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  Banking and finance have been around as long as there has been trade.  A barter system or a fully co-operative society doesn’t need banks or money or finance.  There is direct swapping of goods and services for other goods and services.

  But of course as a society becomes more complex direct co-operation between individuals becomes impossible.  Bartering falls down pretty quickly once you move from simple home plot agriculture and physical labour in the fields or on the hunt.

  So there is evidence of financial transactions involving money, interest, profit and records from the world’s earliest civilisation in Mesopotamia – from Babylon to be precise – and dating right back to the 18^th century BCE.  Moreover, as so often, this evidence comes from temple records.

  With the concepts of money and trade and profit comes another element that has always caused worry and heart searching among religious and community leaders:  debt.  Loans of money allow us to acquire goods and services before we actually have the means to pay for them.  We work, make money and repay the loans.  The people who gave us the money for current gratification are business people too and so expect to make a profit from the loan.  That profit – the price, if you like, of money – is what we call interest.  It is the potential ease of acquiring un-repayable debts, of owing too much money and causing hardship to ones family trying to pay them off that has worried scholars so much.  Is it right to profit from creating debt?  Is it therefore right to earn interest?

  Islam has always been completely clear on its response to this question.   It is not right and thus it is not allowed.  Other religions have felt the same but have allowed that scruple to slide alongside the rise of Capitalism as we now know it.  There are after all benefits for many from the use of interest bearing financial instruments.  But the downside, the problem of debt, remains.  Islam has remained staunch in its disavowal of interest.

  But this has caused difficulties in the modern world, not just for individuals but for developing nations as well.  Without access to loans, mortgages, savings schemes, bonds and all the other paraphernalia of the modern financial capitalist edifice how can Muslims benefit from the advantages they bring without the disadvantages of interest induced debt?

  The basic solution has been around since the earliest days of finance, just not widely used.  This involves swapping the concept of interest, at an up front pre-determined rate, for profit and risk sharing, the amount of profit not being known of course until after the event and the risk sharing well defined beforehand.  And of course Islam demands an ethical approach to finance and investment with trade in items like gambling, alcohol, pornography or pork products being forbidden. 

  Interestingly, many Western style finance houses have discovered that ethical investments can bring better than average returns as well.

  In the late 1970’s, with increasing wealth particularly from oil and growing participation in the global economy, demand for acceptable Islamic products increased enough to make financial institutions take notice and develop some modern products for use in the wider world. 

  Today we have a full set of financial instruments available in Shari’a  compliant form not just for international finance but also for individuals that allows them for example to finance home buying or fund the purchase of a car.

  Moreover in some countries, notably in the US and UK, Islamic compliant products are seen as being attractive alternatives to traditional interest bearing schemes especially in the field of home buying.

  Shari’a compliant mortgages are available in different forms but the commonest are Ijara & Murahaba.

  An Ijara contract has the finance company buy the property and rent it to the potential homeowner over an agreed period, even as long as 25 years like a traditional mortgage.  The rent is based on market rates and reviewed regularly but in general less frequently than interest rates change under traditional schemes.  This can make a more favourable deal for the renter because it offers more stability of payments.  At the end of the agreed rental period title transfers to the renter and no interest has been paid.

  A Murahaba contract is in some ways even simpler.  The bank buys the property for a known price.  It then sells it on to the customer at an agreed higher price which he pays in equal instalments over time.  This has the major advantage of giving the homeowner a fixed repayment for the duration but again since the customer is only repaying capital the risk of interest is avoided.

  Other schemes are available for entrepreneurs to gain funding for their business ventures. 

  For example under a Mudarabah scheme the bank provides capital and profits from the business of the entrepreneur are shared with the bank at an agreed ratio, this profit sharing continuing until the loan is repaid.  If there is no profit the bank potentially makes no gain from their loan.

  Also on the market today are various purchase and leaseback products that emulate Hire Purchase or Contract Hire but at all times making only capital payments.

  Now not everyone is happy with these schemes.  It has been said that they are reminiscent of the ‘Contractum Trinius’ which was a complex triple contract used by Mediaeval European bankers to avoid the Pope’s ban on usury; that is, legal niceties that comply technically but break the underlying principle of no interest and shared risk.

  Today though more and more commercial organisations have sought and found ways of funding that not only comply with the letter of the law but fully with the spirit too.  Profits and losses on contracts are shared proportionally without resorting to sophistry to protect the asset but to genuinely share.  Because of the lack of debt burden businesses can flourish and the banks become partners rather than simply suppliers; ironically a situation traditional banks have striven to achieve all the while trying to maintain their lack of risk exposure.

  Islamic financiers have looked also at solutions for the huge international debt bubble which has led to a world economy desperately unbalanced.  Compare the $30 trillion plus of corporate and sovereign bonds to the production and capital base of the global economy and you see an upside down pyramid of debt balanced on a pinpoint of production generating income to service that debt.  Debt that the lenders insist must be repaid irrespective of the social disaster it might cause.

  An Islamic based financial system keeps a close link between finance and production and the principle of risk sharing keeps a lid on the endless debt spiral.  Even the IMF has seen that this must stop and is pushing principles to developing nations that whilst not named as Shari’a compliant nevertheless follow the principles closely.

  For example they look for growth from FDI not borrowing. If borrowing is necessary it should not all be short term maturity but have a long enough maturity date that underlying business can develop first and repay from profit not income.  Lenders and partners on an international scale share both the risk and reward in the long run and the endless cycle of debt is broken.

  Islamic finance has made huge strides since the ‘70s.  But there are still lessons to be learned and changes to be made.

  There still needs to be a common regulatory framework and greater standardisation and transparency.  This would for instance stop the unseemly practice of ‘fatwa fishing’ where institutions shop around among scholars until they find one with a view more conducive to their commercial plans.  This makes a mockery of sensible scholarly discussion and truly Shari’a compliant business.

  However because so many scholars have contributed to the thinking and set precedents in legal documents it is far quicker today to issue compliant bonds than in the past.  This will continue to improve and that will only make the products more attractive.

  Innovation is still needed especially in the fields of project and infrastructure finance and money markets and we still need more input from the Global financial institutions and not just those from Islamic countries.

  But all in all the development of products and services has been successful and popular; a situation that can only improve as time goes by.

  By sharing the risks financial institutions can work to develop greater profit for themselves and their clients without having to charge interest.  Over time the gain is greater for both parties than that made by saddling the customer with a heap of debt so he only works to pay off the debt not grow the business.  American Capitalists call this Win-Win and spend millions training their businessmen to understand it.  With Islam it is built in to the teachings of Prophet Mohammed (pbuh).