Islamic banking, which has gained a lot in popularity over the past decade, has now proven to be largely immune to the credit crunch. Is Islamic banking a viable alternative to western banking? And what can European and American banks learn from Islamic banks?

The principles of Islamic banking are based on Islamic law: the Sharia. According to the Sharia, it is forbidden to charge interest on loans. Instead, Islamic banks buy the asset (be it a house or a new office building) and sell it to the client for an increased price, which can be paid in terms. This way, the bank shares the risk of the investment and is less likely to finance high risk investments. Additionally, the trade of high risk investments is forbidden, as this is seen as a form of gambling. Insurances are organized along the principles of Takaful, a form of mutual insurance where losses and profits are shared among the members.

The unique characteristics of Sharia banking have caused Islamic banks to remain largely unscathed by the credit crunch. At a recent Islamic economic conference, Malaysian Deputy Prime Minister Najib Razak stated that the crisis is a “golden opportunity” for Muslims to prove the power, strength and effectiveness of the Islamic banking and finance system. It is doubtful, however, that Sharia banking will one time completely replace Western forms of banking. The Sharia forbids investments in the liquor industry, casinos, pork, weapons and pornography. While many Westerners would likely applaud these principles, the fact of the matter is that these industries constitute a large part of the Western economic system.

So is it possible for Western banks to redefine their business and incorporate some of the sensible ideas of Islamic banking? Or will they remain two separate banking systems?