Islamic Banking

Thanks for the kind words, Alex. It’s a pleasure to be here.

First entry: During my undergraduate economic sociology class week, we engaged in a discussion of Islamic banking after a Malaysian student said that banks in her country were engaging in interest free banking. A web search revealed that Maylasia has a well developed dual banking system, with some banks engaging in interest-free lending. There are now money markets and other economic institutions based on observance of Islam (a summary).

Another student pointed out that it was difficult for international organizations to loan money to Islamic nations because its hard to tell how much debt has been incured. Apparently, a lot of accounting in Islamic nations deals with making interest payments invisible. For example, a bank is allowed to purchase something and sell it to a “borrower,” with fees for late payments. Once you have the idea that you can trade such contracts, you can have securities markets.

Which leads to a question: if you can reproduce most Western banking practices in Islamic banking, does it make a difference in the banks performance? How are the non-Islamic banks in Malaysia doing?