The phenomenon of Islamic banking has steadily emerged as one of the alternatives to the conventional mode of banking based on interests. The Islamic banks work or operate on the principles where profit is not the sole or primary motive and it makes the account holders or the people who come for the loans as stake holders in the system itself. It has become popular not only in the Muslim dominated countries rather it has increasingly gained ground in the Western world as well. There are various factors responsible for its growing visibility. Despite its ostensible success it has still a long way to go. It has to respond to various challenges or obstacles which are thwarting it from gaining a strong foothold. Islamic banks have to device various suitable mechanisms to face the challenges posed to them from the conventional banking.
The evolution of Islamic banking goes back to the early 1960s. Egypt is considered to be the pioneer of the Islamic banking as first bank based on the principles of Islamic Shari’ah was opened there. However, it began to make rapid stride only from since 1975 after the establishment of the IDB. The IDB gave significant impetus to the Islamic banking by infusing huge cash into it.
In the last 30 years this industry has been reasonably performed well considering various unfavourable circumstances. According to IMF, the continued growth in the Islamic banking industry can be attributed to three factors: increasing demand from a large number of Muslims (including Muslim immigrants to western countries), rising oil wealth and the budding attractiveness of Shariah compliance financial services to non-Muslim investors seeking “ethical” investment and banking practices.
Conventional banking industry is totally based on Riba, the nature of which is fragile; and also the retail investors are always worried about the future of market. Their apprehensions are justifiable due to various factors, mainly because the world financial markets are not solely governed by economic and financial fundamentals, rather on speculation in the stock market and short selling through derivatives, which witness many financial shocks of and on. Especially global meltdown or subprime crisis occurred in 2008-2009 after the meltdown which the entire world could not escape. Many of the west scholars realised that interest is one of the biggest factors behind this crisis and started arguing that Islamic banking could be a successful alternative.
Where experts were saying that Islamic banking could be an alternative simultaneously there was a number of scholars who were raising questions against the viability of Islamic banking. Like, Islamic banking has crossed the limits, Islamic banking industry is fraud with innocent Muslims and Islamic banking is the new way to earn huge profits. Apart from all the questions raised against Islamic banking, one question which is frequently asked and it is not merely a question but has become a comment on entire Islamic banking industry, which is raised by eminent scholars like Umar Chapra, Gamal and Zamir Iqbal, is that Islamic banking has transgressed the limits. Let us try to throw light on the concerned issue.
It is sad to observe that most of the Islamic financial institutions are heavily involved in short-term (Murabahah and Bai Bithaman Ajil) rather than long-term investment (Mudarabah and Musharakah) financing. The former is a sale contract whereas the latter is a financing contract.
From the Islamic point of view, Murabahah contract (which is dominating the current practices of all Islamic financial institutions, with the exception of the Sudanese Islamic Bank that operates on the basis of Mudarabah and Musharakah financing) should be restricted only to cases where Mudarabah and Musharakah are not applicable. But the current practices of Islamic baking reveals that that situation is vice-versa now, Islamic banking is solely dependent on short term financing (murabah, sukuk, tawarruk) which are debt based rather than long term financing (Mudarabah and Musharakah) based on equity.
Mudarabah and Musharakah financing are not popular due to the following three main reasons:
1. There is a lack of honest and trustworthy entrepreneurs. Some of them did not declare their profits while others did not possess the skill to engage in business;
2. There is a lack of medium and long-term funds which is one of the conditions for Mudarabah and Musharakah financing. The major portion of BIMB’s funds is in the short-term with the remainder, at best, in the medium term; and
3. Long-term financing involves higher risks and there is a lack of qualified personnel to undertake the operation. Subsequently, BIMB is partial towards short-term investment financing. To overcome this problem, the author is suggesting an Islamic investment company is set up as well as an Islamic consultancy house. These companies will first identify the potential sectors such as manufacturing, agriculture, services, and small-and medium sized industries. They will then evaluate each project based on its economic and financial viability, and propose it to the bank for funds.
The above arguments also hold good in the light of Balance sheet below:
BANK ISLAM MALAYSIA BERHAD: MODELS OF FINANCING (% TO TOTAL FINANCING)
BBA (Bai Bithaman Ajil): QH ( Qard al-Hassanah)
[Sources: BIMB Annual Reports, 1984-1991]
In the above balance sheet we can see the share of Mudarabah and Musharakah is very less whereas the other modes of finance which are debt-based have got a big share. The reasons for using short term financing methods the author realised that more use of debt based instrument and lesser use of equity based instruments patronage that, in order to compete the conventional financial system it seems that Islamic banking has crossed the limits but experts must accept that this industry’s objective is not to compete financial system but to abstain from interest with sustainable earning. The industry’s objective is not to give setback to conventional banking rather to be harbinger of holistic development and provide improvement for the community. If we are with the notion to be the obstacle to conventional system, there is obviously no denying the fact that we shall be crossing the limits.
Where have the basic principles of interest-free banking gone, there still remains the question with a big question mark at the end. Islamic banking is a drop in the ocean compared to conventional banking, and the author does not hesitate to say this, as conventional banking started 500 years ago whereas Islamic banking started just three decades ago. Islamic banking has to go a long way and in this way there would be many obstacles to come, for the better resentment we have to be tolerant as much as possible. But the situation is worst now, Islamic bankers have found the new ways to run Islamic banking which Shariah experts do not subscribe and which can in the long run otherwise increase the complexities of Islamic banking rather than proving functional.