Department of Government
Harvard University
ksmith@latte.harvard.edu

Prepared for delivery at the 2004 Annual Meeting of the American Political Science Association, September 2 - September 5, 2004. Copyright by the American Political Science Association.

The distinctive practices of Islamic banks are key to their popular appeal, but they
have proven a liability with regulators. Islamic banks have found themselves under
pressure to comply with international standards inattentive to their special characteristics,
and often detrimental to their interests. This presents a formidable challenge to the
industry which has had to confront substantial obstacles to collective action while
simultaneously answering fundamental questions about the nature of their enterprise and
its relationship with global capitalism. Is Islamic finance a rejectionist movement
seeking to create a separate banking system with its own norms, rules and logic? If not,
what is to be the nature of its integration into the international financial system?

I argue that Islamic banks are attempting anIslam ic integration into the existing
hegemonic Western financial system that will force their recognition as distinct
institutions requiring different rules, while still gaining acceptance in global financial
markets. This has entailed the creation of a whole new set of transnational institutions to
develop and lobby for separate accounting standards, financial prudentials, the rating of
individual banks and products, and the management of liquidity. These regulatory and
facilitating bodies have recently gained the support of international financial institutions,
giving an enormous boost to Islamic finance in its search for international legitimacy.

These new institutions were initiated for the express purpose of integrating
Islamic finance into global financial markets. Yet in the current atmosphere of growing
mistrust between the West and the Islamic world post 9-11, they may be mobilized
politically to promote a regional market for capital mobilization and investment nurtured
by Islamic solidarity.

markets. In one year, oil prices quadrupled, precipitating the fastest transfer of wealth in
the twentieth century. Many Gulfis who previously had no dealings with financial
institutions had their first introduction to banking. It quickly became apparent however
that there was a tension between the institutions and norms underlying Western finance
and the prevailing belief amongst many Gulfis that earning interest is forbidden by Islam.
Throughout the Gulf, and particularly in Saudi Arabia, religiously observant individuals
chose to leave their money in non-interest bearing accounts rather than contravene
Islamic law.

This cultural difference opened up the space for entrepreneurs to mediate between
the global system and local beliefs and customs. The result was the creation of Islamic
banks: financial intermediaries that offer services similar to those of conventional banks,
but through financial instruments legally structured to comply with Islamic religious law
(Shariah). The entrepreneurs behind this institutional innovation have been able to create
a profitable niche for themselves amongst the religiously conservative populations of the
Gulf. Beyond their marketing advantage, they have likewise used demands for parity
with conventional banks to receive government contracts, and the desire of foreign
investors to present a \u201clocal\u201d face on their business to market themselves for joint
ventures. Their advantages are not strictly economic, however, as my research into the
Islamic finance industry in Kuwait, Bahrain, and the UAE has shown.1Politically, the
banks have been instrumental in creating synergistic relationships between Islamist