FOR those banks still smarting from loan losses to insolvent energy and dairy companies, here is a modest proposal: convert to Islam.

By that I do not mean full religious conversion but the adoption of certain principles of Islamic finance. A full-scale conversion might entail the loss of important clients in the beverage and media sectors, not to mention a curtailment to the pleasures of the directors’ dining room. The Islamic Bank of Britain, soon to be launched in London and Birmingham, promises that it will not do any business relating to alcohol, tobacco or pornography.

The attraction in Islam for secular bankers is less the ascetic lifestyle but the puritan approach to business transactions. It is widely known that Sharia (Koranic law) prohibits the giving or taking of riba (interest) and you might think that a banker would have to be three sheets to the wind to want to prohibit the interest-bearing loan, a transaction that is the cornerstone of the world’s banking system.

Of course, Islamic banks don’t offer finance gratis and have devised techniques that allow them to engage in funding transactions for profit without falling foul of scripture. Sceptics dismiss these contortions as interest by another name and it would be surprising if the payments made by an Islamic bank customer for an ijara home loan did not bear a close resemblance to typical building society rates.

The difference is philosophical but nonetheless important. Islamic finance experts seem to be saying that all business transactions must involve a sharing of risk and a fixed return on capital is not allowed. Money is not a commodity with an intrinsic worth but a mere representation of value, they say. Therefore, to make money out of money alone is immoral. Hence, the widespread use of leasing arrangements to underpin Islamic banking transactions. You don’t borrow money to buy your home — the bank buys the house and rents it to you until the cost (plus the bank’s profit) is paid off.

It seems to fly in the face of both reason and reality to deny the commoditisation of money. If money in and of itself has no value over time, a whole panoply of derivative transactions, futures and options, becomes impossible. Even simple banking services, such as an overdraft, become tortuous. In order to satisfy the principle of shared risk, Islamic banks must create a joint venture with their customer to provide working capital. Alternatively, the bank enters into a shadow transaction involving the purchase and sale to the customer of a commodity, such as copper, the proceeds of which (less fee) is used to fund the “overdraft” account.

Traditional banking: one. Islamic banking: nil.

Except for the interesting proposition that all transactions between bank and customer must involve a sharing of risk. So what, says the City banker: every loan transaction involves a risk of default. Yet the objective of conventional banking is to avoid (dare I say it, ignore) the commercial risk and narrow the transaction to a discrete loan risk. Has the borrower the means to repay, is he good for the money? Most banks don’t care a jot about a customer’s business. All the guff about partnership is nonsense — a bank is as much your partner as the telephone company. Fail to pay on time and the line goes dead. The customer is not a joint-venture partner but a statistic; real difficulties emerge when the customer is no longer a statistical blip but an Enron or a Parmalat.

Even then, corporate borrowers are not partners in some exciting enterprise in which the bank shares risk and reward. The corporate customer is a BBB or A-1 or, best of all, a triple-A. Most bankers have neither the wit nor the interest to judge a commercial enterprise on its merit. Instead, they delegate the assessment of risk to ratings agencies, such as Moody’s or Standard & Poor’s. Indeed, so eager are the banks to avoid the responsibility of dealing with risk that the agencies are not even their subcontractors. It is the borrowing company that pays the agency for its own rating, a bizarre arrangement that would seem to invite more risk. Were you a house-buyer, would you accept a survey provided and paid for by the vendor?

In the alternative world of Islamic finance all transactions must in some way be equity-related. And the mess that was Enron and Parmalat seems to prove their point. A bank may have no need or desire for partnership but default will find it inextricably linked to the business of its customer for years to come.

Yet, Islamic banking does not really provide the answer, just added complexity. There is no evidence that Islamic banks are any better at judging risk than the traditional variety. If they prosper at the moment, it is because we are entering a new era of Middle Eastern wealth caused by the recycling of petrodollars. During the 1970s, US banks profited from the soaring price of oil but this time Islamic institutions are taking their share of the pool of cash.

Still, the Koran’s moral abhorrence of riba can sometims strike a chord among non-Muslims. Is the traditional corporate banker not a vile creature? On the one hand padding his fees while on the other, trimming his margins in the hopeless pursuit of triple-A credits. He is, however, proving Islamic bankers wrong. Money is a commodity and the banks are no more than bloated utilities recycling cash at fixed rates to feed an army of bureaucrats.

carl.mortished@thetimes.co.uk

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