Need for them to shift from money management to adding broader socio-economic services. PHOTO: FILE
LONDON: Many industry observers assert that all Islamic banking products in essence are replicas of conventional banking products, be they Islamic deposits or financing products based on leasing or trade-based contracts.
A replica, however, by its very nature and definition is inferior to the original, and should sell for a significantly lower price. Islamic banking products are certainly not replicas in this sense, as in most cases they happen to be more expensive than their conventional counterparts.
Prospects of Islamic banking in Pakistan
While structures of these products fulfill basic Shariah requirements, they are not novel in their economic profiles. Islamic banking faces cynicism from those who expect it to be different from conventional banking not merely in terms of adherence to Shariah principles but also in terms of its socio-economic implications.
What Islamic banks are doing wrong
Because of limited economic value addition by Islamic banks and financial institution and relative dearness of Islamic financial products, Islamic banking and finance has emerged as an elitist phenomenon. It is therefore not a co-incidence that it is more popular in the countries where Muslims have higher per-capita income and wealth. Within other countries, Islamic banking and finance is serving the relatively affluent segments of the society.
It is only fair to accept that Islamic banks have retained basic features of conventional banks that are no more than money managers. Islamic banks on the other hand should have been structured as trading houses, which has to date been not the case, as they by and large do not get involved in trading. They merely finance trading activities of their clients, with the help of contracts like Morabaha and salam.
As such their returns are based on financing and not trading. As financiers, the managers of Islamic banks think like financiers and not traders.
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If an Islamic banker thinks like a financier, acts like a financier, prices his products like a financier, and penalises defaulters like a financier, then he is involved in tapping. Such an Islamic banker is a tapper.
If an Islamic bank is involved in tapping, it does not add economic value to conventional banking. Tapping, in other words, is nothing but meeting basic Shariah requirements without adding any economic value.
Islamic banking and tapping
In tapping-based Islamic banking and finance, the prohibition of interest is merely a Shariah technicality, without a substance. In this context, Islamic banking is a little more than a sub-set of conventional banking and definitely not an alternative.
As long as Islamic banks remain involved in money management, they will do nothing more than tapping. For Islamic banks to add real value to the societies and communities they serve they will have to add broader socio-economic services to their product offerings. Many critics would argue that Islamic banking as a phrase is a contradiction in terms. According to this argument, Islamic financial doctrines can best be implemented outside a banking context. It is argued that a charity or donation-based model better suits Islamic financing. It is proposed that an Islamic financing model could be based on a for-profit-philanthropy (FPP) model.
An FPP branch could be deemed successful if it has improved levels of employment, education and earnings, and by doing do so has enriched the lifestyle in its catchment. With the increased use of FinTech in financial services, it is not only possible but is also expected to drive businesses in future.
Alternatives
There have been some interesting initiatives that could have been developed into viable improvements to conventional banking, if not full-fledged Islamic alternatives.
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The initial thinking behind Modaraba companies in Pakistan was a model for developing an alternative to conventional banking but that initiative received little strategic attention by the subsequent policymakers.
The Securities and Exchange Commission of Pakistan (SECP) remained indifferent to the recently exposed Modaraba scandal in Pakistan, giving a bad name to an otherwise sound business model.
Modaraba Companies, which still operate in Pakistan, nevertheless target relatively sophisticated investors in the society. The proposed FPP-based model could be used to bring masses and financial excluded segments of the society into banking and finance.
In Pakistan, there is no harm in using existing banks (conventional as well as Islamic) for basic banking needs (like current accounts and safe custody), as banks are not heavily involved in financing any way. Islamic finance should reposition outside the banking sector where there is scope as nearly two-thirds of bankable population is still outside the banking sector.
The writer is an economist with a PhD from the University of Cambridge
Published in The Express Tribune, January 25th, 2016.
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SOURCE: http://tribune.com.pk/story/1033459/questioning-the-economic-value-of-current-islamic-banks/
Categories: Asia, Islamic Banking, Islamic Finance, Pakistan, The Muslim Times
What Islamic banks are doing wrong??
Islamic Bank is haram, forbidden in Islam ( Al Quran).
Extremist Muslim create the act of discrimination that Allah condemn it.
The main coal of extremist Muslim around the world want to create Islamic law or Syariah laws, and then they will create Islamic Bank, Islamic Airline, Islamic school, university, Hospital, transportation, Malls , then female and male have to be separated in public place, and then all female Muslim or non Muslim have to cover the whole body, from the head to the toe, the so called modest dress. etc.
Can you imagine it? there is no freedom of expression, dress–just like Saudi Arabia,ISIS and Taliban.
This kind of faith of Islam is not the true Islamic law or shariah laws, they mislead people.
CONVENTIONAL BANK IS NOR HARAM OR USURY,
Extremist Scholar misguide Muslims around the world with wrong interpretation of God’s verses below.
O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper QS.3:130.
Definition of usury.
If you lend money to one of my people among you who is needy, do not be like a moneylender charge him no interest.Exodus 22:21
From the above verse we can conclude that lending to someone needy (such as the poor, the sick who can not afford to pay, to pay school fees or marriage etc) but not for trade, it is prohibited to provide interest. The statute is haram
If someone borrows money for commercial purposes, for profit, then allow give interest. It is not haram. Because it will benefit both parties and beneficial to society.
So it is very clear that all Western Bank are not Haram, but lawful according to His law above. Muslims do not feel guilty when they want to use the Western Bank.
Except, when you use loan from credit card is Haram, because Credit Card company will charge you high interest around 25% per year. That is hurt you.
I want to get respond from Muslim Ahmadiyah.
Does Muslim Ahmadiyah support Islamic Bank, Islamic Air line (Malaysia, Saudi Arabia ) etc
Where does Muslim Ahmadiyah stand for on this issue?
Was Salam