Is Islamic banking really Islamic?

Saqib Omer Saeed June 25, 2010
The journey began with trying to establish Shariah compliant prudent banking opportunities. The concept was to provide Halal banking and safety from Riba (interest). The aim was to avoid foreign banks and their banking system in Muslims countries. The vision was to establish an Islamic Economic System.

After the initial stage, people started having questions in their minds: Is Islamic banking really is Islamic?

The matter is drawn from two aspects. First, what is the difference in the methodology the common man can see when he deals with an Islamic bank in comparison to a conventional commercial bank? And second, whether interest is completely weeded out, even at the benchmarking level, from the Islamic banking system?

The problem arises when the Islamic banking system is only considered to be a change of name.

When people come across such Islamic banking products as Ijarah or lease, they wonder if it’s the same that which a conventional bank offers. If we look closely Ijarah Muntahiya Bitamleek (Islamic Leasing Product) is very similar to the finance lease provided by a conventional financial institution, except the difference of the insurance cost (Takaful / Islamic Insurance) which has to be borne by the lessee in the Islamic mode and it is built in the rentals.

Here I would like to stress that people always try to compare an Islamic banking product with a conventional banking product, and it becomes critical when it has a fixed return embedded.

Regardless of the fact that many Islamic banking products have some embedded components of fixed return, there is another issue that is more objectionable of the current Islamic banking system. And, that is the use of interest rates as a benchmark. Being an 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 were working under the same capitalist system by giving it a different name for our own satisfaction i.e. Islamic.

A person can argue that for instance if the price of beef is benchmarked with that of pork, we cannot say that beef is prohibited just because of the pricing mechanism. There are two important points to consider here. First, the development of Islamic benchmarks and second, the tentative nature of the rates that are not a benchmark within, but rather a mere estimate assigned by relevant probabilities or there is a will of having something fix part and making the rest performance based.

Another objection against Islamic Banks is regarding their transactions with commercial banks including how some commercial banks have opened up Islamic banking branches. It makes one wonder whether the money being used in such transactions is free of interest or not?

Sometimes there is also doubt about the intentions of the seller of the banking product. While at one place a bank is selling conventional banking products, on other hand they also have Islamic Banking Products. It is same if Hamdard announce to sell wine with their parallel sale of Rooh-e-Afza. This point must be addressed by the existing Islamic banks and the regulators.

No matter how problematic the above mentioned issues seem, in my opinion the biggest point of concern is something else. The real issue is that we cannot establish an Islamic Banking System of the truest form without having a true Islamic Economy and we cannot establish a true Islamic Economy without surrendering our non-Islamic lifestyles and societies.

I don’t understand why we are more interested in names. No one can sell Halal Wine simply because we cannot make wine Shariah compliant. The same way we can not find a way to make interest Halal. An interest free banking system is correlated with the will of the economy to invest in risk. People cannot attain Islamic Banking with a will to have fixed income securities in their portfolio as well, tagged as “Islamic.” It is actually the risk that we fix rather than return on income. If the concept is risk sharing, we have to work far too long to make our society aware in this regard.

I do not say that we should discourage Islamic banks. We just need to learn and implement faster.

The more we emphasize on the Islamization of Islamic banking, the more we will need to have an Islamic economy and the more we would want an Islamic economy, the more we will have to be good Muslims in all aspects of our society. Otherwise it is all a never ending debate. Don’t try to find Islam in Islamic Banking. Implement Islam on yourself, then your economy. Banking will automatically become Islamic.
Saqib Omer Saeed A financial researcher, analyst and adjunct faculty in CBM, SZABIST, BIZTEK & University of Karachi and blogs at
The views expressed by the writer and the reader comments do not necassarily reflect the views and policies of the Express Tribune.


Sulaiman Dawood | 13 years ago | Reply Aoa, Great Post and people should realize how they are being fooled! The most funny thing what I heard from my Engineering Economics teacher that State Bank of Pakistan gives loan to the local banks on interest and asks a percentage more than given to them be it labeled Islamic Bank or UnIslamic Bank. So on this condition how can any bank be Islamic? Moreover, I encourage you people to study this article in PDF Format: May Allah reward you for identifying such an important issue here and hereafter. (Ameen) And please guys stop bl
Talha Jamshaid | 13 years ago | Reply This is a very informative article..I have made my effort in explaing the Islamic Banking and Financial System of Pakistan..The link is given below..
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