The doctrine of Sharia banking (also called Islamic banking) was conceived in the 1920s by Islamists in the Indian subcontinent who were campaigning for a separate homeland for India’s Muslims. Their political struggle led to the creation of Pakistan, but they were not satisfied with this achievement—they now wanted to develop an Islamic economic system that could unite the Muslims in different countries. In the 1970s, when General Zia-ul-Haq imposed Sharia on Pakistan, the movement began in the country to create a system of Islamic banking.
In his book Islam and Mammon: The Economic Predicaments of Islamism, Timur Kuran has done a scathing critique of Islamic banking. He notes that Islamic banking is a fundamentalist doctrine which claims to be regulated by a set of immutable principles drawn from the traditional holy resources of Islam. Since the Islamic banking system does not adhere to the secular banking laws enacted by the central bank, an Islamic bank has the power to make and remake its own rules and objectives according to its interpretation of the traditional resources.
Kuran writes: “Ceding Islamists a monopoly over the interpretation of Islam’s economic requirements, it has enabled them to determine which economic behaviors and approaches are properly Islamic and which are to be resisted as dangerously un-Islamic.”
According to Kuran, the movement towards Islamic banking has been spearheaded by Abul A'la Maududi, the founder of Pakistan’s Jamaat-e-Islami. Maududi has preached that “Islam encompasses all domains of human existence, including education, medicine, art, law, politics and economics. To support this assertion, he laid the foundations of several Islamic disciplines, among them Islamic economics.” Kuran rejects Maududi’s contention that Islam must dictate all aspects of life. He argues that “there is no distinctly Islamic way to build a ship, or defend a territory, or cure an epidemic, or forecast the weather,” and by this logic there cannot be any distinctly Islamic way of banking.
He discusses the work of several other Islamic scholars who have made significant contributions in promoting the doctrine of Islamic banking: prominent among these scholars are Sayyid Qutb and Hassan al-Banna, the leaders of Muslim Brotherhood in Egypt, and Muhammad Baqir al-Sadr, the Iraqi founder of the Islamic Dawa Party.
These scholars have proclaimed that the economy of the Islamic states was doing very well during the Islam’s canonical Golden Age, the tenure of the “rightly guided” caliphs, because in that period Sharia was being faithfully implemented and Islamic banking practices were being used. Kuran rejects this argument. He argues that “by modern standards the 7th century economy of the Arabian peninsula was very primitive. It produced only a few commodities, using only simple technologies. Moreover, it featured only the most rudimentary division of labor.”
Islamic banking does not lead to economic improvement; it does not bring improvement in the living conditions of the poor; it does not strengthen the democratic system. Only the Mullahs, warlords, and the politically connected bankers (the crony capitalists) benefit from Islamic banking. Kuran cites instances where the promoters of Islamic banks and the Mullahs backing them were lining their own pockets in the name of helping the poor. He also sheds light on the instances when the funds from Islamic banks have been used for “advancing the political agenda of Islamism.”