Now such innovation are not just commonplace in the Gulf, but also have become an important revenue source for Western financial giants with Islamic-banking division, such as Citigroup Inc. and HSBC Holdings PLC.
increasingly sophisticated Muslim communities in fast-growing Asian countries such as Malaysia are beginning to influence the Arab heartland, offering a vivid example that an embrace of the global economy can coexist with Islam.
Unlike oil-rich Gulf monarchies that rely on guest labor, Malaysia derives its prosperity from an educated work force and cutting-edge manufacturing. Electric and electronic goods such as mobile phones, semiconductors and computer parts account for about half of its exports.
The barrier that Islamic financial modernizers are trying to overcome is the Quranic prohibition on receiving or paying interest: "Allah permitted trading and forbade interest." While ignored by many secular Muslims and the conventional banks that operate in most Muslim nations today, this ban has long denied the benefits of modern banking to strict believers -- contributing, some say, to the Muslim world's relative decline after interest-based bonds and loans powered the West's Industrial Revolution. In Malaysia, Muslim distrust of conventional finance has also helped cement the historic domination of the country's economy by non-Muslim ethnic Chinese.
As Malaysia's government sought to lift the Malay majority out of poverty and promote native entrepreneurship, it focused on creating an Islamic financial alternative. Malaysia's government, by contrast, encouraged banks to replace interest-based transactions with arrangements that, while benchmarked to interest rates, are technically based on profit-sharing, leasing or trading -- all activities permissible in Islam because they involve entrepreneurial work rather than simply moneylending.
Malaysia also introduced the first sukuk, or Islamic bonds, years before Middle Eastern clerics accepted the practice.
Though rival Islamic banking and capital-markets centers have since sprung up in Dubai, Bahrain and London, Malaysia still accounts for two-thirds of the world's Islamic bond issuance. The country has achieved "the closest possible replication of conventional finance while giving it an Islamic label," says Mahmoud El-Gamal, Egyptian-born chair of Islamic finance and economics at Rice University in Texas.
One beneficiary is Azrulkhakim Suradi, the 31-year-old owner of a herbal-medicine business in the town of Shah Alam outside Kuala Lumpur. Mr. Azrulkhakim, who sports a shaggy beard and whose wife is shrouded in a black abaya, is a fervent Muslim believer and considers paying or receiving interest a grave sin.
Thanks to the availability of Islamic finance, Mr. Azrulkhakim became the first in his family to accept a bank loan. He has borrowed $43,000 from one Islamic bank to buy his dream car, a Mercedes-Benz C 200. He owes another Islamic bank $27,000 on a mortgage, and has just arranged financing for a second home. "I can sleep well at night," Mr. Azrulkhakim beams, "because I can be sure that everything my bank is doing conforms with the way of Islam."
Thanks to the availability of Islamic finance, Mr. Azrulkhakim became the first in his family to accept a bank loan. He has borrowed $43,000 from one Islamic bank to buy his dream car, a Mercedes-Benz C 200. He owes another Islamic bank $27,000 on a mortgage, and has just arranged financing for a second home. "I can sleep well at night," Mr. Azrulkhakim beams, "because I can be sure that everything my bank is doing conforms with the way of Islam."
Dr. Daud is unapologetic about the fact that many recent Islamic financial products, while technically based on lease or trade contracts, have become virtually indistinguishable from those offered by interest-driven Western finance.
"It's all about the journey you take to that destination," he says, drawing a parallel between financial gain and sex. A seeker of sexual pleasure, he explains, can get married or fornicate on the side -- just as a seeker of financial gain can profit from an Islamic sukuk or a conventional bond. "You'll have enjoyment in both cases," Dr. Daud chuckles, "but one is halal [permissible] and the other is not."
"It's all about the journey you take to that destination," he says, drawing a parallel between financial gain and sex. A seeker of sexual pleasure, he explains, can get married or fornicate on the side -- just as a seeker of financial gain can profit from an Islamic sukuk or a conventional bond. "You'll have enjoyment in both cases," Dr. Daud chuckles, "but one is halal [permissible] and the other is not."
Aware of this attitude, Malaysian banks in recent years have concentrated on crafting new structures based on leasing contracts, known as ijara, for global dollar-denominated sukuk marketed to Arab investors. The issuer of ijara sukuk places certain assets, such as a palm plantation or a building, in a special-purpose vehicle. In exchange for their cash, investors receive the right to the lease payments that the issuer makes to the special-purpose vehicle. The lease payments are usually set in advance and benchmarked to interest rates, making the investors' return comparable to interest from a bond.
The ijara principle was pioneered in corporate bonds in 2001, when Malaysian plantation company Kumpulan Guthrie issued the $150 million sukuk that were so controversial at the time. These days, almost identical ijara sukuk are commonplace in the Gulf. "If we persevere in educating the markets, eventually the markets will understand," says Badlisyah Abdul Ghani, the chief executive of CIMB Islamic Bank, one of Malaysia's largest. Mr. Badlisyah helped arrange the pathbreaking bond as an investment banker at Bank Islam.
Eager to educate oil-rich Gulf investors about such financial novelties, Malaysia's central bank, Bank Negara, is spending $57 million to invite Islamic scholars from around the world to Kuala Lumpur for a "Shariah dialogue" program. "To be an international financial center, you must allow a diversity of interpretations," says Bank Negara Deputy Governor Razif Abdul Kadir "This is our strength."
The ijara principle was pioneered in corporate bonds in 2001, when Malaysian plantation company Kumpulan Guthrie issued the $150 million sukuk that were so controversial at the time. These days, almost identical ijara sukuk are commonplace in the Gulf. "If we persevere in educating the markets, eventually the markets will understand," says Badlisyah Abdul Ghani, the chief executive of CIMB Islamic Bank, one of Malaysia's largest. Mr. Badlisyah helped arrange the pathbreaking bond as an investment banker at Bank Islam.
Eager to educate oil-rich Gulf investors about such financial novelties, Malaysia's central bank, Bank Negara, is spending $57 million to invite Islamic scholars from around the world to Kuala Lumpur for a "Shariah dialogue" program. "To be an international financial center, you must allow a diversity of interpretations," says Bank Negara Deputy Governor Razif Abdul Kadir "This is our strength."
