Are Finance Charges In Islam's Interest?

Throughout history, interest was common in the Islamic world in places such as the Ottoman Empire, Kuran said. Controversy over the practice emerged only during the 1940s, when Indian Muslims cited the need for an interest-free banking system as one reason they needed a homeland separate from Indian Hindus, Kuran said.

The Islamic finance sector developed slowly before taking off in the past 20 years, with Islamic financial institutions offering a growing number of transaction models, such as profit sharing, that avoid interest.

One example is a murabaha mortgage. For instance, a Muslim family wanting to buy a house for $100,000 would go to an Islamic bank, which would buy the house and sell it to the family for $120,000. The family would then have a certain amount of time to repay the bank. A similar practice was common in medieval Europe when interest was prohibited by the Roman Catholic Church.

Mahmoud Amin El-Gamal, chair of the Islamic economics department at Rice University, argues that such transactions amount to a bait and switch.

"The whole is, I want to lend but I don't want to call interest 'interest,' " said El-Gamal.

He says such transactions cost more than other financial arrangements and hurt Muslim consumers.

"They're trapped because they're told they'll fry in hell if they go to regular banks," he said.

El-Gamal said obedience to the form of the contract often supersedes the spirit of Islamic economic values, such as serving the poor.

Industry advocates counter that even if some financial transactions serve the same purpose as interest, that doesn't mean they are forbidden by Islam.

"It's possible, as it is in many ethical and legal systems, for two different actions to have the same outcome but, because of the way they're done, for one to be wrong or illegal in that ethical or legal system, and for the other to be permissible or lawful," said Taha Abdul-Basser, an Islamic law scholar with the Islamic Finance Project at Harvard Law School.

Hussam A. Qutub, a spokesman for Guidance Financial Group, an Islamic bank based in Reston that offers interest-free mortgages, said Islam draws a difference between monetary lending agreements and agreements based on commodities.

"We're trying to reach the same end result that other financial organizations are trying to reach, which is putting people in homes," Qutub said. "But how are you going to get me there, that's where we differ."

Skeptics like Kadir, the investment banker in Chicago, remain unconvinced. "For me, Islamic finance is nothing more than affinity marketing -- you market your services to someone who you have an affinity with," he said.