Riba, Economics, and Islamic Finance: A Different Perspective (1)
For months, I have considered republishing my book, “Riba, Economics, and Islamic Finance: A Different Perspective,” which was first published in 2011. Its previous edition sold out not because of overwhelming demand, but because the Beirut-based Center for Arab Unity Studies limits its print runs to no more than 2,000 copies. However, to release a new edition, I needed a preface that explains the changes in the Islamic finance industry over the past fifteen years. This required interviews with experts in Islamic finance, a review of banking studies and academic research published on the subject during that period, and consultations with experienced investors in Islamic finance to benefit from their insights. I even met with religious scholars who shared their views on the topic.
About five months ago, I met with an investor and innovator in Islamic finance. Since the book’s introduction discusses the economic and political conditions that led to the establishment of Islamic banks—conditions I attribute to the Islamic revival that began after the Arab defeat in 1967 and was reinforced by the 1979 Iranian Revolution—I asked him for his assessment of the Iranian Revolution’s impact on this financial sector. He agreed with me that its influence was significant and crucial, but argued that without the revolution, Islamic finance would still have succeeded, albeit to a lesser extent. We disagreed, however, on the point that without the Iranian Revolution, Islamic finance, if it existed at all, would have achieved only limited, perhaps marginal, success.
When I asked him why he believed Islamic banks outperform conventional banks, he replied: “Because they capture a larger market share, while conventional banks lose their share in societies with Muslim majorities. This reduces the ratio of operating costs to business volume. Moreover, Islamic banks primarily focus on retail banking services, whereas conventional banks handle a larger share of major corporate projects and national projects with more complex requirements. Consequently, economic slowdowns affect conventional banks more severely.”
Regarding the accuracy of the claim that Sharia-compliant index funds outperform conventional funds, he added: “This is logical, as Islamic banks avoid companies whose debt exceeds 30% of their total assets. Lower financial leverage is an indicator of lower financial risk and stronger cash flows.”
To be fair, very little in the book’s content needs to be changed, as the book does not focus on the specific banking instruments available to either Islamic or conventional banks, nor is the size and evolution of markets its main subject. Instead, it addresses more fundamental topics, such as the concept of Riba (usury/interest) in Islam compared to other religions. However, it is necessary to highlight the substantial increase in the volume of funds invested in Islamic finance. About twenty years ago, this figure stood at approximately $500 billion; by the end of 2026, it is projected to reach around $5 trillion—a tenfold increase. Nevertheless, its global distribution remains concentrated in the Gulf states. Nine of the top ten Islamic banks are located in the Gulf. In Saudi Arabia, Islamic bank investments exceed 70% of the market; in Kuwait, they exceed 51%; in Qatar, they account for about 30%; and in the UAE, they represent approximately 20%.
It is also worth noting that the gap in the availability of investment instruments between conventional and Islamic banks has largely disappeared. Conventional bank cash loans have been replaced by Tawarruq (monetization) structures, and conventional debt securities have been transformed into Sukuk (Islamic bonds). Despite these developments, the core message of the book remains vital and provocative.
Dr. Hamed Al-Humoud
