Mixed Blessings of Islamic Banking

Islamic banking is a hot topic now days in Pakistan. Banking sector in Pakistan heavily focus on Islamic banking, a lot of Islamic banks are working in Pakistan which include UBL AMEEN, Meezan bank, bank ul Dubai, albaraka bank etc. Recently a forum had been organized on Islamic finance. This forum provide platform for the scholars to share their views about the future of Islamic banking. After studying the views of proponents and critics of Islamic banking I come to this conclusion that Islamic bank is being stuck in the middle because Islamic banking at the same time a good try to follow the rule of Islam (shari’ah) but it is also not totally following the true Islamic theme;

“Overriding principle of Islam is social justice and equality”

The scope of Islamic banking also in increasing trend, annual rate of increase in Islamic banking in world is 20%. Many international banks like HSBC, Citi bank and standard charted bank have already started their operations in Islamic banking. The popularity of Islamic banking in world shows that this system enhances the profitability of banks that’s why non-Islamic banks show their interest in Islamic banking. This is the main point that allows critics to say that Islamic banking is not following true Islamic roots. A lot of proponents defend the Islamic bank that this system helps in eliminating the riba or interest, based on the following justifications;

Islamic banking promote the system of fairness through profit sharing (Mudharabah), in financed project the financier and end beneficiary share the actual profit and loss, not all burden throw on the entrepreneur. According to the principle of justice and fairness the actual output should fairly distributed among two parties.
In contrast to conventional banks, Islamic banking is not just centered on credit worthiness and ability to repay, but more focus on worthiness and profitability of project.

Another important feature of Islamic banking is relationship with the depositor based on grounds of investment rather than predetermined fixed interest rate. Bank assure the depositors that their money will be invested in highly profitable projects

Although Islamic banking has advantage over conventional banking, but critics said that Islamic banking does not follow its base of development “justice and fairness”. One visitor at Islamic forum on finance said that “Islamic banking is not for poor”, its mean Islamic banking only a capital banking focus just on asset management not help in channeling the funds to poor’s. In Islamic banking certain new instruments which are interest bearing in disguise, such as documents which are shown as sales documents at surface but actually are interest bearing loans. Certain critics said that Mudharabah has deceptive properties; mean there is a relation of interest with profit because certain practices show the involvement of riba in Mudharabah. When bank make purchase on the behalf of customer and sell to it, bank set certain percentage of cost that customer has to pay in future with repayments as profit margin. Critics said profit margins attached to the total amount of sale is the equivalent to riba; it is basically an interest in disguise. Another problem with Islamic banks they borrow money from conventional banks in the period of reserve shortage that lead the banks to be involve in interest bearing activities, like payment of interest to conventional banks.

In conclusion we can say that, Islamic banking is in early development stage and it is trying to follow true values of Islam. It is very good thing to see that many Islamic scholars get interested in supporting the Islamic banking in removing practices that effect the performance of Islamic banking. However due to popularity of Islamic banking, many banks around the world trying to bring innovation in Islamic banking that harm the Islamic principle of fairness and justices, that’s why there is no problem to say that Islamic banking is a mixed blessing.

By Hammad Bin Azam Hashmi