Muslims seek to do business the Islamic way. Proponents of `Islamic' banking take to heart religious injunctions against usury. Islamic-style financial institutions are springing up to help get rid of the `evil of interest.' But the trend is a dilemma for many Muslims who have invested in Western-style banking systems.

Devout Muslims from Cairo to Karachi are becoming a new force in international finance. Increasingly, in Egypt, the rich Gulf Arab states, Pakistan, and other Muslim nations, customers have been withdrawing funds from Western-oriented banks and investment firms and entrusting them to so-called Islamic financial institutions.

The rise of ``Islamic banking'' over the past decade has triggered a flood of entirely new deposits as rural Muslims are convinced for the first time to liberate hordes of cash from within mattresses and lock boxes throughout Northern Africa, the Middle East, and Asia.

``Islamic banks are becoming a power,'' says Abdullah A. Rahim, general manager of the Bahrain Islamic Investment Company.

There has been ``a real boom in Islamic investments and deposits,'' adds an executive with a large conventional bank in the Gulf.

The Islamic economic movement, barely 10 years old, is afforded great respect in Islamic circles as it is based on the centuries-old teachings of the Prophet Muhammad. He taught that God has forbidden charging or making payments of interest on loans. In addition, scholars say, God forbade all speculative dealings. To many Islamic scholars and economists, interest, in whatever form, is usury and speculation is gambling. How an Islamic financial transaction works

Abdullah Abolfateh, acting general manager of the Bahrain-based Albaraka Islamic Investment Bank explains the difference between conventional and Islamic financing this way:

``If you come to me and say you want a loan to buy a car, I will not give it to you. But if you come to me and say you want to buy a car, I will buy the car and sell it back to you over a period of time and at a profit.''

In such a case, the bank's profit from the car sale could be identical to the interest payment costs of a conventional car loan. But the process is acceptable in Islam because it avoids charging interest.

This technique - known as murabaha - has been applied to a wide range of ventures including the funding of large-scale trade deals. In a murabaha deal, the Islamic banker or investor works as a middleman between the original producers and the ultimate buyers, and charges a fee (profit) for the services.

``Ninety percent of Islamic banking transactions at present center around murabaha,'' says Muhammad Rahim Muhammad, a manager at Albaraka.

Dilemma for the devout

Proponents of an ``Islamic'' economic order - who include scholars, economists, bankers, and financiers - want to trigger a fundamental reorganization of the way conventional financial institutions do business in the Islamic world.

``Once our economy is ridden of the evil of interest, it will prosper more rapidly than the interest-ridden economies of the Western world,'' wrote Afzalur Rahman, in his book, Economic Doctrines of Islam.

``When the door of `false profitability' is closed,'' he added, ``Allah will open a hundred and one other doors of real earnings and profitability for His servants.''

But such interpretations have created a significant dilemma for Muslims worldwide, and particularly for those in the wealthy Gulf states where Islam is the state religion and where both individuals and governments nevertheless rely heavily on conventional Western banking techniques and investments. Last year, foreign investments of individuals and governments of all the Gulf Arab states totaled an estimated $320 billion (compared to an estimated $12 to $20 billion held in Islamic institutions.)

The billions of petrodollars moving through the Western-style banking systems of many of the Muslim nations have made interest payments a multi-million dollar dilemma and controversy.

It remains to be seen how rich Muslim states like Saudi Arabia and Kuwait will balance compliance with the Koran against the significant financial benefits of their Western-oriented dealings.

Three countries - Iran, Pakistan, and Sudan - already require domestic banks to use Islamic methods of finance. And virtually all other Muslim countries are investigating ways to promote Islamic banking. But bankers say there is little chance of a massive transfer of Muslim capital out of well-established and lucrative Western markets.

There is no way the current skeleton network of roughly 100 Islamic institutions could invest and manage that volume of funds. But a growing body of Islamic economists and bankers are looking forward to a day when they can offer viable Islamic alternatives on an international scale.

Eventually, the push for an Islamic economic order is expected to lead to the creation of an interconnected system of banks, investment houses, stock markets, trade companies, and monetary agencies, all operating in full compliance with the Koran.

Two developments last month illustrate the movement toward that goal:

One of the largest Islamic banking conglomerates, the Albaraka Group, said it was beginning efforts in Bahrain to establish the first Islamic stock exchange.

Another large Islamic bank, Massraf Faysal Al Islami of Bahrain, finalized a $100-million Islamic syndication to finance a rice-export deal to Pakistan. It was the largest such syndication yet completed, and it points up the diversification of Islamic financing.

For hundreds of years the Islamic prohibition on interest hadn't been a major issue among Islamic leaders and scholars. But with the resurgence of Islamic fundamentalism more Muslims are seeking to live strictly by the Koran.

Many pragmatic Muslim bankers and financiers have argued that the Islamic injunction is aimed specifically against usury rather than interest. They say Muhammad was opposed to the loan-sharking techniques employed by money changers in the lawless markets of Mecca before the establishment of Islam.

The modern-day pragmatists say that there is nothing wrong with charging a reasonable price for the use of funds for a period of time. They argue that the Koranic prohibition applies to overcharging and usury, not money-market funds or interbank lending rates.

Most Islamic scholars, however, say that references to usury in the Koran do constitute a total prohibition on all forms of interest. ``This subject is no longer discussed in the Islamic world because it is quite clear to every Muslim,'' says Abdulatif Janahi, managing director of the Bahrain Islamic Bank. ``It is not for us to say, `Well, I don't see the total problem with interest,''' adds Adnan Al-Bahar, general manager of the Kuwait Finance House. ``It is a command of God and we do not question it.''

Islamic scholars stress that the only Islamic way to earn profits is by putting money to work through a risk-sharing venture. Idle cash must not be a source of guaranteed income or profit, they stress.

Antidote to economic problems?

Apart from the religious appeal, Islamic banks and investment firms also offer returns competitive with, if not better than, Western-style banks and companies. In Egypt, deposits in Islamic investment houses have skyrocketed as accounts promise dividends over 20 percent. Local banks pay 13 percent.

In the Gulf, bankers say Islamic institutions offering returns roughly equivalent to those of Western-style banks. And Islamic bankers stress that as the range of investment opportunities grows, so, too, will the appeal of Islamic banking.

``I think the success of the Islamic banks must be measured in their ability to cover the needs of the Islamic investor and users of money,'' says Mr. Bahar.

``The Western systems need to be rectified,'' says Mr. Janahi, who is also a lecturer on Islamic banking. ``I feel we have something in this part of the world to offer - a new system that we can introduce.''

To allegations that the prohibition on interest is archaic, Islamic bankers reply that solutions to many of the problems plaguing Western, industrialized economies can be found in Islamic teachings. They maintain that God has outlined a divine economic path and that Western economies have strayed off course. Last year's Oct. 19 plunge in world stock markets is viewed as a warning from God.

``I started my professional life as a commercial banker. But I believe the Islamic way of doing business - or whatever you want to call it - is better for society,'' says Sammi Hamoud, head of the Jordan-based Islamic Financial Consultation Center.

He says that interest-based economic systems help concentrate wealth in the hands of a minority. A better allocation of wealth is possible under Islamic economic principles, he says, because the cost of capital isn't driven by competitive interest rates and it is easier for middle-level workers to obtain the necessary funds to start their own businesses and projects.

``People have equal political rights, but in economics we do not have equal economic rights,'' Dr. Hamoud says.

Scholars and bankers stress that under Islamic economic principles attention is paid to social and moral considerations. In interest-based economic systems, they say, socially important development projects that have low profit margins are never pursued.

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