What is Shari’ah banking?

The lexical meaning of Shari'ah means 'a clear or straight path to a source of water.' The Shari'ah way, is a set of directions designed to promote cooperation among a society's members. The Shari'ah is not a religion but rather a philosophy or guide that anyone can apply. Crucial to the Shari'ah economic system is a set of ideals regarding how people earn and spend wealth. 

If we were to remove the religious lens through which we see this, and look at it at another economic system, we will find the principles and philosophies that underpin it appealing to people from all walks of life.

Here, we compare conventional economics with those of the Shari'ah and explain how these views affect the way we do banking. First, we'll discuss how each system defines money; then, we will discuss the Shari'ah way of using money to promote society's cooperation. Finally, we will discuss some ethical considerations and boundaries for earning money the Shari'ah way.

To understand the difference between the conventional and Shari'ah economic systems, we must explore how each philosophy views money. 

How do conventional economic systems view money?
Conventional economics defines money as a unit of account, a medium of exchange and a store of value. In essence: conventional economic systems treat money as an asset and thus charge for its use, i.e. interest-based banking. Money is, therefore, an asset that is either given out on rent or sold to the client. The rent or mark-up (interest) on the sale is how the financial institution generates economic benefit.

How does the Shari'ah philosophy view money?
In contrast, the Shari'ah economic system does not recognise money as holding value due to it being fiat in nature. Fiat money is a government-issued currency not backed by a commodity. The Shari'ah economic system sees money as a measuring tool and not an asset – it is defined as currency. Money is, therefore, to be used for exchange and accounting only and has no intrinsic value. Money must be converted into something tangible, a commodity, to be useful. As a result of money not being seen to have intrinsic value, it cannot increase in value independent of it being deployed into an actual an asset (as defined by the Shari’ah economic system) or into the production process through which tangible economic value is created. 

There are also qualitative and quantitative conditions to financial transactions. The quantitative conditions being:

•     The charging or receiving of interest is prohibited,
•     Contracts must be written down, and their contents must be clear,
•     Risk-sharing as opposed to risk transference (which places all the risk on one person), and

The qualitative condition is that money within the system cannot be used in the following industries or sectors:

•     Pornography
•     Gambling
•     Arms / weapons
•     Alcohol
•     Tobacco
•     Pork
•     Transactions purely for speculation

From this one can see that if religion is removed, the Shari’ah economic system is a system that has a certain set of philosophies and principles at its core that can be adopted by all and research has shown that as a result of some these philosophies, it has in most instances demonstrated economic resilience through global economic booms and busts. Still nascent in its global institutionalisation, Shari'ah-compliant financial services needs to build upon this and reach a level of maturity and sophistication that can be compared to any other financial service or product. At Standard Bank, we take this seriously. We are building a modern banking system that upholds traditional Shari'ah values that is not specific to Muslims only and is available to anyone who needs to change the way they do banking