Islamic Banking, Essay Example

Islamic banking is a concept which emerges from the contemporary desire to participate in the global capitalist economy while at the same time not sacrificing a deeper religious and spiritual commitment to the Muslim faith. Accordingly, “an Islamic banking and financial system exists to provide a variety of religiously acceptable financial services to the Muslim communities” (Hassan & Lewis, 2007, p. 2). However, the very concept of Islamic banking remains problematic from two major perspectives. Firstly, the interpretation of which kinds of financial systems and banking systems are consistent with Islam requires an understanding of Islam. In other words, different Islamic scholars will offer different interpretations of which financial practices are acceptable to the Muslim faith and which are not. To the extent that unified interpretations of Islam are non-existent – this is evident from the sectarian divisions of Islam, from Sunni to Shia, to within the Sunni faith itself, movements such as Wahhabism – so to would be a coherent conception of Islamic banking. A Twelver Shia vision of Islamic banking, accordingly, could radically different than a Wahabbi Sunni vision of Islamic banking. From this perspective, within Islamic banking, not only is the concept of economics and finance crucial, but also a religious, sacred, and hermeneutic dimension. Secondly, Islamic banking, even if it is proposed according to the Islamic faith, may find itself completely at odds with the dominant world global system of capitalism. Critical scholars have written and commented extensively on the incompatibility of Islam with modern capitalism, above all because of the reliance of the latter’s financial system on paper and electronic currency and the concept of interest. (e.g., Hosein, 2007, Masudul Alam Choudhury, 2007) In so far as this latter view is correct, the clear problem regarding the effectivity of any Islamic banking system is the following: the proposed Islamic banking system must conform itself to the financial system of global capitalism and not vice versa. Namely, since the current global system is dominated by a capitalist system which actively uses paper money and interest, financial concepts which according to some interpretations of Islam are forbidden, it is the financial system that will determine how Islamic banking works. In other words, from an Islamic perspective, the ideal situation would be that the financial system emerges organically from the Muslim faith.

However, the capitalist and global system with which Islamic banking must engage because of the hegemony of the former has emerged in non-Islamic Western countries. This entails two possibilities. Firstly, that the effectivity of the Islamic banking system will require liberal interpretations of Islam that conform the religion to economic principles. This is clearly an approach prone to objection, as Hosein (2007) has written, since the economic principles are informing the interpretation of the religion. Secondly, Islamic banking could emerge as an alternative to the dominant capitalist model. (Choudhury, 2007) The problem with this approach is that the capitalist Western model is hegemonic in world finances. Effectivity thus in the context of Islamic banking has a difficult dilemma to address: does effectivity in this case mean that Islamic banking must strive to survive in capitalism and therefore make compromises of religious tenets? Or does effectivity instead mean prioritizing the religious and trying to offer an alternative to the main financial system? It appears that Islamic banking has tried to take a middle path to this Scylla and Charybdis, one, however, which may ultimately be a compromise of the Islamic faith itself. Accordingly, an Islamic banking system must above all one that remains authentically Muslim: defining precisely what this requires is the key challenge for Islamic banking in the 21^st century.

The incompatibility of any authentic form of Islamic banking with the modern finance system is arguably most explicitly demonstrated in the disagreement over the concept of interest (riba). As Hassan and Lewis write, “financial systems based in Islamic tenets are dedicated to the elimination of the payment and receipt of interest in all forms. It is this taboo that makes Islamic banks and other financial institutions different in principle from their Western counterparts” (2007, p. 2). This creates an immediate tension between Islamic banking and the dominant Western form of banking. Hence, in so far as “modern commercial banking is based on interest which is against the Sharia (Islamic law), for all the believers in Allah SWT (God) dealings with these institutions do not suit well” (Hanif, 2011, p. 167). The implication of this choice is radical: not only does Islamic banking forbid interest, but it also forbids, by logical consequence, dealing with financial institutions that use interest. In this case, this means that any authentic Islamic banking cannot have any dealings with modern commercial banking. Since modern commercial banking is the dominant form of banking, this places Islamic banking in a position where its effectivity will, from the very outset, be minimized, as Islamic banking must, by definition, operate outside of the remit of global capitalism and its reliance on interest.

Some proponents of Islamic banking have tried to navigate this tension by suggesting that the concept of riba given in the Qu’ran is not equivalent to the concept of interest in modern commercial banking and the world of capitalism. (Ariff and Iqbal, 2011) The logic for this reasoning is clear: it is only through this compromise or re-definition that Islamic banking can interact with the hegemonic Western financial institutions. This is clear in “ age-old issue, still smouldering with no consensus of opinion in Islamic banking, the concept of usury (riba) and its connection to interest rates….the reader will learn that it is difficult to equate usury and interest as interchangeable if one looks at the historical positions of Islamic or other jurist on this question.” (Ariff and Iqbal, 2011, p. 2) This argument is based on two key points: firstly, the authors draw a distinction in the English language between the terms usury and interest. In English, the latter term is dominant, whereas the former is no longer used in public discourse, according to its negative connotation. However, in the Arabic of the Qu’ran, there is no such difference: there is only the one term, riba. Secondly, the authors use the notion of a lack of consensus to advance an argument that since riba is itself ambiguous, contemporary Islamic scholars cannot equate riba with modern interest, and therefore exclude the dealings with the modern commercial institutions, which are necessary for the survival of Islamic banking.

Another strategy used to avoid the prohibition of riba in Islam is to utilize concepts which take the role of riba in the Islamic banking system. Hence, the concept of murabaha has become one of the key mechanisms used to overcome the prohibition of riba, described by El-Gamal as follows: “if a customer needed to borrow $1,000,000, and the “Islamic bank” was willing to lend him $1,000,000 at 5 percent interest, a simple intermediary trade solved the problem of Islamicitiy: the bank bought $1,000,000 worth of a commodity with relatively stable prices over the short term (e.g., some metal traded on a commodity exchange) and then sold the commodity to the customer on credit, with a deferred price of $1,050,000.” (El-Gamal, 2006, p. 34) However, there are clear religious problems with murabaha: as the premise states, the Islamic bank in question is only “willing” to lend the sum in question at a given rate of interest. Trade, in this example, replaces the form of interest – however, it is still a form of interest or riba. As Talib Jaleel (2014) writes, “what is being done is a fictitious deal which ensures a predetermined profit to the bank without actually dealing in goods or sharing any real risk. This is against the letter and spirit of shari’ah injunctions.” (p. 170) Accordingly, this crucial issue in Islamic banking is the following. Even in cases where the murabaha concept is being introduced, contrary to Ariff and Iqbal’s (2011) assertion that no consensus on what riba means exists, the very use of muarbaha as an alternative to riba, suggests a very clear understanding of what riba means. Namely, murabaha has emerged as a popular alternative to riba because riba has been clearly associated with interest. Yet even murabaha appears to fall short of reaching the standards needed for Islamic banking to not fall into riba practices, as Jaleel (2014) argues. (p.5)

In this regard, concepts such as murabaha are an implicit recognition that the fundamental economic world-view that emerges from the Islamic faith is incompatible with the dominant Western vision. However, in order for Islamic banks to remain effective in the contemporary economic globalization, they require precisely such a compromise of their religious principles. Yet this compromise seriously places in doubt the extent to which they can be called “Islamic” banking institutions. The problem with riba is one of the symptoms of this same incompatibility. In the words of Choudhury (2007) , “Islamic banks have mushroomed under an Islamization agenda, but the system has not developed a comprehensive vision of an interest-free system, nor has it mobilized financial resources for enchancing social wellbeing by promoting economic development along Islamic lines.” (p. 22) In other words, the desire to remain effective in the global economy, dominated by a Western vision of capitalism, has led the Islamic banks not to promote an alternative vision in accordance with Islam, but rather to interpret Islam in a way that will render Islamic banking feasible in a Western context.

The defenders of Islamic banking, however, will argue that it is only through such an interpretation that Islamic economies will remain vibrant in the modern global financial system. Accordingly, key components of the latter system, such as interest, without which this system would not function, must now be re-interpreted through concepts such as murabaha, so as to ensure the viability of Islamic banking. Furthermore, transactions between Islamic banking institutions and non-Islamic banking institutions must be maintained so that the former remains vibrant, even though the latter explicitly uses concepts such as riba interest. In an EY (2013) report on the future success of the Islamic banking system, it is concluded that “banks with strong connectivity across key markets and sectors are set to gain….a major challenge for Islamic banks is to adjust the propositions, opereating models, systems, tools and processes to understand and fully capitalize on the international opportunities provided.” (p. 2) In line with the above, however, from a more critical perspective, even if one accepts that current Islamic banking practices are authentic to the Qu’ran and the sunnah, financial analysts suggest that these practices are not sufficient for Islamic banks to remain viable. Namely, banks must emphasize connectivity across “key markets and sectors”; furthermore, key elements of the system, such as operating models, tools and processes, must be revised so as to remain viable. While from the perspective of some Islamic scholars and economists, current Islamic banking are not at all Islamic, from the opposite perspective of the EY report, these institutions are not even capitalist enough to fully survive.

For this reason, the effectivity of Islamic banking appears to rest entirely on a necessary re-evaluation of what effectivity means in this context: does it mean participating in the global economy at any cost, or does it mean maintaining the religious commimtnet? Any authentic Islamic banking must side with the latter choice. This, however, does not mean that Islamic banking itself must necessarily be ineffective. For example, Choudhury (2007) suggests that “the rediscovery of a worldview founded on the doctrine of Tawhid (the oneness of God) as enunciated by the Holy Qu’ran and sunna, a social wellbeing function for Islamic banks in terms of social security, protection of individual rights and resource mobilization in keeping with the Islamic faith” (p. 21) is necessary. What is required, is an alternative to “a mere deepening subservience to neo-liberal economic and social doctrines.” (Choudhury, 2007, p. 21) In other terms, the vibrancy of the Islamic banking phenomenon is not ultimately determined by its “subservience” to Western principles, but rather by the extent to which it is able to present a viable alternative. For example, “Islamic banks have not constructed a programme of comprehensive development by rethinking the nature of money in Islam in terms of the intrinsic relationship between money as a moral and social necessity linked enogeneously with real economic activities.” (Choudhury, 2007, p. 34) This vision of Islamic banking is in radical contrast to neoliberal hegemony: namely, money is not a speculative tool, but must be tied to “real economic activities” (Choudhury, 2007, p. 34) and possess an “endogenous” whereby “money is a systemic instrument that establishes complementarities between socioeconomic, financial, social and institutional possibilities towards sustaining circular causation between money, finance, spending on the good things of life and the real economy.”  (Choudhury, 2007, p. 34) This entails that the overall aim of Islamic banking, not to “capitalize” in the words of the 2013 EY report, but, rather, to be based on the worldview of a “social wellbeing function.” (Choudhury, 2007, p. 34) This means that the aim of the Islamic bank is not the success of the bank itself, as in the neoliberal system, but rather the society. According to Choudhury (2007), for Islamic banking to be truly effective, it must understand that its definition of effectivity is determined by this concept of the greater social good which is fundamental to Islam: “Islamic banks become investment-oriented financial intermediaries and agencies of sustainability of the socioeconomic order, the sociopolitical order and institutions of preservation of community assets and wellbeing.” (p. 34) The effectivity of Islamic banking, in short, must be judged not on its own endemic effectivity, but rather on the extent to which it is effective in preserving the community. Crucial to this system, therefore, is the sense in which standard bank practices, such as investment opportunities, are now looked at in terms of concept of greater social sustainability to the community as opposed to concepts of profit.

The effectivity of an Islamic bank, in conclusion, cannot be judged in terms of Western principles, without betraying the religious commitments of the Islamic bank itself. Approaches which have attempted to assimilate Islamic banks to Western practices have become instances of what Choudhury terms “subservience.” Explicit impasses between Islamic banking and neoliberal banking – such as the concept of riba – mean that Islamic banking should prevent itself as an alternative to the dominant model. This is the only possible option for an authentic Islamic bank, in so far as it wishes to remain authentic to the Muslim faith as opposed to the modern market. This, however, requires systematic adjustments which are radical in comparison with the capitalist system. Nevertheless, precisely such adjustments are demanded by the religious foundation of Islamic banking.

References

Ariff, M. & Iqbal, M. (2011). The Foundations of Islamic Banking: Theory, Practice and Education. Northampton, MA: Edward Elgar.

Choudhury, M.A. (2007) “Development of Islamic economic and social thought.” In K. Hassan & M. Lewis. Handbook of Islamic Banking. Northhampton, MA: Edward Elgar. Pp. 21-37.

El-Gamal, M. (2006). Islamic Finance: Law, Economics and Practice. Cambridge, MA: Cambridge University Press. 14, (2013). World Islamic Banking Competitiveness Report 2013-14. UAE: EY.

Hanif, M. (2011). “Differences and Similarities in Islamic and Conventional Banking.” International Journal of Business and Social Science. Vol. 2, No. 2. pp. 166-175.

Hassan MK, Lewis MK. (2007). Handbook of Islamic Banking. Northampton, MA: Edward Elgar Publishing, Inc.

Hosein, I.N. (2007). The Gold Dinar and Silver Dirham: Islam and the Future of Money. San Fernando, Trinidad and Tobago: Masjid Jami’ah.

Jaleel, T. (2014). Notes on Entering Deen Completely: Success, Ummah, Renewal. EDC Foundation.