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Is Islamic Banking really Islamic?

The journey was started to accomplish Shariah compliant prudent banking opportunities. The concept was to provide Halal Banking and safety from Riba (Interest). The will was to avoid foreign banks and their banking system in Muslims countries. The vision was to establish Islamic Economic System.

After passing an initial life of its working today in 2010 people have questions in their mind that Is Islamic Banking really Islamic? The matter derives from two aspects. First – what is the difference in methodology a common man can see while he deals with Islamic Bank in comparison to conventional commercial bank? Second – weather Interest is completely weeded out even at the benchmarking level from Islamic Banking System?

The problem arises when Islamic Banking System is considered as merely a change of name. People try to figure out what if we say Ijarah to Lease? Is it a same product that a conventional financial institution can offer? If we sees it closely so Ijarah Muntahiya Bitamleek (Islamic Leasing Product) is very similar to the finance lease provided by conventional financial institution except the difference of Insurance cost (Takaful / Islamic Insurance) which has to be borne by lessee in Islamic mode and it is built in the rentals. But again it is not enough to say something goes wrong. Here I just want to indicate that people always try to compare Islamic banking product with conventional financial institution’s one. But it goes critical when it has some fixed return embedded.

Regardless of a fact that many of Islamic Banking products have some embedded component of fixed return there is another issue that is still a biggest objection of current Islamic banking system. This is the issue of using Interest rates as a benchmark. Being Investment Banking professional of an Islamic bank in 2006 I prepared many term sheets based on KIBOR for benchmarking Diminishing Musharika profits. It made me feel that we are just working under the same capitalist system by giving a name of satisfaction i.e. Islamic. A person can say that if the price of beef is being benchmarked by pork so we can not say beef prohibited just because of pricing mechanism but there are two points here first is the development of Islamic benchmarks and second the tentative nature of rates that are not a benchmark within but a mere estimate assigned by relevant probabilities or there is a will of having something fix part and making the rest performance based.

There is another argument on Islamic Banks and it is regarding their transactions with commercial banks. In addition the way commercial banks are having Islamic banking branches. It raises the issue of credibility that whether it is the same money or not? Sometimes it is also odd that what the will of seller of banking product is. At one place a bank in Muslim Country is selling Conventional Banking Product and on other hand they have Islamic Banking Products. It is same that if Hamdard shall announce to sell wine with their parallel sale of Roh Afza. The point has to be addressed by Islamic Banks and regulators.

In my view all above mentioned apprehensions are minor. The big point is different. The real important point is we can not accomplish truest Islamic Banking System without having a true Islamic Economy and we can not accomplish Islamic Economy without surrendering our Non-Islamic lifestyles and societies.

I don’t know why we are more interested in names. No one can sell Halal Wine; simply we can not make wine Shariah compliant. The same way we can not find a way to Halal the interest. An interest free banking system is correlated to the will of economy to invest in risk. People just can not derive Islamic Banking with a will to have fix income securities in their portfolio with tagging of “Islamic”. It is actually risk that we fix rather than return in fix income product. If the concept is risk sharing so we have to work far too long to aware our societies in this regard.

I never say that we have to discourage Islamic Banks. We just need to learn and implement faster. The more we are emphasizing on Islamization of Islamic banking, the more we have to work for Islamic economy and the more we want Islamic economy, the more we have to be good Muslims in all aspects of our society otherwise it is all a debate that can not end. Don’t find Islam in Islamic Banking. Implement Islam on youself then your economy to banking shall automatically be Islamic.

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Adnan Amin Khan Says:

I think that Islamic Banks are in starting phase so they can not become purely islamic at once. we people have to give this system at least this much so that they can make their on benchmarks and get rid of KIBOR .We are all the spending time on critising islamic financial system rather than finding any suitable way to help this system to do better than what it is doing .Alhamdulaih at least we have realized that Conventinal system was not for muslims this is a big achievement .One gentleman have raised a very valid point that our economy is not supportive for islamic financial system ,we have to built our economy first.And for that firstly we have to select a suitable leadership and sorry to say we are touching thae ground in this aspect.So how can we bring islamic financial system. we have to think for others for for making our economy favourable for islamic financial system.Do u think If Meezan Bank Starts giving QARZA HASANA and our people will get good out of this ? One day all u people will see a true Islamic System will be in our hand Inshah Allah

22 - October - 2010 06:35:28 PM

Mr Fuji Says:

charging intererst is permisable and there is nothing wrong in it when a compnay is borrowing heavy sum for investment or to grow.however, charging interest is not permissbale in those cases where people are needy and charging interest would futher supress then.Thus,charging interest depends on the inviduals background --the purpose he is borrowing money for.Therefore, there is no fix formula by whcich u can say that interest in all cases is haram.Interest is just like rent on assets or anything else similar to that

25 - June - 2010 06:31:40 PM

bibi maryam Says:

in banks either it is Islamic or conventional run on interest during my internship i came to know how banks earn their income other then their is totally on interest whatever banking system is?

02 - August - 2010 03:59:27 PM

Ali Says:

Islamic Banks are still evolving and are in a transition stage. We should back them and give them a chance. At the least they are better then the conventional "interest based" banks

21 - January - 2011 09:44:08 AM

sam shah Says:

renaming a bitmap image to jpeg works on some windows, but it never alters or reduces the images pixels, so lets not rename interest a gift because it will make no difference

25 - January - 2012 06:25:35 AM

Umm Haneen Says:

It's heartening to see someone actually voice their opinion on this very controversial topic. As an Ex-Islamic Banker, i somewhat agree with your view with a slight addition: In their plight to success these Islamic Banks fail to ensure the strict guidelines laid out by the Shariah scholors...... these guidelines are what make the transactions halal, however there are many instances when the banks simply focus on the completion of documentation and not the actual process flow of the transaction! This is especially the case in short term Murabaha Financing where ideally the bank should have their own procurement department. Unfortunately the banking mindset has not changed and till we don't see a profound change in mindsets of the management of these banks it is highly unlikely to experience Islamic banking in its full glory!

02 - August - 2012 12:48:58 PM

Salman Hameed Says:

Islamic banking needs Islamic depositor that is willing to deposit his/her money on lesser profit than conventional banks. For example in Pakistan in a hire purchase agreement Islamic banks charge around 12% rent per year. But in actual the rent is around 6% per year of the value of property in case of residential property. So when Islamic bank tries to compete with conventional bank it mix 6% interest in the rent to keep it as profitable as conventional bank. Unless Islamic bank change there target customers and priorities they may not become Islamic and it will be just hiding or mixing interest in halal Islamic transactions.

24 - February - 2015 06:37:29 PM

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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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