The result has been a rapid growth in Islamic financing, with centers of activity in places as far apart as London, Switzerland, Saudi Arabia, Dubai, and Singapore.
By some industry estimates, Islamic finance has grown worldwide during the past 20 years to $300 billion in bank assets. According to the General Council for Islamic Financial Institutions, that total is expected to exceed $1 trillion within the next five years. And those estimates do not include private savings accounts, which appear off the bank balance sheets.
The International Organization of Securities Commissions predicts that as much as one-half of the savings of the world's 1.3 billion Muslims will be in Islamic financial institutions by 2015. In fact, Islamic finance has seen so much growth that the sector is now seen as a viable part of the global banking industry.
Asif Mumtaz, the regional head of HSBC bank's Islamic finance arm, HSBC Amanah, agrees that Shari'a-compliant investment is no longer a niche market. Still, he says, Islamic banking needs innovators to come up with new Shari'a-compliant schemes before it is able to compete with the wide range of services offered by conventional banks.
"If we compare what has happened in conventional banking, it has grown over thousands of years. Shari'a-compliant banking, or Islamic banking, is 40 years old," Mumtaz says. "So now we see that, yes, we have moved away from the niche, and we are going into the mainstream. In order to be fully there, we need to have that innovative thought process."
Un-Islamic Investments
Indeed, the focus on the Koran's prohibitions can make it difficult for Islamic financial institutions to work in the same way as a conventional Western bank. For example, Islamic law prohibits investment in sectors such as alcohol and gambling. So an Islamic bank must ensure its clients that their deposits are not being reinvested in a firm that does business deemed as "un-Islamic."
Some conservative Islamic scholars have concluded that investing in stock markets is a form of gambling -- and is therefore prohibited by the Koran.
Another basic rule of Islamic finance is a prohibition against what the Koran calls "riba," a word interpreted as the payment and collection of interest on loans or savings deposits.
"The basic idea about Islamic banking is that it should be riba-free," says Abdul Ghafoor, a Netherlands-based author and expert on Islamic finance. "Riba is generally equated to interest, but there is a little bit of a difference. The interest in a person-to-person transaction is equal to riba. It is also the same thing when I put some money in a bank and they give me interest. That is also riba. But, on the other side, [Islamic] banks lend at a higher rate. This increase can be excessive. But there is a component of expenses incurred by the bank."
'Riba-Free' Savings
As a result, instead of collecting interest on their savings, a person who deposits money into a riba-free savings account instead collects a fee based upon a prearranged contract, a profit-and-loss sharing agreement with their Islamic bank.
"Many people do not agree with the present practices of Islamic banks," Ghafoor says. "The model that they want to promote is what is called 'mudarabah' -- that is to say, business-risk sharing, and profit-and-loss sharing. But that is not used very much. And if it is used, it is used only on one side [often to the disadvantage of the depositor]."
That makes savings accounts at Islamic banks much riskier than a guaranteed savings account at a conventional Western bank that also is backed up by government insurance plans for depositors. If an Islamic bank invests money from savings accounts into a firm that fails, the holders of those savings accounts can actually lose their money.
Aref Ismail al-Khouri is the general manager of the National Bank of Abu Dhabi, an Islamic bank in the United Arab Emirates that began operations this year. He says continuous economic growth in oil-rich Persian Gulf countries has made it imperative for Islamic banks to diversify the finance options they offer so they can meet the growing demand for both personal and corporate finance in the Muslim world.
Profit Pressure
With savings-account holders essentially taking risks similar to a shareholder, al-Khouri says there is a lot of pressure on Islamic bankers to turn a profit.
"They want us to be profitable from last year. As a shareholder, they always look at this," al-Khouri says. "But, inshallah, we are planning to be profitable from year one."
Other critics of the sector say the strong emphasis on prohibitions in the Koran has led most Islamic banks to serve only the wealthiest clients in oil-rich Arab states.
Michael Gassner, who heads a leading Islamic-finance consultancy that has offices in London, Germany, and Dubai, argues that the basic principles of Islamic finance need to be reevaluated in order to allow microloan programs that can help poor Muslims start small businesses and improve their lives.
"What we need is not only to exclude things which are forbidden by Islam, but to include things which are recommended by the religion," Gassner says. "So we have to look at how we can better finance the poorer people -- how we can include poor people and serve them like clients and earn money with them, having profits even with the poorest. This is something that we need to look at in the future."
Gassner tells RFE/RL that many wealthy Muslims around the world are changing the way they think about Islamic investment. He notes there is a strong movement toward private-equity companies and local investment in the Middle East, despite the declarations of Islamic scholars that stock-market investments are a form of gambling.
Gassner concludes that in the core Middle East markets -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates -- investors are starting to think more about ways to improve living conditions for people in the Muslim world.