Islamic Banking: An Evaluation

Islamic banking, a financial innovation, has come to be seen as the most 'visible' aspect of Islamization. Notwithstanding its novelty, it has made considerable progress, measured by the rapidity with which it has been adopted in the Muslim (even non-Muslim) countries in a relatively short period of time. However, the progress made by Islamic banking is seen by some Muslim economists as more apparent than real because it is not being run exclusively (or even mostly) on the basis of the Sharicah-favored profit and loss sharing (PLS) principle; rather, the fixed-rate type of financial instruments, which are seen as a 'deviation' from the Islamic ideal, have proliferated. It is argued in this paper that there is no warrant whatsoever for this misplaced 'financial puritanism', which has obfuscated the subject and its manifestations. The fact of the matter is that, deviation or not, the fixed-rate financial instruments, duly approved by the Sharicah, form an integral part of Islamic banking; and that it would be counterproductive to limit the possibilities of this institution just to the PLS principle. Hence, respecting the preferences of the consumers, Islamic banks should aim to evolve a risk-minimizing 'mixed' investment portfolio, containing both the variable and fixed-rate of return types, without any 'imperfection complex'. Even more important, rather than pursue an ambiguous financial ideal, which cannot be reached, the focus of the future reform should be to produce something strikingly original which can win the acknowledgement of the people. To this end, Islamic banking should be informed with an earnest knowledge of the ethical objectives of an Islamic economic system, the truth of which can be established only by the quality of social justice and the primacy it accords to the needs of the underclass in society. If Islamic banking is unmindful of its economic consequences and remains hooked on 'procedural purity', it will wither on the vine of public apathy, even its disapproval.