Friday, October 31, 2008
Islamic banking during the financial crisis
A Washington Post article asks how Islamic banks are performing during the current financial crisis (you may need to log in for free at the web site to view the article). Islamic banks uphold Sharia (the Islamic law that was mentioned in an earlier post here), and one of the key features is that they do not charge interest. Because banks make earn profits from the interest on dispersed loans, Islamic banks must devise another way to earn profits. They do this by having profits structured into the loans in a way akin to interest but different enough to comply with Sharia. Islamic banks also tend to issue less risky loans. This has allowed them to perform better than others during the crisis, though, of course, they will usually have smaller returns on average. There is a standard risk-return trade-off here.