In past few years the phenomenon of Islamic banking has earned a lot of fame. Many institutions, economists, analyst etc are busy in understanding the concepts and nature of Islamic banking. A lot of work is being done in different countries to understand the Islamic mode of financing. However the Islamic banking system has not yet been able to beat the current banking system. There are many myths around the Islamic banking system.
Now as a student, critically analyze the major reasons behind
the above mentioned situation of Islamic banking system and why the Islamic banking is more like a myth than a reality? Please discuss this issue here. I hope the discussion that that follows will prove be very helpful to those who want to develop material on a topic like such... Thanks

I dont see anything Islamic in islamic banking, it is new name of the old system and an attampt to satisfy the religious minded customers.

Okay.In fact, any sort of banking which is based on interest (ie sood in Urdu) does not make it to be Islamic banking. In Islam, there's no such concept but BAIT-UL-MAAL which regulates in conformity with the Islamic code of conducts. So, I agree with you that it's an attempt to fool the customers and keep the system going...

My dear before arguing about Islamic banking, We need to understand the traditional banking, going on in the world including Pakistan.

It is well known to every Muslim that Interest is strictly prohibited in any form by our Lord. In Pakistan after the Zia's era many economists, bankers and sharia experts who were feeling the necessity of corrective measures to restore the actual spirit and soul of Islamic finance tried their best. in this respect a petition was filed in sharia appellate bench of supreme court of Pakistan headed by Justice Taqi Usmani and other Islamic law and finance experts.

In his historical verdict which is globally accepted and being followed in the world, the current banking system declared as full of interest.

In 2002, Meezan bank (Islamic bank) started its operations and doing profitable business in Islamic way till today.

As i said that we need to understand traditional banking 1st then Islamic banking let's see why?

Our whole life is based on contracts whether social or commercial. In our religion purity of contract (ahad) have great importance. Marriage is a social contract contains some restrictions for both parties, similarly for Muslims there are some restrictions for commercial contract as well.

Besides Interest there are so many evils in traditional banking but our core focus here is interest. let's see how it exist in traditional banking and not in Islamic banking.

In commercial transactions on of the cause of creation of Interest is Liability or Debt. the traditional banking contract whether it is saving or current account is based on the relationship of debtor and creditor. We i.e. depositors are creditors and bank act as debtor.

Debt means it is guaranteed to repay the creditor in any case. traditional banking saving and current accounts grantees the repayment of your deposited amount in any case with profit i.e. interest.

According to Quran and Ahadis any addition over debt is known as Riba i.e. Interest. but the Islamic banking contract is on the basis of Profit and loss Islamic bank work as the Fund manager not debtor. On the principle of Modaraba contract you can say a fund management contract. which have very special significance over traditional banking contracts. Also on asset side the whole investment is based on creation of assets. The profit generated, then distributes among depositors and banks as prescribed ratio.

This is the very grass root level difference. there are also very huge differences. If you are interested then you should read Judgement on Riba by Justice Taqi Usmani.

All over the world Islamic financial institutions constitutes around $ 250 Billion and growing at 25+ percent speed. In Pakistan it constitutes 5.4 percent of over all banking industry and going to achieve 12 percent share in 2012.

Riba (Interest) is strictly prohibited so what is Riba??
Actuallr Riba is " To earn money from money" thats what traditional banking system is involved into.
Islamic banking claims to be free of interest but i m of the view that there is nothing such difference just to attract customers of rligious minds. Islamic banking is also involved in earning money from money that is riba.

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@ yasir_kasb and Zash
Thanks for sharing such valuable information with me. I've read your posts thoroughly and find them to be of a great deal of knowledge to me. You know, knowledge increases when shared.
I'm still looking forward to hearing their personal opinions from my other forum fellows on the same account. Thanks

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" To earn money from money" thats what traditional banking system is involved into.

yes one kind of Riba i.e Interest is to earn money from money....

we need to understand the nature or more precise the concept of money in Islamic Finance as well as in traditional finance.

Islam looks money from different point of view as opposed to traditional economists. Islam prohibits the dealing of Money merely as commodity and restrict as medium of exchange only. In traditional finance the creditor is rewarded by excess repayment due to the time value of money preferences theory. Your objection about Islamic banking that they also deal in money is correct but look inside they deal it as only medium of exchange not commodity.

Read the definitions of money from traditional economists they consider it as commodity as well as medium of exchange and store of value also.

Now answer me can you eat money to satisfy your hunger desires? the answer is absolutely no meaning that you will use it as medium of exchange to buy something which could fulfill your hunger desires.

due to time and space constraints i can't explain the whole phenomenon of money that how it was dealt in Prophet (P.B.U.H) and Caliphs' period but the following brief points will help you to understand the differences.

The conceptual difference between an Islamic finance and a conventional finance transaction lies in the fact that in conventional finance, the financial institution generally lends cash for a length of time, often direct to the client or borrower, of course based on a credit rating or evaluation, on the basis that the borrower would return the borrowed amount plus an interest amount.

The interest amount and the original borrowed amount is required to be repaid to the lender over the loan period or by the end of the loan period. Thus the transaction in essence is the lending of cash against the return of a higher amount of cash, and not necessarily for a specific purpose. One of the basic ideas behind the interest rate is the time value of the money lent. The excess cash returned to the lender over and above the borrowed amount is considered “riba” in Islamic finance.

In Islamic finance, there is no direct lending of cash against return of a higher amount of cash, unless the transaction is “asset backed” implying that the transaction has to involve the sale and purchase of an asset. In a typical financing transaction, the Islamic financial institution will purchase assets required to be financed by a borrower at a price and sell them to the borrower at an agreed (higher) price allowing the financial institution to make a profit.

This purchase and sale of an asset basically renders the financing as “Shariah-compliant.” Islamic Shariah laws allow cash to be lent, but generally only as “Qard Hassan” where only the same amount of cash is required to be returned, if returned at all.

The point to note is that in an Islamic finance transaction, the financier takes an element of risk, that of ownership of an asset and consequent non-payment by the client of the asset’s sale price. Any default penalties imposed to encourage payment on time do not accrue for the benefit of the lender but get paid to charity. There are other inherent risks in the transaction but the idea is that this risk-taking is what allows the Islamic financial institution to make a profit on the financing transaction. Therefore, even though the payment terms in a conventional and Islamic financing contract may look alike, there are differences in the conceptual structure of the transaction.

In conclusion, using Islamic finance or even regulating it, requires an understanding of concepts that underlie the industry — in this case the Islamic code of law — the Shariah. An understanding of Shariah and its goals or maqasid will greatly enhance one’s perception of Islamic finance and economics.

We should not take the Islamic economic & banking system in isolation, the
pre-requite of its implementation is that the whole society must be understand & act upon it from the core of their heart. If we only try to adopt & wish to take the benefit of Islamic banking system, than it will be nothing but just a myth.

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Hi i just wanted to know that there is this Govt institute named as "KOMI BACHAT" or something like that . IF u deposit 100,000 rs u are payed 1000 rs every month. is that "SOOD" as well ?

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We should not take the Islamic economic & banking system in isolation, the
pre-requite of its implementation is that the whole society must be understand & act upon it from the core of their heart. If we only try to adopt & wish to take the benefit of Islamic banking system, than it will be nothing but just a myth


Yes exactly, Banking is an exact science, 2 plus 2 always result in 4 irrespective of your belief. similarly process has core importance e.g. slaughtering an animal by following the process of sharia or by just remove its head in single shot, the outcome will be same i.e. meat.

In Islamic essence the things which are in the interest of human beings and don't contradict with Islamic teachings are acceptable. Banking is the back bone of business and Islamic finance has posed many solutions at advanced level of economy too e.g. how the monitory policy will be used in an Islamic economy? etc...

the need of hour is that learn Islamic finance without any biasness by considering it as a science just like traditional finance.

We often hear in our homes that don't call the name of pig i.e. your tongue will become impure but very few stress the severity of Sood i.e. Riba also when we face any problem regarding religious matters we run towards muftis e.g. marriage etc and follow his advise but in case of commercial transactions we consider ourselves enough to proceed.

It is may be due to that very few Islamic scholars have Knowledge of Traditional and Islamic finance but now the time is changing they are paying equal attention on traditional finance too.