The myth of Islamic banking
By Dr Aqdas Ali Kazmi
ISLAMIC banking is commonly defined as that form of banking which operates without the norm of interest. As a concept, it is comparatively of recent origin. It is only during the last 50 years or so that Shariah experts, scholars and economists in the Muslim world have made stupendous efforts to develop the theoretical foundations and the operational framework for Islamic banking. As a consequence of these efforts, a vast literature has appeared on the subject of Islamic banking and the associated themes such as Islamic economics, Islamic finance, and Islamic monetary system and so on. A large number of journals and periodicals is being published on the subject, thus augmenting the stream of intellectual output of Muslim thinkers. Numerous universities around the world have approved Islamic banking for master’s course and doctoral level research and have conferred degrees on the subject. The workshops, seminars and conferences held on the subject of Islamic banking and Islamic economics during the last five decades throughout the Islamic world as well as some of the world financial centres like London and New York run into hundreds. It is not only the Islamic Development Bank at Jeddah but the IMF and the World Bank too, being the major international financial institutions, are promoting the cause of Islamic banking. The IMF at one stage had opened a Shariah department with the sole responsibilities of devising Shariah compliant securities for domestic and external debts and transforming the existing financial system in the Islamic world on lines specified by the Shariah department. What has been the success of these ventures, however, is of historical interest only. The bibliographies on the subjects such as Islamic economics and Islamic banking, etc., run into many volumes and cover thousands of pages. In this field the lead has been provided by the Islamic Research and Training Institutes (IRTI) of Islamic Development Bank. Other writers also have prepared their own bibliographies of Islamic economics and related themes and these bibliographies are also in numerous volumes. A critical review of the literature on Islamic banking and an evaluation of the so-called Islamic banks operating globally leads to a startling but significant revelation: Islamic banking both in theory and practice is nothing more than mythology. This mythology has a genesis, a structure and socio-economic implications which need to be analyzed in full detail. By its definition, structure, organization, functions and methodology, a bank cannot exist without interest. These two concepts are too intertwined to be separated. Because of the inseparability between a bank and the norm of interest, it can be concluded that Islamic banking is a mythical and a contradictory concept. If the objective is to abolish interest, the entire banking system will have to be scrapped altogether. In other words, if the foundation of the banking superstructure, namely the norm of interest has to be eliminated, the entire superstructure would have to be dismantled. However, to justify Islamic banking, the Shariah experts, economists, bankers and intellectuals have continued over the last five decades or so to build a web of myths which are increasing in number day by day. The first or the primary myth which has gained common currency throughout the Islamic world is based on gross misinterpretation of the Quranic verses on Riba, which have led to the conclusion that Riba prohibited in the Quran and the bank interest are identical and as such interest must be abolished from all tiers of the economy including banking. The Muslim scholars have never seriously and dispassionately discussed the three basic and inter-related questions. What is Riba? What is interest? Are Riba and interest synonymous? As a result of the failure of Islamic scholars to critically address these fundamental questions, the myths on Islamic banking continue to flourish. The second myth around which the concepts of Islamic banking and Islamic economy are developed points out that interest is the basic cause of the ills from which modern economies suffer such as unemployment, inflation, depression, income inequalities, poverty, etc. Remove the norm of interest and the economic system would be fully purified (Islamized) with no unemployment, no inflation and no income and wealth inequalities. The third myth is in the form of the popular claim that there are as many as 200 banking units or banking companies which operate around the globe without interest and that these banks represent alternative models to interest-based banking. Even the Western secular banking companies are now opening branches of Islamic banks or Islamic windows to cater to the needs of Muslim investors. The fourth myth is that J.M. Keynes, one of the greatest economists of the 20th century, in his numerous writings has propounded and approved the structure of an economy which is free from interest. The Quranic injunctions and interpretations forbidding interest are thus supported by western economists. The fifth myth is that the mode of profit-loss-sharing (PLS) is truly an Islamic mechanism and as such it can best serve as the basis of Islamic banking. In other words, PLS can replace the norm of interest in the banking industry and can give optimal results. The sixth myth stipulates that Islamic banking will become a reality once the Islamic economic system is established in its totality. In other words, the successful launching of true Islamic banking is contigent upon realizing the objective of transforming the existing economic systems which are secular in their outlook and spirit on Islamic lines. If a truly Islamic economic system is established in a particular country or globally, operation of Islamic banking and financial system will be feasible and practicable. The real issue is that the mythology of Islamic banking is being propagated as a new science throughout the Islamic world. Muslim scholars in Pakistan, Indonesia, Malaysia, Bangladesh, Sudan, Iran, Egypt and Saudi Arabia, etc., have taken the themes of Islamic banking and Islamic economics to a new level of research, interpretations and model-building. However, the process of Islamization of the baking and financial system has serious implications for the future of economies of the Islamic countries. In case, interest is abolished through an ordinance or an administrative fiat, the Muslim world would face an unparalleled predicament of economic disorder and disaster. The author is a former joint chief economist, Planning Commission, Islamabad.