Is Islamic Banking Truly Islamic?

As the global economy continues to recover from the 2007 recession, Islamic banks continue to remain relatively unscathed.  However, a recent news piece by BBC raises the question of whether Islamic banking truly adheres to the principles of Islamic economics and finance.

At the helm of the criticism is Taqi Usmani, a member of Bahrain based Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI), the premier governing body of Islamic banks and a world renowned expert in the field.  Usmani claims that the reliance on sukkuks or Islamic bonds, render Islamic finance non-compliant with Islamic economic principles.

Unlike a conventional bond, a sukkuk purports to be free of interest-rate pricing mechanisms.  Moreover, like all Islamic economic transactions, sukkuks are meant to be reciprocal; both economic parties are meant to share equally in the potential risk and reward.  However, in an effort to make sukkuks more flexible and soluble within the greater interest-based economy, sukkuks traditionally are fixed-rate instruments that do not necessarily reciprocate risk.

Aside from the issue of risk reciprocity, sukkuks — like many other Islamic financial instruments — are priced to an interest rate benchmark (e.g., LIBOR).  Potentially, this commonplace practice may be more problematic for Islamic finance than the reciprocal risk.  Islamic economics is primarily identified as being riba or interest-free.    Thus, pricing sukkuks to an interest rate benchmark may be more problematic because it implicitly introduces usury into the Islamic economy.

Yet, interest rate benchmarking is ubiquitous in Islamic banking and is generally considered a necessary evil.  Moreover, Usmani himself has argued that pricing Islamic instruments to existing interest rate benchmarks is equivalent to profit margins of related, but prohibited industries.  To illustrate this example, Usmani argues that a soft-drink manufacturer may legally — from a Shari’ah perspective — price products with the profit margin of an alcoholic beverage manufacturer, an industry that is proscribed by Shari’ah.

Nevertheless, Islamic banking practitioners and scholars differ in their interpretation, and thus permissibility varies in Islamic banking.  Islamic banks bypass such problems by hiring the growing number of Shari’ah technicians, who can endorse a given financial instrument as being within the auspices of Islamic legal principles.

Islamic banking is a relatively new sub-sector in the larger banking world, which continues to evolve and mature.  Whether Islamic banking is or is not truly Islamic is largely a theological question.  As with all issues of theology, judgment of what is orthodox or “correct” in a specific religious tradition is dependent upon the reigning interpretation.  As such, what was permissible yesterday may not necessarily be permissible tomorrow.  It appears that Islamic banking is taking such a progressive evolutionary step.

 Source : the examiner

3 thoughts on “Is Islamic Banking Truly Islamic?

  1. Assalam-o-Alaikum

    Unfortunately, we have indulged ourselves in irrelevant discussion of defining the nature of Islamic banking rather than defining the Islamic banking according to the commandments of Allah (SWT) and His Messenger (PBUH). Some say’ it is riba or interest free and other claim it should not offer a fixed rate of return and yet others see dangers in benchmarking LIBOR.

    To my mind there is no room in Islam of a business model that mainly comprises of borrowing and subsequent lending. I have given detailed reasons in my blog at http://saeedbabarviews.blogspot.com/2010/02/islamic-banking-and-finance-is-not.html

    Like

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    Like

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