The Politics Behind Islamic Finance

In the wake of the September 11, 2001, terrorist attacks on the United States, the UN Security Council passed a resolution targeting transnational sources of terrorist funds. At least one offshore Islamic bank was shut down, and American officials, ignorant about Islamic finance, viewed any “Islamic” bank with heightened suspicion. The Bush Administration targeted Al-Baraka in particular, confusing a Somalian funds transfer agency with the transnational Islamic banking group that has the same name, a generic Arabic term for “blessings.” Most Islamic capital formation derives from legitimate business activity, however, and many governments in the MENA world tolerate and encourage the development of its distinctively Islamic financial practices. As the United States and multinational institutions such as the IMF encourage the governments of the Middle East to adopt policies of economic liberalization, a new type of capitalism may be emerging, not based on a Western Protestant ethic, but rather on Islamic values and beliefs. It is important to distinguish the financial phenomena associated with this development from money laundering and terrorism.