Islam is the world’s fastest-growing religion, with 1.3 billion adherents, many of whom are young and new to personal finance. Standard & Poor’s estimates that in the Muslim countries of Asia and the Gulf, 1 in 5 banking customers would opt for Islamic financial products over conventional ones if given the opportunity. By 2012, nearly a third of all business deals in the Gulf will be done through Islamic finance, according to the Middle East Economic Digest. Add a booming Muslim middle class and non-Muslims eager to profit, and it is easy to understand why some of the world’s biggest banks are spending millions to enter the market. The 300 dedicated Islamic banks and funds worldwide, operating in 75 countries, are beginning to face stiff competition from top-tier global firms such as Deutsche Bank, HSBC, and Citibank.

This competition is fueling even grander aspirations among scholars such as DeLorenzo. Islamic finance, he says, is not just a way for Muslims to turn an honest profit; it is the vehicle that will make Islamic law relevant for the 21st century, a far cry from debates over “marrying and burying” that dominated his own madrasa education in the 1970s.

“Islamic finance scholars say that what’s happening in the conventional world of finance is at the heart of the difference between Islamic and ordinary finance,” says Davide Barzilai, a partner specializing in Islamic finance at the international law firm Norton Rose. Muslim investors haven’t suffered from falling bank stocks, Islamic scholars point out, because their faith forbids investment in financial institutions. Since the Koran bans gambling, the related practice of risk is forbidden. So too is the short-selling of stocks (on the grounds that you can’t sell what you don’t own) and the sale of debt. Indeed, the practice of repackaging and trading debt, as well as credit-default swaps, both so central to the financial crisis, never could have happened under Islamic law.

MARKET FUNDAMENTALISM

Sharia scholars such as DeLorenzo see Islamic finance as the path to a distinctly spiritual end. Like political Islam, Islamic finance began as a search for authenticity and independence from the West. Its origins lie in the postcolonial Islamic identity that emerged in the 1950s and 1960s, when Muslim economists returned to the Koran to develop what they called Islamic economics.

The central concept is justice. Transactions that could be unjust for either the borrower or the lender are discouraged. For any financial undertaking, risks must be shared. To get around the Koran’s ban on interest, Islamic banking has relied heavily on what is called murabaha: a loan or sale in which a markup is added to the transaction’s cost. So when a Muslim borrower goes to a bank to buy a car or house, he agrees to a contract in which he pays back the cost of the item, plus a certain amount of profit. The bank is technically a partner, rather than just a financier. These methods are believed to meet the spirit of the law because they avoid the exploitation of the borrower.

Using this model, Islamic banks have created scores of financial products for Muslims to avoid Western-style interest or risk. The result is a parallel system of Islamic offerings that mirror those available from conventional banks: Islamic mortgages, Islamic car loans, Islamic credit cards, Islamic insurance. An ijara, or Islamic lease, allows a bank to buy a car or a house for a customer and then earn a profit by renting it to them. An Islamic investor who wants to start a business can go to a bank and embark on a mudharaba, or partnership, in which the bank supplies the money and the customer brings the business skills. Profits are shared in a predetermined ratio; losses are borne by the bank. For insurance, companies offer policies in which a group of subscribers creates a pool of funds that can then be invested and drawn on in cases of legitimate claims. Unclaimed profits are then distributed among policyholders.

To many, including some Islamic scholars, such offerings look a lot like conventional finance in disguise. But for many devout Muslims, the fact that they are technically avoiding interest makes such practices acceptable. Under sharia, money must be exchanged for a real good or service. “Money itself creates no value,” observes Mohamed Elgari, a top sharia scholar. “[Under Islamic law], it is only a medium of exchange.” It’s a nimble balancing act, and for those banks willing to attempt it, there are plenty of willing customers.

In Britain alone, the value of the Islamic mortgage market has topped $900 million, up 50 percent between 2006 and 2007. The global Islamic insurance market is growing 25 percent annually and is slated to reach $14 billion a year by 2010, according to HSBC. And non-Muslims are increasingly keen takers. Half of HSBC’s Islamic mortgages in Malaysia went to non-Muslims the first year the company offered them. Saturna Capital, a Washington-based investment firm, estimates that 60 percent of customers for its sharia-compliant mutual funds aren’t Muslim. All of which raises the ironic possibility that Islamic finance, in its quest to develop a more spiritually pure alternative to modern materialism for the world’s Muslims, may have ended up creating a large and attractive market for Western investors.