by Michael Greaney

Created on: January 10, 2008

"Islamic banking" often presents a puzzle to people unfamiliar with economic and philosophical history. It is distinguished principally by the general refusal to charge interest on loans, terming virtually all such loans "usury." While a slight oversimplification, the view that all interest represents an unjust profit is closer to traditional western economic thought, rooted firmly in the philosophy of Aristotle, than the situation that prevails today in many nations.

To understand Islamic banking, it's a good idea first to disabuse yourself of the vast body of myth and misinformation that has grown up around the institutions of money and credit. Neither money nor credit are mystical things, handed down from heaven (or up from hell). They are human creations, and (most simply put) represent a convenient means of conveying a property interest between individuals or groups. "Money" is any vehicle that conveys a property interest at the time of a transaction, while "credit" is any vehicle that conveys a promise to deliver a property interest at some time in the future.

It surprises many people to learn that, in the United States and many countries, there is no legal definition of money. Given the above brief description of money (probably too brief), however, we can see why a legal system would be wise not to lock itself into any specific definition of what money consists. A court must be free to judge on a case by case basis whether or not a property interest has been conveyed in a particular situation.

Next we must come to an understanding of what a "bank" is. Within the context of Islamic banking, we are talking about what would in the United States be called a "commercial bank," that is, a bank not set up for consumer purposes, but for business purposes. True, in the U.S., most commercial banks will extend services such as savings and checking accounts to private individuals, but this is not necessary for an institution to define itself as a bank.

The legal definition of a bank is a financial institution that makes loans and takes deposits. Islamic banking is based on the assumption that loans for productive purposes can only be made out of existing savings (the ability of a "bank of issue" or a central bank to take the productive potential of an individual, a company, or a nation and turn it into money is a whole other topic). These savings, obviously, have an owner; the principle of law being "everything has its proper owner."

Because the savings are owned, the

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