Theory of Islamic Banking: from Genesis to Degeneration

Islamic banking was launched as an alternative of interest based banking. Pioneers of Islamic banking defined profit-and-loss sharing as the desirable alternative. As far modes involving fixed return, they were either not considered by the pioneers or were deemed only permissible but not desirable. But the practice of Islamic banking did not follow this ‘idealist theory’ and relied heavily on ‘undesirable’ contracts. Later on, pragmatic approach to Islamic banking questioned the priority associated with pls business forms and justified the modeling of Islamic banking using even controversial contracts. The paper shows that these developments in Islamic banking theory were not meant to overcome the problems that hindered the practice of its first best theory but to accommodate Islamic banking transactions according to the needs of interest based system. This academic approach could not result in the alternative of the conventional system rather leads to integration within it. Thus, Islamic banking theorists adopted a strategy that is largely responsible for the current state of affairs in Islamic banking. To take industry out of it, a shift in its approach from accommodationist to transformationist strategy is required.