As the world's leaders debate the role of banking and how best to regulate it, there are many elements of Islamic banking that could provide guidelines.

Most people believe the critical element of Islamic banking is the ban on usury - that interest cannot be charged. While accurate, this is just detail. The fundamental principle is that all economic activities should benefit society as a whole, not just for the present, but for generations to come. Out of that comes some principles - such as not making money out of money; not selling goods one does not own; avoiding speculative transactions; and sharing both rewards and risks.

Sharia law is there to restrain individuals to live within their means. If they do borrow, they must pay the money back as quickly as possible. If they have extra resources, they should use them productively to stimulate the economy on a profit and risk-sharing basis. But just at the point Islamic banking might become a role model for the West, it is in danger of being corrupted and replicating the pitfalls of conventional banking, with what many see as a focus on greed and selfishness.

Replicating mistakes

The biggest problem is that there is no infrastructure in the UK to manage Islamic banking, which leaves it open to corruption of its principles and ethics. At a recent conference, a 'sharia technician' said: "Give me any mainstream, Western banking product and I will design a sharia-compliant process so you can offer the same products to Muslims." Not only is the ethos disappointing, this attitude will miss the opportunities for market growth.

There are a number of weaknesses in the UK's Islamic banking system. There are very few sharia-trained lawyers and accountants. So instead of having people steeped in both the professional side and the religious implications, banks are bringing in mainstream-trained professionals to advise on adapting products to sharia principles. It is the wrong way to do this.

Every bank must have a sharia board consisting of religious scholars who oversee that products are sharia compliant. But because there are only a handful of scholars worldwide, it is not surprising to find the same faces sitting on 20 different boards, including in the UK - this surely cannot be seen as independent or good practice. In some cases, they are not banking experts and their lack of knowledge beyond sharia makes them susceptible to being manipulated by management.

Difficult to regulate

While only a few Islamic financial products generate different liquidity profiles from conventional products, the lack of uniformity of standards for Islamic banking practices across countries makes it difficult to apply the same prudential regulatory standards - such as capital adequacy requirements. Harmonisation is needed - both in Islamic banking practices and sharia standards at national and international levels.

Disclosure practices are not as transparent as in most conventional banking - there is more attention on whether a product is sharia compliant than questioning the sources of funds. There is a rush to tap into the disposable funds owned by high-net-worth Muslims, but a more transparent system is needed to ensure the ethics of investments.

Project evaluation plays an integral role in ensuring that financial investments comply with profit and loss-sharing principles. This requires specialised technical skills that are largely absent in current Islamic banking. Apart from evaluation of projects, most should also be monitored, with participation in the monitoring to avoid false reporting.

Fees, not speculation

In the 'traditional' model of Western investment banking, most revenue came from fees, and risks were limited to underwriting. In the 'innovative' model, revenue comes from proprietary trading and is paid as bonuses.

Speculation is completely unacceptable in Islamic banking and it must be ensured that, in the 'Westernisation' of Islamic banking, it does not creep in. If money is traded at its real worth, currency crises will be avoided. And if the papers in stock exchanges are traded without speculation, there will be fewer bubbles that burst.

If the UK is serious about having a viable Islamic banking and finance system, it needs a capital market for Islamic financial products. Malaysia is the world's leader in this and the UK is the obvious place to make this happen in the West.

There is also a need now for an international regulatory framework for Islamic banking - and again, the UK is ideally placed to take the global lead on this, learning from the start that has been made in Malaysia, but developing it further to make the UK an international centre of excellence.

Roszaini Haniffa is professor of accounting and finance, Bradford University School of Management, UK

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