Sharia banking, also known as Islamic banking, was first articulated in the 1920s by Islamist thinkers in the Indian subcontinent. These ideologues, who were at the forefront of the campaign for a separate homeland for Muslims, envisioned an economic system rooted in Islamic principles that could unify Muslim communities across national boundaries.
While their political aspirations culminated in the creation of Pakistan, their ideological ambitions extended further—to the formulation of an Islamic economic order.
This ambition gained institutional momentum in the 1970s, during the regime of General Zia-ul-Haq, who imposed Sharia law in Pakistan. Under his patronage, Islamic banking began to emerge as a formal movement, seeking to replace interest-based financial systems with alternatives allegedly compliant with Islamic jurisprudence.
In his incisive critique Islam and Mammon: The Economic Predicaments of Islamism, economist Timur Kuran challenges the ideological underpinnings and practical efficacy of Islamic banking. He characterizes it as a fundamentalist doctrine, one that claims to be guided by immutable principles derived from Islam's sacred texts. Unlike conventional financial institutions, Islamic banks operate independently of secular banking laws, allowing them to craft and interpret their own regulatory frameworks under the guise of religious legitimacy.
“Ceding Islamists a monopoly over the interpretation of Islam’s economic requirements,” writes Kuran, “has enabled them to determine which economic behaviors and approaches are properly Islamic and which are to be resisted as dangerously un-Islamic.”
Kuran traces the intellectual origins of the movement to Abul A'la Maududi, founder of Pakistan’s Jamaat-e-Islami. Maududi propagated the idea that Islam governs all spheres of human existence—education, medicine, art, law, politics, and economics. As part of this worldview, he helped lay the groundwork for Islamic economics as a separate discipline. Kuran, however, finds this claim untenable.
“There is no distinctly Islamic way to build a ship, or defend a territory, or cure an epidemic, or forecast the weather,” he asserts—and by extension, there is no distinctly Islamic method of banking either.
Beyond Maududi, several other influential Islamic thinkers have promoted the ideal of an Islamic financial order. These include Sayyid Qutb and Hassan al-Banna of Egypt’s Muslim Brotherhood, as well as Muhammad Baqir al-Sadr, the founder of Iraq’s Islamic Dawa Party. These scholars idealized the economic structure of Islam’s so-called Golden Age—the era of the "rightly guided" caliphs—as a model for Islamic banking, claiming that the application of Sharia principles then had ensured economic prosperity.
Kuran disputes such claims, arguing that by modern standards, the 7th-century Arabian economy was rudimentary at best. It relied on a limited range of commodities, employed basic technologies, and exhibited minimal division of labor—hardly a system that could inform contemporary economic models.
According to Kuran, Islamic banking fails to produce tangible economic benefits. It does not improve living standards, reduce poverty, or enhance democratic governance. Instead, it often becomes a tool for enriching clerics, warlords, and politically connected financiers—what he terms “crony capitalists.” He documents instances where Islamic banking was cynically used to enrich its promoters, while making rhetorical appeals to poverty alleviation. Moreover, in several cases, Islamic banks have been used to channel funds into advancing the political goals of Islamism.
Far from offering an economic alternative, Islamic banking, in Kuran’s view, represents a veneer of religiosity over an economically flawed and politically opportunistic agenda. Its rise may reflect the ideological aspirations of Islamists, but it has done little to foster inclusive growth, empower citizens, or modernize financial systems in the Muslim world.
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