Islamic financial institutions now operate in over 75 countries. Their assets have increased more than 40-fold since 1982 to exceed $230 billion. The first Islamic banks were created in the 1970 s, 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 don't 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 that it is often said that Islam is incompatible with the "new world order" that emerged with the end of the cold war.

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? The globalization of finance has in fact allowed Islamic finance to thrive, especially since 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 1970 s -- 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 (NEO) that would favor 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. One of the characteristics of the new aggiornamento is a "multi polar" Islamic world with emerging nations such as Malaysia playing a key role, and by a world of finance that is marked 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 Mail 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, but also of history, politics, economics, business and culture. Return to Home Page.