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    The Politics of Islamic Finance

     
    Toward a deeper understanding of the workings and complexities of Islamic finance.
    10/25/2004

    This collection of essays provides a survey of what Islamic finance is, where it comes from, and how it has been affected by the post 9/11 world.

    Islamic banking is a unique institution in that Islam does not permit usury or the charging of interest. So, Islamic financial institutions arrange private equity type financing or, in the case of standard loans, through a form of credit called the murabaha that involves a simple markup on sales price. "The bank buys you a car for $30,000 and you owe the bank $33,000 a year from now. This arrangement is perfectly acceptable from the standpoint of Islamic financial theory, but looks to the outsider like a simple loan at 10 percent interest," according to the book.

    The catch in this arrangement is that the bank now has to buy the car, and Islamic scholars are left to debate how these transactions should be handled. For example, one bank in Jordan acquired a bonded warehouse several years ago to support these types of loans.

    The book's examination of political factors impacting the practice of Islamic finance is instructive and shows that Islamic banks tend to be successful in more liberal political environments such as Kuwait and Jordan. As the editors point out, "From the start, Islamic capital kept at a certain distance from political Islam," but certainly politics played a major role in its successful adoption. To illustrate, the second half of The Politics of Islamic Finance describes a number of case studies about how Islamic finance is being implemented in different countries across the Middle East and North Africa.

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