islamic banks were typically commercial banks operating on an interest-free basis. Today, as a consequence of broad changes in the political–economic environment, a new generation of Islamic financial institutions, more diverse and innovative, is emerging as the doctrine is undergoing a new aggiornamento.

 Perhaps the most important development has been the growing integration of Islamic finance into the global economy. There is now a Dow Jones Islamic Market Index, which tracks 600 companies (from inside and outside the Muslim world) whose products and services do not violate Islamic law. Foreign institutions such as Citibank have established Islamic banking subsidiaries, and many conventional banks – in the Muslim world but also in the United States and Europe – are now offering ‘Islamic products’ that are sometimes aimed at non-Muslims.

Islamic finance is thus in many ways well suited to the global economy. This is all the more striking and paradoxical in that it is often said that Islam is incompatible with the ‘new world order’ that emerged with the end of the cold war.3 In addition, how could a medieval economic system be relevant in a world of revolutionary, technology-driven global finance? And how could an interest-free system fit within the broader interest-based financial system?

One of the arguments of this book is that the globalization of finance has allowed Islamic finance to thrive and that there has been in recent years a fusion of sorts between Islamic and conventional banking. Whereas the traditional world of finance, dominated by commercial, interest-based banking, could raise potentially troublesome theological issues, the new world of finance, characterized by the blurring of distinctions between commercial banking and other areas of finance, the downgrading of interest income, and financial innovation, has been rife with opportunities for Islamic financial institutions. Indeed, Islamic finance has driven financial modernization in many parts of the Muslim world.

A related argument is that the aggiornamento of the 1970s – the period when Islamic teachings were updated to create the first Islamic banks – is falling into obsolescence, and that a new aggiornamento, barely noticed in most writings on the subject, is emerging.

The two updates have evolved under sharply different contexts. The first occurred at a time of Islamic assertiveness in the midst of a fleeting belief in a New International Economic Order (NIEO) that would favour the South at the expense of the North. It was dominated by oil-producing Arab states (primarily Saudi Arabia), with some input from Egypt and Pakistan. Since that period, the world of finance has undergone a dramatic transformation. The visions of banking or of the world economy that prevailed in the seventies are barely relevant today. The new aggiornamento is characterized by the increased multipolarity of the Islamic World, with emerging nations such as Malaysia playing a key role, and by vast transformations in international finance, driven by technological change, innovation, deregulation and globalization.

Perceptions of Islamic finance in the West cannot be separated from general perceptions of Islam, as a monolithic, unchanging and somewhat fossilized belief system. In reality, Islamic finance reflects the diversity of a 14-century-old, 1.2 billion strong religion spread over every continent. Islamic financial institutions come in all shapes and forms: banks and non- banks, large and small, specialized and diversified, traditional and innovative, national and multinational, successful and unsuccessful, prudent and reckless, strictly regulated and freewheeling, etc.

Some are virtually identical to their conventional counterparts, while others are markedly different. Some are solely driven by religious considerations, others use religion as a way of sidestepping regulation, as a shield against government interference, as a tool for political change, or simply as a way of attracting customers. It should finally be noted that there are considerable disagreements among Islamic scholars as to which financial instruments are religiously acceptable.

Islamic finance is a complex and paradoxical phenomenon. A brief overview of a leading Islamic banking group suggests the limits of facile and sweeping generalizations: Dar Al-Maal Al-Islami (DMI), the largest transnational Islamic group, is headquartered in the Bahamas and operates primarily out of Geneva yet uses the language of the Islamic umma; although controlled by Prince Mohammed al-Faisal al-Saud (the second son of the late King Faisal, after whom the principal subsidiaries of the group are named), the group does not operate a commercial bank in Saudi Arabia, a ‘fundamentalist’ country that has been instrumental in bringing about modern Islamic banking yet is one of the least hospitable countries to Islamic banks;

to complicate things further, the DMI group has nonetheless been a significant conduit of Saudi money and influence throughout the Islamic world. In sum, the story of Islamic finance is a vastly complicated one, and cannot be captured without a full understanding of religion and finance, and also of history, politics, economics, business and culture.

The first part of the book provides background information on Islam and Finance (Chapters 1 to 3). It debunks common myths about Islam and Islamic finance, traces the historical evolution of Islamic economics and finance, as well as the mechanisms by which Homo Islamicus and Homo Economicus were reconciled, and considers religious injunctions as they pertain to finance. One of the underlying themes is the contrast between traditional interpretations with their emphasis on literalism and legalism, and modern ones, which are more adaptive and more likely to focus on the spirit, or the ‘moral economy’, of Islam.

The second part of the book introduces and describes the world of Islamic finance (Chapters 4 to 7). It traces the birth and evolution of modern Islamic finance and places it in its proper political and economic context. It accounts for the diversity of the industry by analyzing the ways different countries have introduced and dealt with Islamic finance, and by providing a typology of Islamic financial products.

The third part (Chapters 8 to 12) deals with the issues and challenges facing Islam from five vantage points: management, strategy and culture (how the practices of Islamic financial institutions differ from those of conventional ones; the strategies developed by Islamic financial institutions to expand their markets; the managerial problems encountered by Islamic financial institutions; the problem of the ‘Islamic moral hazard’;

 the cultural barriers to the implementation of true Islamic financial systems); economics (the role of Islamic finance in mobilizing savings, allocating funds, and promoting development; Islamic capital markets; the macro-economic implications of Islamic finance); regulation (the regu- latory issues raised, domestically and internationally, by Islamic finance; the impact of the regulatory norms of the global economy on Islamic institutions); politics (the connection between Islamic finance and domestic politics; Islam in the New World Order; the alleged ties of financial institutions to Islamic terrorism); and religion (the battles over religious interpretation in historical and comparative perspective).




  1. Author’s database.
  2. In the words of Adnan Al-Bahar, Chairman of International Investor, an Islamic bank based in Kuwait: ‘It is my belief that Islamic banking will be responsible for managing up to 50% of savings in the Islamic world in the coming five to 10 years.’ Los Angeles Times, 11 August 1996.
  3. Samuel Huntington, The Clash of Civilizations and the Remaking of World Order,

New York: Simon and Schuster Touchstone 1997, p. 211.

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