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The Islamic world is flexing its growing financial muscle.

The Qatar Investment Authority, the agency that invests the country's oil wealth, is a front-runner to clinch a deal to buy a nearly 30 percent stake in the London Stock Exchange. That follows a recent $4 billion bid for OMX, the Stockholm-based Nordic stock exchange, offered by Borse Dubai – Dubai’s government-backed stock exchange.

Decades of oil revenue have transformed many Persian Gulf states from the world’s paupers into cashed-up, international financial players.

Anxious to diversify their economies beyond reliance on oil revenues, some Gulf states such as Kuwait and Bahrain are slowly liberalizing their economies. Their “sovereign-wealth funds” (government investment corporations) are also becoming more creative in their financial strategies. Thus we see Gulf investors, private and public, seeking to acquire stakes in companies ranging from British supermarket chain Sainsbury’s to American utility TXU Corp.

Given the Arab world’s increasing religiosity, however, one potential obstacle could significantly handicap these nations’ financial creativity and economic diversification policies: Islam’s absolute prohibition of interest-charging.

The Qur’an’s proscription of usury (riba) has caused considerable angst for Muslims for centuries. Though some Islamic thinkers argue about what the Qur’an means by usury, it has been generally interpreted as prohibiting interest-charging. More than one scholar suggests that this continuing ban has contributed to the Middle East’s slower economic development compared, for instance, to Western Europe.

Christianity once had a usury issue, though somewhat different from Islam’s. Many Christians were influenced by Aristotle’s insistence that money’s apparently unproductive nature made interest-charging indefensible. They also faced the apparent contradiction between the Hebrew Scriptures’ condemnation of interest-charging and Christ’s parable of the talents, which implies that accepting interest payments is legitimate.

Christianity began resolving these matters in the medieval period. As embryonic forms of capitalism began emerging in thirteenth-century Europe, some scholastic theologians turned their attention to economic questions, including usury.

First, the scholastics established that, under certain conditions (such as free exchange economies), money transcended its “sterility.” In these circumstances, money was not simply a means of exchange, but also “capital”: that is, a productive good whose owners could legitimately charge others for its use.

Second, as John T. Noonan explained in his authoritative The Scholastic Analysis of Usury (1957), the scholastics clarified usury as the sin of “taking profit on a loan without just title.” Noonan notes that what constituted just title or a loan became understood as “matters of debate, positive law, and changing evaluation.” Not all interest-charging, the scholastics concluded, constituted usury.

As a result, observes the economic historian Franz-Xaver Kaufmann, the scholastic literature developed and codified these distinctions. This, Kaufman writes, “contributed to the growing sophistication of economic discourse; for instance, concepts such as risk and opportunity came to be invoked with increasing frequency.”

In short, many seeds for Western financial capitalism were laid that bore fruit in succeeding centuries. No analogous developments exist in Islamic thought.

Today, many Muslims simply ignore the Qur’an’s strictures on money-lending. Increasing numbers, however, opt to invest in Islamic banks and Shari’a-compliant investment funds. These avoid interest-charging and trading in financial risk (gharar), and focus on activities such as profit-sharing ventures (murabaha) and issuing Islamic bonds (sukuk).

A July 2007 IMF working paper estimates, “There are currently more than 300 Islamic financial institutions spread over 51 countries, plus well over 250 mutual funds that comply with Islamic principles.” The paper states that these organizations presently enjoy, “growth rates of 10-15 percent per annum” and exist in majority Muslim nations and nations with Muslim minorities — including Britain, whose Financial Services Authority has authorized Shari’a-compliant investment and retail banks.

With religious observance increasing among Muslims, more are likely to invest in these banks and funds.

While good for devout Muslims, such trends could impede the Islamic world’s financial integration into global financial markets. As the IMF working paper notes, some Islamic scholars have already questioned “the legitimacy of establishing Islamic subsidiaries or banks using capital from conventional banks.” 

A graver question is whether Islam’s money problem is symptomatic of what some regard as Islam’s apparent inability to generate the foundations required by any free society from “within” its own theology. To say that doubt exists, even among some Muslims, about Islam’s potential in this area is an understatement.

The West’s resolution of its usury question showed that it could settle conflicts about an economic issue in ways consistent with its dominant moral traditions — a process which gave rise to new conceptual possibilities for economic creativity. Likewise, medieval debates about the state’s powers provided important intellectual foundations for concepts of rule of law and constitutionally-limited government.

It is not fashionable to say so, but not every expression of religious faith is compatible with free and pluralist societies, let alone capable of internally spawning the institutions that protect these goods.

Is Islam one such religion? The jury’s still out, but the Muslim world’s inner-wrestling over interest-charging provides fascinating insights into Islam’s current dilemmas – something we all have a stake in. 

Dr. Samuel Gregg is director of research at the Acton Institute. He has written and spoken extensively on questions of political economy, economic history, ethics in finance, and natural law theory. He has an MA in political philosophy from the University of Melbourne, and a Doctor of Philosophy degree in moral philosophy and political economy from the University of Oxford.