The actual transition from the vague discourse on Islamic economics to actual Islamic financial institutions took place several decades later, which is yet another testimony that the concept of Islamic economics was indeed a fabricated one. The actual driving forces behind the establishment of Islamic banking in the 1970s were two closely related developments. The first one was the huge windfall profits that accrued to Saudi Arabia and other Gulf oil producers following the 1973 oil embargo and the dramatic spike in oil prices that followed it.26 Suddenly endowed with unprecedented amounts of money, Saudi Arabia dramatically accelerated its drive to promote itself as the leading country of Islam and export its radical Wahhabi creed worldwide by using its new financial clout.27 In the ten years following the embargo, Saudi funding of Islamic activities, couched as “overseas development aid” outside of its borders averaged $4 billion per annum between 1975 and 1987, a truly unprecedented sum at the time.28 By 2002, according to Saudi sources, Riyadh’s Islamic largesse had built a Wahhabi-controlled network of 1500 mosques, 210 Islamic centers, 202 Islamic colleges and 2000 Islamic schools in non-Muslim countries alone.29
A first practical result of this drive was the founding of the Saudi-controlled multinational Islamic bank, the Islamic Development Bank (IDB) in 1975. The first private bank, the Islamic Bank of Dubai followed in 1975 and several others were opened before the decade of the 1970s was over.
The real takeoff of Islamic finance, however, took place in the 1980s prompted by the success of the Khomeini revolution in Iran in 1979, the ongoing Islamization of Pakistan under Zia ul-Haq in the 1980s and the imposition of shariah jurisprudence in these two countries as well as in Sudan in the same period. The result was a veritable explosion of Islamic banks and affiliated institutions across the Muslim world. According to the International Monetary Fund (IMF), their number reached 300 in 2005, and more recent Arab sources estimate that there are 400 Islamic banks active in 75 countries with close to a trillion dollars under management in mid-2007.30
This does not include the dozens of Western banks that are now offering various Islamic financial products and “Islamic windows” at their institutions. Moreover, there are good reasons to expect that the avalanche-like growth of Islamic finance will continue at least for the foreseeable future. First, with oil prices hovering around $80/barrel presently, liquidity in the Gulf is growing at rates even exceeding those of the 1970s. Secondly, western governments and central banks not only do not appear disturbed by the phenomenon, but seem willing to welcome and facilitate it.31
Faced with the reality of a burgeoning Islamic finance industry that pledges allegiance to the medieval obscurantism of shariah, albeit without disclosing its substance, it is appropriate to look briefly into the mechanics of Islamic banking and what it entails.
Islamic financing, very simply, claims to be an effective and morally superior alternative to conventional finance by strictly following shariah tenets which prohibit interest transactions, uncertainty and speculation (gharar), investment in a host of prohibited (haram) activities ( such as gambling, prostitution, alcohol, finance, tourism, entertainment etc) and encouraging wealth redistribution and poverty alleviation through alms giving (zakat). Indeed, more than a few western institutions have gone overboard touting it as “ethical”, “socially-responsible” etc. To achieve that goal, Islamic finance claims to have developed a series of sophisticated, shariah-compliant financial instruments superior ethically and in terms of performance to conventional ones. These currently include alternatives to the entire gamut of traditional credit, investment, insurance and fixed income products, designated by exotic Arabic names like murabaha, mudaraba, ijara, takaful, sukuk, musharaka etc.
While there certainly are financial products in Western finance that do not involve interest transactions (venture capital, stock market investment), there are few if any that involve neither consideration of the time-value of money (interest) nor a significant degree of uncertainty and speculation. Since you cannot have either one according to shariah, most Islamic banks and institutions routinely engage in various ploys, ruses and plain dishonesty to hide the fact that they engage in both.