Credit Unions Come Closest Among Western Financial Institutions to Meeting Islamic Shari'a Compliance
|A new WOCCU report highlights the challenges WOCCU confronts in establishing credit unions inthe war-torn Islamic country of Afghanistan. Here, members meet at Balkh Investment and Finance Cooperative in Mazar-i-Sharif.
MADISON, Wis.—Interest paid to depositors on
savings by western banks is considered a loan with interest and is not allowed
under Islamic financial principles. However, the mutual ownership and equal
distribution of profits typical among financial cooperatives may mitigate some
restrictions under that law and make credit unions attractive for Islamic
savers and borrowers, not only in developing countries, but also in the United States,
according to a new technical report issued by World Council of Credit Unions
report, "Supporting Credit Union Development in Afghanistan: An Overview of Issues
Important to the Development of Shari'a-Compliant Cooperative Finance,"
outlines the challenges WOCCU confronts in establishing credit unions in the war-torn
Islamic country. Robert Wieland, the
report's author and a researcher with Main Street Economics, also takes a
comprehensive look at ways financial services are evaluated under Islamic
jurisprudence, arriving at the conclusion that credit unions may have the best
chance to meet the needs of Muslim borrowers with the terms of their religion.
Islamic law, lenders may not charge riba,
often translated as "interest" or "usury," on money lent, nor pay interest on
deposits held without truly sharing in gharar,
translated as "risk" or "uncertainty," writes Wieland. The two requirements are
part of Shari'a compliance, a term
used to describe financial transactions allowed by the Koran. Credit unions'
mutuality, which distributes profits in the form of dividends, aligns more
closely with Muslim law, according to the researcher, making the cooperative
model well-suited for Muslim countries and communities.
truly mutualist institution would minimize the costs of achieving Shari'a compliance for its beneficiaries
and, to the extent that profits were generated, these would accrue fully to the
member-participants," says Wieland. "This reading of Islamic jurisprudence
should interest supporters of credit unions."
report goes on to discuss types of financial products and the way they may be
developed for Shari'a compliance, including savings, investments and different
types of loans. Under the teachings of the Koran, there are strategies by which
financial business may be conducted without violating its laws, which includes
a characteristic of generosity and forgiveness without penalty for loans and
investments that go bad. However, western financial practices run afoul of
those laws in most cases, causing most for-profit financial institutions to
operate at odds to those teachings, Wieland says.
interest benefit paid to depositors in western banks - and which motivates a
large portion of the liability side of banks - is off the table in Islamic
finance," the researcher writes. "A known and expected increase in one's
deposit over time is considered a loan with interest and is not allowed."
copies of the 21-page report, funded by WOCCU's USAID Cooperative Development
Program, are available at www.woccu.org.
Click on "Publications," then "Research Monographs." Hard copies may be
requested by sending an e-mail to firstname.lastname@example.org.
World Council of Credit Unions is the global trade association and development agency for credit unions. World Council promotes the sustainable development of credit unions and other financial cooperatives around the world to empower people through access to high quality and affordable financial services. World Council advocates on behalf of the global credit union system before international organizations and works with national governments to improve legislation and regulation. Its technical assistance programs introduce new tools and technologies to strengthen credit unions' financial performance and increase their outreach.
World Council has implemented more than 290 technical assistance programs in 71 countries. Worldwide, 57,000 credit unions in 103 countries serve 208 million people. Learn more about World Council's impact around the world at www.woccu.org.
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Contact: Rebecca Carpenter
Organization: World Council of Credit Unions