Reporters Notebook: The Ethical Aspects Of Islamic Banking

Are Islamic banks anti-war? Islamic banks discourage investment in the arms and military industry as well as speculation and taking excessive risks

A couple of weeks ago, I was asked by a fantastic organisation to look into Islamic banking and how ethical it really is. Whilst I learnt that most Islamic banks may not have the best environmental record, I did discover that they do have some distinct ethical selling points. One of which is their reluctance to invest in the arms industry as well as an aversion to speculation and excessive risks which can destabilize the market. At a time when no-one trusts their bank, Islamic banking doesn’t look like such a bad alternative to the conventional profit-driven financial system.

Islamic banking is based on Sharia or Islamic law which stipulates that making money from money is forbidden and that risks and profits must be shared. The first principles means that interest is not allowed but neither is investment into schemes where the source of the profit is vague. Islamic banks are consequently only allowed to invest in assets- real things like commodities, properties and natural resources. Although this means that there are less shady investments, there is a lot more investment in things like oil, gas and the mining of natural resources – something which is not good for the planet.

In fact, a close link between Islamic banks in the UK and the Middle East means that a lot of investment is in the oil producing industry which is polluting and harmful to the environment and future of this planet. There is only a vague understanding of the concept of environmental responsibility and that doesn’t go beyond recycling at the office to actually considering the kind of companies that they invest in.

Many of the banks I was commissioned to look at (those based in the UK) did however take a firm stand on investing in things like the tobacco industry and the arms and military sector. Nigel Denison, the Head of Wealth Management and Treasury at the Bank of London and the Middle East said, “Our bank complies with Sharia’a principles meaning that we aim to share reward and risk and not to act against the interest of the wider community. For example, we don’t invest in the arms and military industries, we don’t gamble or don’t take excessive risks or speculation with our investments.”

Whilst not all the banks take such a firm stand against investing in the arms industry, quite a few did which I found encouraging. So the Islamic banking sector may not have great green credentials but if you are also worried about those bankrolling the arms industry, than Islamic banks wouldn’t be a bad place to start.