Islamic Finance

1,400 years ago, Islamic scholars recognized the fragility of economic systems built on interest and categorically forbade it. They reasoned that money alone is not productive, so simply lending it should not produce more of it. Instead, value should increase or decrease according to people’s real-world productivity. At this time, Judaism and Christianity also opposed the charging of interest, but only in Islam has this legacy survived to the contemporary world in any widespread fashion.

Increasingly, people are realizing the global economy needs alternatives to dominant practices of interest-charging and debt. Economists have found that as people and businesses take on more and more debt they don’t invest as much in people, innovation, and other things essential to a healthy economy. Despite this evidence, policies and business practices around the world still favor debt-based financing and the interest that comes with it. But the longstanding tradition of Islamic finance reminds us that other ways of doing finance are possible.

While Islam welcomes loans, it uses debt as a form of redistributive finance, rather than as a profit-making tool for the already-wealthy. Islamic economics puts emphasis on mechanisms that foster widespread ownership through shareholding and risk-sharing. It encourages partners who take on some risk to share in the profits and losses. Mudaraba, for instance, is an Islamic finance instrument dating back to when Islam’s founder, Muhammad (peace be upon him), entered a partnership with his later-wife Khadija; she provided the capital and he provided the skill and labor, and they both shared the risk. When investors and participants share both risk and return, there is no incentive for dangerous financial projects such as the exchange of a debt for a debt or “shorting”—which helped produce the 2007–2008 global financial crisis by enabling investors to profit when borrowers don’t pay back their loans.

Fair trade, socially responsible enterprises, and shared investments make up the backbone of contemporary Islamic economics. Islamic tradition also recommends a wealth tax known as zakat on idle assets—those not generating revenue but requiring maintenance costs—which reflects an expectation that rich individuals and companies should circulate wealth in the economy rather than putting the burden on those dependent on an income. This tax then becomes a source of interest-free capital for future entrepreneurs.

Islamic economics puts an emphasis on mechanisms that foster widespread ownership through shareholding and risk-sharing.

Much of what is practiced in global financial markets today contradicts the values of Islamic finance. In the predominant forms of capitalist economics, interest-bearing debt is an integral feature. For most individuals and businesses, the only way to access capital is by taking on an interest-bearing debt. This makes borrowers beholden to lenders who, rather than sharing risk, profit from the interest on the loans and take possession of collateral offered against them. This allows lenders to increase their wealth regardless of the outcome and pushes borrowers into financial turmoil. Today, usury—the practice of lending money at extremely high interest rates—is a major contributor to wealth inequality.

It is difficult for alternative financial practices to function alongside and compete with dominant financial practices of today’s global capitalist system. Most of the Islamic financial sphere has side-stepped fundamental Islamic principles in order to maximize profits. This means there aren’t many working examples that can demonstrate the true potential of an Islamic finance model. But some entrepreneurs are working to change this.

After civil war broke out in Yemen in 2015, a London-born Yemeni named Faris Sheibani opened Qima Coffee to introduce Yemen’s specialty coffees to the world, using the company as a vehicle to improve the livelihoods of local rural communities sustainably. Modest loans played a vital role in Qima Coffee’s growth. With the help of flexible three-year payment terms, Qima Coffee became the largest specialty coffee exporter in Yemen, now working with 2,500 farmers across the country and selling to 26 countries globally. Sheibani went on to set up the Qima Foundation to direct the success of the coffee business toward serving Yemeni communities by making loans to local enterprises. In the spirit of Islamic finance, instead of imposing fixed repayment terms, Qima encourages entrepreneurs to move toward profitability before a 12-to-36month repayment period begins.

One could compare Qima Foundation’s interest-free loans with microfinance—small loans extended to unbanked communities. But most microfinance initiatives that have arisen in recent decades are rooted in conventional capitalism and interest-based practices. Qima offers an innovative approach through an incubator program based on the same age-old forms of support and financing that Qima Coffee received on its own journey.

There are aspects of the internet economy that are well-suited to be managed according to the principles of Islamic finance. Rewards- and equity-based crowdfunding, for instance, is a financial tool centered on communities pooling money rather than interest. But currently the model is rife with abuse. Most crowdfunding platforms don’t hold their campaigns to any ethical standards. As many as 9 percent of Kickstarter campaigns fail to deliver a single reward to supporters, enabling the campaigners to pocket their crowdfunding wins. The absence of guidance or education has resulted in a 64 percent failure rate for crowdfunding campaigns across the various platforms that host them. Since large crowdfunding platforms are financed by venture-capitalists, their business models privilege creators who can raise large sums at lower cost, through ripe access to resources, capital, and networks. This is a disservice to social enterprises led by women and people of color who are more likely to lack such privilege.

Inspired by the tradition of Islamic finance, UpEffect emerged in London in 2016 to address the failures of modern finance to empower and equip entrepreneurs addressing today’s most pressing problems. Through rewards-based crowdfunding, campaign management, and strategic consulting, UpEffect helps enterprises engage in real economic activity, avoid misaligned investors, and raise capital directly from customers to grow revenue. In contrast to the average industry success rate, UpEffect’s crowdfunding coaching model has led to a formidable 95 percent campaign success rate for social entrepreneurs. 70 percent of UpEffect campaigns have been female-owned and 65 percent have been led by people of color.

In 2017, actuarial practitioner Raza Ullah co-founded Primary Finance in London, a cooperative reinventing home buying by creating ethical alternatives to traditional mortgages. Its product enables home buyers and investors to enter into equitable partnership arrangements that form a virtuous cycle of risk-sharing and shared ownership. Home buyers are able to purchase a home by making monthly payments similar in cost to a traditional mortgage, but without any burden of debt. Meanwhile in Chicago, Muslim community organizer Hoda Katebi co-founded Blue Tin Production, a sewing cooperative run by refugee and immigrant women to address the fashion industry’s reliance on sweatshops, which, in turn, normalizes violence and exploitation. Profits are shared and distributed equally among the members every quarter, and all the members (minus one) are stitchers. Through organizations like Primary Finance and Blue Tin Production, the long tradition of Islamic finance converges with other traditions to promote inclusivity and solidarity in our economies.

Projects like the above demonstrate how financing instruments can enable shared ownership and equitable capital distribution on the path toward a more just economy. Alongside other global traditions, Islamic finance shows that efforts to imagine alternatives to economic exploitation go back a long, long time.