Identity crisis: Islamic banking - in search of a lost soul
There is no doubt that Islamic banking and finance must always fulfil the requirements of Islamic jurisprudence. However, it is increasingly being felt that Islamic banking must go beyond the law and imbue the ethical spirit of Islam to remain relevant to the needs of Muslim communities around the world.
While there has been tremendous growth in Islamic banking and finance in the last decade or so, it is also true that it has become increasingly capitalistic in its approach and operations. Stakeholders, especially shareholders and management on the supply side, prefer it to be conformist in its approach. They have convinced Shari’a scholars that the way forward is to compete effectively with Islamic banking’s conventional counterpart through a replication of economic outcomes.
Tax neutrality, standardisation of accounting practices and legal contracts, and favourable regulations seem on the surface to promote Islamic banking and finance; careful scrutiny reveals that they are all intended to bring Islamic banking and finance closer to the ethos of the conventional financial system.
Most of the current products offered by Islamic banks – from Sukuk to profit-sharing investment accounts; simple Murabaha-based financing to large-scale syndicate financing – are structured around capitalistic principles of profit maximisation for shareholders. So powerful is the influence of capitalistic thinking in product development that even products that are mutual in nature – Takaful, for example – are being developed as for-profit products.
While legitimate products and practices in their own right, these cannot be considered the building blocks of a novel model. If adequate reforms are not brought into Islamic banking and finance soon, this could prove to be the death of a new idea in its infancy.
The last few years can be regarded as a lost opportunity for Islamic finance. The financial crisis that commenced in 2007 called for an alternative model of banking and finance which was to be less opportunistic and exploitative and more equitable and just. The theoretical models of Islamic banking and finance impressed Western policymakers, but Islamic banking failed to answer the call. It did not take the former long to discover that Islamic banking was no more than a sub-set of the Western capitalistic financial system.
Advocates of Islamic banking and finance must start thinking of reforming their own practices. Now is the time to pause and evaluate the progress of Islamic banking and finance to date. While Islamic jurisprudence must remain central to product development, it should not serve as an intrinsic foundation for Islamic banking and finance. On the contrary, it must be founded on firm Islamic paradigms. Law is process; principles drive process. Hence, principles of social justice, favouring the weaker party, cooperation, mutuality and ethical dealings are cornerstones of an Islamic ideology. It is no coincidence that the contemporary world also holds these values in high esteem.
To truly assess the success of Islamic banking and finance from a qualitative perspective, seek out just a single person whose soul was touched by Islamic banking and finance and whose material well-being was enhanced. If such a person does indeed exist, Islamic banking and finance is truly a success. If not – and sadly this seems to be the case – then Islamic banking and finance must search for its lost soul.
Western models of socially-responsible investing – like microfinance – have attracted millions of followers who have changed their corporate practices with the help of investors’ activism. If Islamic banking and finance – despite being a trillion dollar industry – fails to offer a single success story of social change, this calls for some serious re-thinking of its model and its contemporary applications.
The writer is an economist and a PhD from Cambridge University.
Published in The Express Tribune, June 4th, 2012.
COMMENTS (17)
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For a detailed analysis please view the following presentations within the Pakistani context:
Concept of Interest and Islamic Banking - Day 1
Concept of Interest and Islamic Banking - Day 2
What Islamic banking or Finance? There was no paper currency at the time law was revealed. Everything was based on gold which was, is and will remain precious and scarce. Either use gold or forget, the paper has no value it’s just piece of paper.
@Musa Zuma: Granted that brother Dar is a reknown structurer of Islamic Finance products and services, we still have to interogate his writing, especially when he calls some issues into question the reality of which cannot be arrived at from a single perspective no matter how broad - for the benefit of doubt I am talking about his insinuation that it is rare to find satisfied customers.
The author of the article is one of the most renowned structurer of islamic financial products and therefore is speaking from his experience working in the industry.
There is definitely a huge disparity between the ideals of islamic finance and practice and it is currently hard to tell the difference between the economics of islamic finance and those of conventional finance. The author is doing us a favour to tell us that the two are almost the same in substance. the economic outcomes are equally important as shariah compliance since shariah prohibitions are meant to deliver more equitable outcomes.
@faraz: kindly look up any islamic financing agreement and examine it in detail and you will see that its basically conventional converted into islamic, closely examine the schedules and you will see the link up with KIBOR!, also ask any banker and he will not remember an instance where the bank actually made a loss in a musharakah transaction! (they are all structured in this way).
**First of all I will like to repeat aprinciple of Islamic ethics which states that "Agreements between Muslims are allowed except those that make the lawful unlawful, and those that make the unlawful lawful."
Generally, I agree with the author that the practice of Islamic Finance leaves a lot to be desired and that more must be done to imbue true Islamic spirit into it.**
The above having been stated I need to state categorically that capitalism i.e. profit maximization is not forbidden in Islam in so far as the making of the profit was or is not from a forbidden activity.
It is dangerous from an Islamic ethics point of view to insinuate that our Shari'a scholars are gullible and thus their decisions and actions are controlled.
Profit maximization is allowed as long as it is achieved in a Shari'a lawful manner.
There may be legitimate barriers to developing an ideal Isalmic Finance system especially for a nascent industry that has to contend with a well engrained system based on interest. Of course the industry needs to be more daring and aggressive.
As far as finding a person whose soul have been touched by Islamic Finance, I know quite a few Muslims who can now sleep easier knowing that they are not at war with their lord for they financed their homes or vehicles lawfully albiet in some cases not competitively - but then when in Islam did cost beat service to the Lord so far as a believer is concerned? But so we do not argue, I myself have availed of the services of the industry and I am satisfied and that is why I am now an advocate of its introduction in my country.
Islam is a realistic not an idealistic religion. What ALLAH expects of us to do our best under the circumstances we find ourselves. I pray for ALLAH's guidance for the sincere industry workers and seek refuge in him from those who are otherwise. The world needs Islamic Finance.
Read again for content-- the author was not looking for "a satisfied customer" but rather one whose "soul was touched" by Islamic finance. He is looking for products based on "principles of social justice, favouring the weaker party, cooperation, mutuality and ethical dealings."
This is not a commodity product offering, conventionally or Islamicly. Why aren't there alternatives? There could be. People will either use them, or they won't. Dr. Dar decries the lost opportunity to create an alternative for possible adoption.
Pakistan will be the first Modren islamic banking, islamic laws, islamic courts, country in the world soon Inshallah mark my words.
@Tanvir: clearly you are not a supporter of the developing. You however do not need to appear thoughtless (no pan intended) by condemning the rest of us who believe in the industry despite its short comings.
I am not a banker but someone who uses a bank. There is obviously something right that the Islamic banks are doing because when many Western banks folded, the Islamic basic concept that ' you can't sell something you do not possess ' proved solid. I am a satisfied customer and I endorse @Umr's comment.
@BruteForce:
The generic answer one gets for such questions is,"because the banks aren't following the original instructions written in Arabic"!
I am not that technical in finance though, however, if the Islamic banking adopts the mainstream interest-bast banking practices - it won't remain "Islamic" banking anymore. The reason Muslims prefer Islamic banking is the essence of it's Ribba-free investments.
@Tanvir: Prove it wrong with references, please.
Very well written piece and for a change an excellent attempt to lay bare the Islamic Banking industry and educating people about its realities. Anybody who thinks and or presumes it to be Islamic in any manner or form has not utilised the faculties of his or her mind. One only has to examine the Islamic Financing documents to realize that its a sham!
The gyst of Islamic banking is not to be hugely profitable for its clients. Rather it is to ensure presence of an alternate for the millions of Muslims who don't want to invest in interest-based conventional banking products.
Islamic banking HAS come a long way since its inception. I am surprised that the author is on the lookout for a SINGLE case of a satisfied customer, while their are millions of them already all over in the Islamic world.
Furthermore Islamic Finance has matured from its infancy stage long ago. So would request the author to do a bit more research before coming up with articles like this!
A sector growing at 25-30% withing the country and around 10% in the world has to be regarded as a successful one!
Not only Islamic banking, Islamic law, Islamic politics has to adopt to the modern view to stay relevant.
One question for the right wingers: If Islamic banking is given by the Almighty, how come it is failing?