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By Claire Chen
Islamic banking is on the rise. Recent estimates suggest that the industry can expect a 10 percent growth rate over the next year, part of its broader transformation from a niche cultural product to a mainstream commodity part of the broader ethical finance movement.
A prevailing interpretation of Islamic banking considers it as simply another alternative in the consumer banking market. It is here that much of the discourse is centered: Islamic banking appears to be an individual moral statement that the savvy consumer chooses among a variety of products.
At the same time, the nascent popularity of Islamic banking cannot be entirely attributed to investors, eager as they may be to participate in this culturally-conscious version of the financial industry. Distinct from other ethical finance products is the vocal and persistent backing that Islamic banking enjoys from one particular type of politician: the Islamic populist.
President Recep Tayyip Erdogan of Turkey is a prime example. His brand of populist politics, which has been described as “anti-Westernist,” “religiously legitimated,” and “reactionary,” requires the construction of a commensurate financial system, and it is in Islamic banking that he can find practices consistent with his self-professed Islamic values.
Erdogan has been the “unlikely champion” of Islamic banks as early as 2015, and observer reports from recent years suggest that he has doubled down, consequences notwithstanding. Politico’s Geoffrey Smith argues that despite Turkey’s current economic crisis, Erdogan still may not pursue what Smith terms “orthodox [economic] policies that traditionally bring stability” – policies such as raising interest rates, which are certainly not in the repertoire of the pious Islamic banker.
This repertoire can encompass a wide range of practices. The International Monetary Fund identifies three general characteristics that help distinguish it from conventional counterparts. First is the aforementioned prohibition of excessive interest, which is likely familiar to the Western audience given the controversial status of usury in the history of Western banking. There is also a moral imperative for equitable and transparent financial practices for the common social good. Finally, the prohibition of short selling and other investment strategies that do not require ownership of assets reflects Islamic perspectives of property ownership.
Essentially, Islamic banking can be viewed as part of the process in which institutional financial practices are reconciled with the cultural and religious norms common to Islamic traditions. However, when Islamic populists co-opt this force as the guiding ethos of macroeconomic policy, Islamic banking can take a difficult turn.
Populists exploit feelings of cultural marginalization that require the pursuit of identity-affirming practices such as Islamic banking. Once institutionalized, these policies legitimize populist dominance within the political scene. Concurrently, this behavior is supported by international actors seeking to extend their own influence. An examination of each step in this process reveals key insights about the relationship between populist support and the development of Islamic banking.
- Cultural marginalization
Like the West, banking in the Islamic world has ancient origins. There is some academic study of medieval Islamic banking practices; for example, Islamic jurisprudence and archeological evidence has provided an understanding of credit during the period.
However, Islamic banking took on its “modern form” during the mid-20th century. Institutions such as the 1963 Mit-Ghamr Savings Bank and the 1975 Dubai Islamic Bank were contemporaneous with the social and political upheaval of the region during the period.
More importantly, the Islamic world had the cash to drive such change. The Wharton Business School notes that “when petro-dollars [started] pouring into the Middle East during the 1970s, and local companies and governments planned major capital spending projects, the monopoly on finance held by foreign banks rankled. A school of economic thought began developing that explored new ways of meeting the saving, investing and financing needs of Muslims in a religiously acceptable way.”
In short, religiosity as it had manifested in modern Islamic banking was not independent of politics. Islamic banking instead served to express a newfound political awareness of a society independent of the Western world order.
While this assertion of cultural independence is by no means equivalent to the Islamic populist movement, political proponents of Islamic banking today have nevertheless expressed similar feelings of marginalization. During the 2015 opening of Turkey’s first national Islamic bank, Erdogan noted, “London is the center of participation [ie., Islamic] banking; why London, not Istanbul?”
These cultural battles are not just specific to the traditional centers of the Islamic world. Malaysian politics also has an outsider problem, not with the West, but rather with its own diverse populace in a system of politics that “revolves around the tensions between the three major ethnic groups [of] [Muslim] Malays, Chinese and Indians.” And just like the sentiment in a post-colonial Middle East, feelings of resentment on the part of “an increasingly unhappy [Muslim Malay] majority that fears it is losing its special privileges” have proliferated.
It therefore comes as no surprise that Islamic banking has also asserted itself as a player in Malaysian cultural grievances. Hideki Kitamura argues that Malaysia’s Islamic central bank has created “institutional mechanisms” that consolidate the power of Muslim Malays against the Chinese Malay minority, who have “historically predominated” the financial world.
Here, the politics of resentment begin to turn into something else altogether: the politics of exclusion. Believers do not prompt feelings of cultural marginalization so that they can lie down and rot. Rather, marginalization galvanizes a call to action that affirms the identity of the in-group, and Islamic populists have leveraged macroeconomic policy to turn the financial sector into a prime battleground.
- Identity-driven policies
Dr. Vedi Hadiz has a chimera-like conception of Islamic populism, which has enjoyed support in various forms all over the Muslim world from an eclectic collection of “highly disparate” supporters. At the same time, he argues it is unified by the belief that “the ummah [the Muslim community] is conceived as a sort of stand-in for the ‘people’ – a concept which is an integral part of all populist imaginings that juxtapose the morally virtuous but marginalised masses to the rapacious and predatory elite.”
Islamic populists claim a Muslim identity to fashion themselves as “the people.” Such a characterization is certainly true of Erdogan, whose detractors observe that he “brings up religion every time he senses trouble,” including in the midst of the aforementioned interest crisis. He is above criticism because he is Muslim, just like his constituents – one of “the people,” not the “predatory elite.”
Unlike Turkey, Malaysian politics are not necessarily populist. Both, however, are still centered on identity. In the case of Malaysia, Kitamura explains that Islamic banking becomes a means to assert Muslim Malay identity. Jobs in the burgeoning industry become a mechanism for more Muslim Malays to enter finance; Islamically-oriented policies privilege the educational influence of Islamic schools. By reducing the influence of foreign banks dominated by Chinese Malays, the state-governed Islamic banking system deliberately and successfully creates a separate financial niche for Muslim Malays.
Rather fittingly, Kitamura concludes: “I define Islamic banking [in Malaysia] as an ethno-political tool rather than simply as a religious economy and contend that the philosophy of Islamic banking as a moral economy conceals an agenda of protecting Malay interests.”
Of course, it is certainly possible for so-called Islamic interests to collide. Though disputes are currently mediated through a system reminiscent of arbitration in conventional banking, the industry has seen its fair share of international controversy. For example, Bangladesh’s Islami Bank has been scrutinized by its wealthy Gulf investors, whose disengagement from the bank following a change in leadership predicated the bank’s current loan laundering crisis.
There has even been conflict over the legitimacy of certain Islamic banking practices. Islamic banking is far from monolithic, and products are regulated by a patchwork of laws. Some of them, like Islamic bonds and Islamic sales contracts, have even been criticized by Islamic scholars, further highlighting the industry’s variability.
The point of this exhaustive analysis of the industry is that there is no consensus on what a truly representative identity-driven policy constitutes. Though various players involved in Islamic banking legitimize their actions through their claim to Islamic identity, the appropriation of religious identity as a justification for political policy does not truly represent the lived beliefs of a diverse religion claiming over two billion adherents.
In fact, it is through this dissonance that the political motivation driving identity-driven policies is revealed. Islamic banking provides a convenient avenue to prove the Islamic credentials that are needed to broker political power.
- Legitimacy and political power
The role of religious practice in the public space has a contentious history. Dr. Salwa Ismail rightly observes that even though the secular West deems religious practice a private affair, the reality is that religion – whether in the form of Christmas or politicians who talk about Christmas – is a part of public life.
Dr. Seyed Mohammad Ali Taghavi notes that similar themes have been contested in the Islamic world with the crucial caveat that the prevailing opinion is of Islamic tradition allowing for a greater entanglement of religious practice in public life: “that Islam is intrinsically a political religion.” It is therefore unsurprising that public figures have used religious identity as a tool of legitimization.
In fact, examining the underlying political structure of the countries studied in this investigation can elucidate why embedding religious and cultural identity within macroeconomic policy can be a winning political strategy.
For example, the biggest source of structural instability in modern Turkey is the so-called “Kurdish question,” which hinges on the political fate of a minority group split between Turkey and three other countries with no state of their own. At 18% of the population of Turkey, their demographic strength combined with their penchant for oppositional politics means that Erdogan must contend with a political force that has the potential to threaten his own power. Perhaps, then, his obsession with identity is a tacit acknowledgement of the role it plays in his own political landscape.
One scenario is that Erdogan’s Islamic politics is meant to extend to Kurds, who themselves are mostly Muslim – a clumsy acknowledgement of a common identity that legitimizes Kurds within the political mainstream so long as they fall in line. Unfortunately, it appears that Kurds have become increasingly discontent with Erdogan’s exclusive interpretation of Islamic identity, which sidelines both independent Kurdish politics in addition to the unique cultural and linguistic heritage of the community.
So it is that his Islamic politics were never meant to include them. Journalist Asli Aydintasbas argues that “rather than the culmination of an Islamist project, Erdogan’s Turkey can be described as the interjection of a dose of conservatism to an already authoritarian nation-state,” wherein “the predominant color in Erdogan’s ‘New Turkey’ is the return of Turkish nationalism.”
The point of Erdogan’s Islamism becomes clear: its universal undertones are a way to erase, not unite, the disparate elements of the Turkish political sphere, sidelining and silencing those inconvenient communities within that space who threaten his power, and Islamic banking is just one such manifestation of his power.
Even more concerningly, one need not be as cartoonishly self-serving as Erdogan to adapt this strategy. The example of Islamic banking in Malaysia demonstrates how a supposed religious preference is actually a method to consolidate the power of Muslim Malays within the financial industry. Malaysia is not alone: President Joko Widodo of Indonesia, touted as a “prominent moderate Muslim figure” and a core constituency of “anti-Islamic populists,” has nevertheless embraced the Islamist virtue signals he needs to remain in power, which may explain his interest in pursuing “national sharia finance.”
These quests for domestic power and regional influence naturally lead into the question of how the politics of Islamic identity, and the consequences of Islamic macroeconomic policy, act on an international level. In today’s interconnected world, truly successful financial strategies have global consequences, and Islamic banking will need to transcend its regional niche to become the Western alternative that its founders had envisioned.
- International relations
The bid to gain international influence has two sides. First is that countries desire to influence others, which is a theme articulated in both of the Islamic bank case studies of Turkey and Malaysia, who have the desire to transform influence in the Islamic banking sector into tangible political influence.
Yet these countries are susceptible to being influenced in turn. The previous discussion of Islamic banking as a reactionary movement against Western and other outsider influence in finance is one aspect of how international trends steer the course of Islamic finance. However, it is also true that such influence can come from within the Islamic world, in which wealthy, politically dominant Islamic nations use Islamic finance as a vehicle to assert regional influence – particularly through politically convenient charitable endeavors.
One prime example comes from the oil-rich monarchies of the Gulf seeking to develop the economies of middle- and lower-income Muslim nations. The Saudi-dominated Islamic Development Bank, with its stated mission of “promoting social and economic development in Member countries and Muslim communities worldwide,” continues to finance economic development in its African member states.
Meanwhile, Iran has created a rival system of charitably-oriented Islamic financial infrastructure. Dr. Ali A. Saeidi explains that bonyads are charitable organizations unique to Iran that conduct various Islamically-oriented community services. Crucially, they are inherently political: Saedi notes that they “have embodied a contradictory position within the religious establishment and have reinforced part of the dual structure of power in the Islamic state when they work parallel with government enterprises.” The scholar William Bullock Jenkins has gone as far to characterize bonyads as “agents and vehicles of Iranian soft power and regional influence.”
Finally, in a move that shows its potential to become a truly global movement, Islamic finance has gained recognition among the international community as an alternative means of altruistic finance. The Islamic Development Bank has partnered with various international organizations, including the WHO, to develop global health infrastructure, and UNICEF, to improve child welfare around the world. While these charitable endeavors are uncontroversial, the political undertones of the charitable endeavors financed by the Islamic banking system become important to note as Islamic banking gains mainstream recognition.
In fact, it is this fourth point on international partnership that highlights the future relevance of Islamic banking. The global Muslim population and their associated quality of life has grown rapidly, and as Muslim states develop as participants in the global economy, Islamic banking is poised to become even more relevant in the future world economy.
At the same time, Islamic banking is not just a reflection of the increasing consumer capital of Muslim customers. As Western markets embrace Islamic banking, it becomes crucial to critically examine Islamic banking beyond its superficial characterization as a culturally sensitive alternative investment. Only through understanding its unique cultural history can one garner an appreciation for the forces that have shaped its current manifestations in the Islamic world.
This investigation has shown how Islamic banking can renege on its ethical principles. It can be a political tool used to consolidate the power of its authoritarian backers. It can be the source of systematic marginalization for religious and cultural minorities. These very real concerns highlight the dangers of giving this burgeoning financial movement unwarranted credit under the guise of cultural competency.
Islamic finance has the potential to galvanize the ethical finance movement through a cultural lens that is alternative to the financial mainstream. Embracing the full cooperative potential of Islamic banking is essential to ensuring this socially conscious financial framework can positively shape a global, interconnected world.
