To Timur Kuran, an economics professor at the University of Southern California, the benefits of investment banking are more than theoretical. They are visible: one chair or school after the other at USC has been endowed by a business that benefited from investment banking or venture capital.

To Mr Kuran, a Turkish-American, all this efficient wealth provided a bitter contrast to the floundering capitalism of many Muslim countries. How is it that Silicon Valley could move from sand and citrus groves to the microchip and the Middle East cannot?

His mind ran especially to the "Islamic bank", as he calls it. The central goal of these banks is to make business possible without charging interest, which Islam, like other Abrahamic religions, frowns on, especially when the rates become too high (this is the old notion of usury).

The practice of charging interest for loans, an Islamic economist wrote, renders "men selfish, miserly, narrow-minded and stone- hearted". The first Islamic bank opened in Dubai in 1975; today there are such banks in 60 nations. They seek to make economic growth compatible with Islam. They are also supposed to help new entrepreneurs, traditionally neglected in such countries. Or that at least is what their charters say.

It might seem that an oxymoron such as the "interest-free bank" would be the perfect example of the sort of obstacle that prevents the Middle East from moving forward. But, as Mr Kuran argues in an intriguing book, that is not exactly so.

In the 30 years of their existence, Islamic banks have failed to capture market share or generate strong growth. This, Mr Kuran says, is a tragedy. For Islamic banks are structured in a fashion ideal for promoting innovation.

The potential advantage lies in the banks' anti-interest bias. In popular murabaha contracts, for example, businesses do not borrow. Instead they give the bank a list of things they would like to acquire. The bank makes purchases on their behalf, adding a service charge. The transaction, Mr Kuran notes, is economically identical to a traditional loan: "the bank bears no risk", or little risk, "the client pays for the time-value of money".

Muslims have recognised this switch for centuries: as far back as 1887 an Ottoman ruling that set interest rates at 9 per cent was dubbed the murabaha ordinance.

This de facto pro-equity tilt, Mr Kuran suggests, gives the bank the potential to practice venture capitalism up there with Kleiner Perkins and Sequoia.

It is not a long way, after all, from murabaha to buying part of a start-up. And VC happens to be something Arab nations need desperately. In a recent World Economic Forum survey, entrepreneurs from Kuwait to Tunisia reported that finding VC investors in their countries was difficult - at times bordering on impossible. Alas, as Mr Kuran pointed out to me, the VC potential of Islamic banks is rarely realised.

"To give an 18-year-old $20m for his idea, you need to have transparency and a strong court system to back you up if he turns out to be a fraud," Mr Kuran says. The US might have that transparency but most Muslim countries do not.

Those Islamic banks that in the late 1970s tried to practice venture capitalism got badly burned. Today what loans are offered are often made for political reasons. And they are made conservatively to sectors of the establishment. In other words, the banks have come to resemble the very traditional interest-based banks they pretend to abhor. As for the entrepreneur, he has a choice between giving up or striking a deal for cash with a money lender. And that money lender often charges a rate of interest that is genuinely usurious.

The reason this situation is allowed to continue, Mr Kuran suggests, lies in the banks' creation. We hear about "Islamic banks" and imagine minarets and institutions dating back beyond the Ottomans. But while interest-free loans have been around for a while, Islamic banks per se are invented tradition.

There were no banks in the Middle East 200 years ago; the first banks there were those of the European colonisers. And when Islamic banks were finally chartered, the reasons were more political and cultural than economic. They were part of the cultural defences of a people that felt besieged by the West.

The moral is: contracts written out of cultural and political concerns rather than economic ones tend to short the ordinary citizen.

Islam & Mammon: The Economic Predicaments of Islamism (Princeton University Press)

The Arab World Competitiveness Report (Oxford University Press)

© Copyright 2004 Financial Times