In other words, Muslims claim Islamic banking is not 'creating money from money', which they say is prohibited in the Koran.
Early attempts at following the Koran in an Islamic system of banking that strived to compete with the West met with failure in the early 20th century.
Muslim bankers quickly formulated new ways of generating money that in principle work the same way as interest - 'creating money from money'.
One of these loopholes is 'murabaha'. This article explains the practice better than I could:
The chief loophole was murabaha. Let’s say that you, a small businessman, wish to go into business selling cars. A conventional bank would examine your credit history and, if all was acceptable, grant you a cash loan. You would incur an obligation to return the funds on a specific maturity date, paying interest each month along the way. When you signed the note and made the promise, you would use the proceeds to buy the cars—and meet your other expenses—yourself. But in a murabaha transaction, instead of just cutting you the check, the bank itself would buy the cars. You promise to buy them from the bank at a higher price on a future date—like a futures contract in the commodities market. The markup is justified by the fact that, for a period, the bank owns the property, thus assuming liability. At no point in the transaction is money treated as a commodity, as it is in a normal loan.
But here’s the catch: most Muslim scholars agree that there is no minimum time interval for the bank to own the property before selling it to you at the markup. According to Timur Kuran, the typical interval is “under a millisecond.” The bank transfers ownership of the asset to its client right away. The client still pays a fixed markup at a later date, a payment that is usually secured by some sort of collateral or by other forms of contractual coercion. Thus, in practice, murabaha is a normal loan.
Since murabaha must be asset-based, however, it can’t help a small businessman who needs a working-capital loan, for example, to provide cash on hand to meet payroll or other expenses. To get such capital from an Islamic financial institution, an entrepreneur would have to sell the bank an equity interest in his business. This is far riskier for the bank and thus much harder to obtain.
In other words, a bank will buy property from a client and then mark up the value of the property the bank just purchased. The client has agreed to buy the marked up item back from the bank at a later date.
In essence, Islamic banking has created a round about way of issuing loans.
Not only is murabaha effectively a form of interest, it is also the primary source of income for Islamic banks:
The experts tell me that every Islamic bank has at least three-quarters of its investments structured as murabaha. Even the inaptly named Islamic Development Bank was, as of the mid-1980s, doing four-fifths of its business through murabaha, and only 1 percent through equity transactions.
http://www.american.com/archive/2007/ma ... ly-kosher/
