Islamic Banking; The Great Expectations

By Sheikh Badru Jaffar

Islamic Banking’s almost forty years in existence has provided Muslims with an alternative banking system from interest based conventional banks. Muslims have generally received Islamic Banks with profound gratitude. Islamic banks, like other banks, are financial intermediaries providing banking as well as ancillary services to their customers. Given that, this is also the realm of Islamic Banks; - the significant difference between Islamic and conventional banks is prohibition of riba or usury.

It is important to note that, Muslim jurists and Muslim economists are in constant debate on the best way to actualize the desired economic vision. Whereas jurists in their capacity as shariah advisory board members are occupied with the banks efficiency, Muslim economists examine and inquire into appropriate means of mobilizing and institutionalizing behavioral values in the pursuit of equitable socio-economic well-being.

Elimination of riba has been the hallmark of Islamic banking, in securing the well being of the society. By no means is this statement meant to deride the milestone achieved in this respect. But the great expectations of the Muslim masses are far from being realized. Islamic banks have been criticized by some as perpetuating Capitalism. Protagonists are of the view that Islamic banks rarely occupy themselves with the plight of poor members of the society. Nonetheless, neither conventional nor Islamic banks ever claimed to be charities and therefore, this argument does not really hold. On the other hand, a keen scrutiny of the Islamic economic system reveals that, Islamic banks act along with other economic institutions to bring the requisite changes in the society. Banning of interest, without institutionalizing the prerequisite behavioral changes and installation of essential economic institutions is akin to suppressing the economy. In other words we cannot achieve socio-economic wellbeing by banning interest alone.

Every human society has a vision. We all seek to achieve the society’s well-being; ostensibly, society’s well-being is defined according to our perceptions and worldview. As Muslims we perceive ‘well-being’ to rise above materialism and hedonism to encompass humanitarianism and spiritualism[ii]. The Muslim’s vision is to bring about an equitable socio-economic order; ‘utopia’ as described by some conventional economists.

Islamic Banks, in aligning themselves with the vision, need to give preference to production and wealth creation. Wealth creation will act as an incentive and promote equitable distribution of wealth. Contrary to conventional banks, Islamic banks do not provide loans only on the basis of the borrower’s capacity to repay the loan but also on the entrepreneurial competence of the client. The latter consideration provides skilled youth with investment opportunities to engage their entrepreneurial skills. Moreover, this ensures wealth creation and development of the society. It is unfortunate that this feature is lacking in many Islamic Banks. The masjid pulpits continue to assert that, Muslims cannot live on mere rhetoric.

The current disposition of Islamic banking needs clarity of thought and a synthesis of the requisite objectives to attain the desired economic vision. Among the recommendations of a recently held research seminar on asset-based and mortgage-based financial products from an Islamic perspective in London is a precaution to Islamic banks to be wary of imitating conventional banks.

The binary-thesis proposed by this paper underpins the need for a holistic approach in the economic discourse. This approach entails looking beyond prohibition of riba, and introduction of profit and loss modes of financing. The other and more daunting challenge faced by Muslim jurists and the leadership at large is institutionalization and proper management of the ‘third sector’ that is characterized by zakah, waqf, and qardhan hasan benevolence loan. The market, non-market and third sector require a synergy of thought and strategy between economists and jurists so as not to lose sight of the true aim of the Islamic economic system; this remains the elusive challenge of Islamic economics.