Islamic Banking and Finance: Concept and Reality

"The objective of this dissertation is to examine the institutional framework of Islamic banking and financial institutions from the standpoint of Islamic conception of economic justice. In the beginning, Islamic conception of justice is reviewed in contrast with its western counterpart. The study then examines the framework of banking and financial institutions with the historical phases of evolution into the modern form and what functional objective were meant to be achieved from the contemporary structure of banking and financial institutions. The study reveals that the main objective of this structure was to fulfill of the growth needs of a capitalistic society, based on materialistic foundations; this was done by developing an ability to issue as much credit to commercial and domestic borrowers (while expanding the money supply) through a fractional reserve process, under the regulatory control of central banks. It is then analyzed to find out the extent these specific features are capable of advancing Islamic conception of economic justice. A critical analysis revealed that Islamic banking and financial institutions at large have adopted the framework of mainstream banking system that was designed to achieve the target of unprecedented accumulation of wealth and maximization of economic freedom particularly for the elite class, even if it is at the expense of rest of the population. In this process various objectives of Shariah (Divine Law) and ethos of Islamic economic justice are trivialized. This includes the pile-up of individual as well as collective debt and spread of materialistic values in the society; this is followed by unequal distribution of wealth and charging of hidden seigniorage from the masses. It was revealed that, at a theoretical level, an alternative framework, that doesn’t multiply the money supply to benefit those in power and prefer using a medium of exchange with an intrinsic value, would be much closer to the normative premise of Islamic Justice. This study would allow researchers in future to analyze the compatibility of Islamic Banks with objectives of Shariah more holistically, while including structural and institutional features within their analysis under the context of Islamic conception of Justice and political economy of Islam. "

2011

Islamic Financial Industry is experiencing a good high pace and many Islamic financial products have been introduced in a very short span of time as compared to conventional financial products but in fact the present prevalent Islamic financial system, around the world, has been developed keeping in view the products of conventional banking in order to attain same results/profit margins in a Shari’ah Compliant way. Consequently, the product becomes Shari’ah compliant but the core attributes of Islamic Economic System i.e. Justice and Social Welfare etc. are overlooked by the Industry. In other words, the conventional thinking of banking has an existence in Islamic Banking and only profit maximization concept is being considered rather than the concept of profit maximization with social welfare. This paper discusses all of such concerns and highlights the flaws and issues in the prevalent Islamic banking system and proposes suggestion/solution in this regard. The current depression i...

Islamic Economics Journal (IEJ), 2022

The last half of the twentieth century witnessed the birth of Islamic banks. Since their inception, these banks have announced-through their theoreticians-their intention to achieve economic and social development based on their commitment to the principles and provisions of Islamic Sharia. The theoreticians' interests were towards long-term investment and partnership-based contracts as a foundation for mobilizing and using financial resources to achieve development. The paper studies the performance of Islamic banks by collecting data from six Islamic banks in six of the major Muslim countries that engage in Islamic finance. Some of the main conclusions are as follows: The Islamic banks' practice reveals that the thoughts of leading theorists have become absent, as these banks have shifted from the long-term investment method to the short-term commercial method in search of liquidity and profitability. As a result, Murabaha became an alternative to credit on the output side. In turn, current deposits dominated the input side, thus transforming Islamic banks into a form similar to commercial banks. The matter was made worse by the resorting of some Islamic banks to the application of organized 'tawarruq,' which reflects the tendency of some current theorists and implementers to follow the path of traditional banks and enter the tunnel of the jurisprudence of reprehensible tricks. Also, the social role hoped for by Islamic banks has become closer to stagnation than to hoped-for mobility.

The raison d'être of this article is to supply basic insights on the origin and characteristics of the Islamic Banking system, its distinguishing features, and related contentious issues that have remained the subject of ongoing debates among Sharia' scholars and members of the academia. These were analyzed by referring to the principles of Muammalat (Islamic economic transaction), which are derived from the Holy Quran, Sunnah of Prophet Muhammad (p.b.u.h.), and Ijma' (consensus) of prominent Sharia' scholars. Contrary to the conventional banks, Islamic banks are required to operate according to the principles of Muammalat, which are identified as the avoidance of Riba', Gharar, Maysir, Hilah, and the promotion of ethical business practices such as justice, fairness and transparency. The 2008 global financial meltdown has created a unique awareness among banking consumers on the need of an alternative to complement the conventional banking system, which was viewed by financial scholars as suffering from a crisis of failed morality as a result of greed, exploitation, and corruption. Likewise, many may viewed that the Islamic Banking system is merely another attempt to capitalize on the pulling power of religion towards people, yet there are a number of interestingly unique features that accentuate it from the other banking alternatives. In essence, it is aspired that this article may assist fellow readers, especially those who are still new to this alternative financial system, in understanding and appreciating its unique features, and further stimulate future research in this field. Insha'Allah (God's willing).

Journal of Islamic Finance, 2013

The emergence of Islamic finance as a system of thought and practice is timely in the midst of world crisis and the uncertain proposals for solving it. It is hoped that Islamic finance offers a coherent perspective for understanding real economic problems as well as a genuine alternative to the very foundations of how economics and finance should be managed to actualize human prosperity. In addressing those expectations and challenges, sufficient attention to the foundations should be given to develop solid conceptual scheme of a new finance in Islamic perspective and to resolve the tensions in the current development. This paper attempts to discuss the foundations of Islamic finance and the requirements in developing Islamic finance from the basic principles of maqāṣid al-Sharī'ah (the objectives of Sharī'ah). Islamic finance, in this perspective,must realize its full potential as a system, not merely a lawful means in doing financial business or a stopgap means of surviving the crisis. It must go beyond that to provide the guidelines for managing a good economy, stimulating growth and development, realizing socio-economic justice and promoting employment and stability as implied in the objective of Sharī'ah (maqāṣid al-Sharī'ah ).

The emergence of Islamic finance as a system of thought and practice is timely in the midst of world crisis and the uncertain proposals for solving it. It is hoped that Islamic finance offers a coherent perspective for understanding real economic problems as well as a genuine alternative to the very foundations of how economics and finance should be managed to actualize human prosperity. In addressing those expectations and challenges, sufficient attention to the foundations should be given to develop solid conceptual scheme of a new finance in Islamic perspective and to resolve the tensions in the current development. This paper attempts to discuss the foundations of Islamic finance and the requirements in developing Islamic finance from the basic principles of maqāṣid al-Sharī'ah (the objectives of Sharī'ah). Islamic finance, in this perspective,must realize its full potential as a system, not merely a lawful means in doing financial business or a stopgap means of surviving the crisis. It must go beyond that to provide the guidelines for managing a good economy, stimulating growth and development, realizing socio-economic justice and promoting employment and stability as implied in the objective of Sharī'ah (maqāṣid al-Sharī'ah ).

Islamic Financial Industry is experiencing a good high pace and many Islamic financial products have been introduced in a very short span of time as compared to conventional financial products but in fact the present prevalent Islamic financial system, around the world, has been developed keeping in view the products of conventional banking in order to attain same results/profit margins in a Shari'ah Compliant way. Consequently, the product becomes Shari'ah compliant but the core attributes of Islamic Economic System i.e. Justice and Social Welfare etc. are overlooked by the Industry. In other words, the conventional thinking of banking has an existence in Islamic Banking and only profit maximization concept is being considered rather than the concept of profit maximization with social welfare. This paper discusses all of such concerns and highlights the flaws and issues in the prevalent Islamic banking system and proposes suggestion/solution in this regard. The current depr...

ĪQĀN

Islamic banking and finance is actually a sub-component of Islamic economic system and is now a reckoned force in the global financial system. In comparison to the conventional economic ideals, Islamic economic system deals with not only the economic issues and problems, but also takes into consideration, the ethical aspects of society in order to ensure social and collective well being and economic prosperity. The aspect of just and fair allocation of economic resources lies at the heart of economic approach of Islam and Islamic economy’s core principle is to ensure that every strata of society including the rich, middle class and the poor all get the opportunity to live their lives in a functional and productive manner. The philosophy of Islamic banking is primarily pinned upon the Shariah fundamental and primary sources of Quran and Sunnah as well as on the secondary sources, from which Ijtihad is the main secondary source. Islamic baking paradigm endeavors to fulfill Shariah obj...

2013

The timely emergence of Islamic finance as a system of thought and practice amidst world crisis and uncertain proposed solutions may offer a coherent perspective for understanding real economic problems and alternatives to the very foundations of how economics and finance should be managed to actualise human prosperity. Despite its impressive development, the question whether Islamic finance is on the right track to realise the hopes pinned on it at the time of its initial establishment currently emerges. This article attempts to reflect on the nature of the development of Islamic finance, as well as its achievement and future direction. For Islamic finance to really progress, it should be developed with the agenda of realising the objectives of Sharīʿah (Maqāṣid al-Sharīʿah) as well as its full potential as a system, not as a stopgap means of surviving the crisis, nor as a legal ( ḥ alāl) means in financial dealings that satisfy the minimum standard of legal requirements. Furthermo...

Social Science Research Network, 2008