Romance Over – Legitimacy OF Islamic Banking?
By Yasir Maqbool
Yasir Maqbool, a senior auditor at Ernst & Young Pakistan, also an ACCA and CFA (finalist) after our article Romance Between ACCA & Islamic Finance, contributed his thoughts and research on the topic.
Currently we are living with two opposite banking systems. The conventional banking system (based on Riba) and the System of Islamic banking and finance (Riba free system) which is completely based on Principals of shariah.
We have seen a tremendous growth in Islamic banking over the last decade and most importantly a part of this growth is also contributed by a western world, which apparently shows their convincement towards the logic behind Islamic banking. But this intensification is also followed by the recent controversies regarding the proper implementation of Shriah Principals in current Islamic banking systems. And that’s a point where we need to judge the legitimacy of Islamic banking around the world and especially in Pakistan.
If these two banking systems are opposite in nature then the fundamentals on which these systems are based should also be completely different. Let’s analyze the fundamentals and their logic in both banking systems.
The core fundamental of conventional banking is “Fractional Reserve Banking” in which a bank s are required to maintain minimum percentage of deposits as reserves and are allowed to use the remaining. And converse to the prior Islamic banking should be based on “Full Reserve” Banking system where a bank has to maintain a 100% deposits as reserves.
There a question arises that are Islamic banks working on the “Full Reserve System”? A very regretful but a realistic answer is “NO” .They are also operating under a fractional reserve system. When both systems are operating on a same fundamental then on what basis can we put the tag “ISLAMIC” on one of them?
As Islam is a religion of logics and the logic behind Islamic fundamental of “Full Reserve Banking System” is the less or no risk of bankruptcy. As we all know that the greatest fear for all conventional banks is the risk of liquidation (Run on bank), which can be substantially mitigated by the fundamental of Islamic Banking.
After analyzing the fundamentals of these two systems (which are almost same) we need to scrutinize the expansion of Islamic banking in the western world. Such a rapid growth of Islamic banking in the western community leaves us with the questions like:
- Why the banks that have been operating under the fundamental of conventional banking for hundreds of years have opened their windows of Islamic banking?
- Why the banks that have been operating under the fundamental of conventional banking for hundreds of years have opened their windows of Islamic banking?
- If they really are, then why they are not trying to shift the whole bank to Islamic systems.
Are conventional banks really trying to adapt the Islamic system or have they just tagged their branches as “Islamic” to attract those usury (Riba) conscious investors who have never been associated to conventional banking.
Why the operations of Islamic banks are not properly transparent? Why the investors are not told about the difference of Islamic banking from the conventional one.
Are they (Islamic Banks) trying to legalize the prohibited Interest based system by artificially articulating the transactions?
Are the effects of current Islamic banking system on economy and on individual is different from the conventional banking system?
These unanswered questions are of paramount importance and should be responded accordingly. Even in Pakistan every investor enters into Islamic bank with a dubious mind. Every person who is associated to Islamic Bank has some doubts regarding its legitimacy. And few conventional bankers are taking advantage of these doubts and are attracting those investors by confusing them through the un- transparent nature of Islamic banking.
Currently almost all Islamic Banks in Pakistan are proving their authenticity by showing the Fatwa’s of renowned Ulma’s .which is the positive approach and they can surely attract those customers who has a blind faith on these Ulma’s but they should also realize the fact that almost 50%-60% of the current population consist of younger people who are of bit rebellious nature, especially when it comes to Ulma community of Pakistan.
How they can be convinced by the decisions of those who get imprisoned every now and then. So they can only be influenced by the logical answers of all ambiguous question placed by the conventional banks.
One approach is to educate the younger community about Islamic banking and its positive effects at individual and national level. In my opinion all the Islamic Banks in Pakistan should take the collective measures in this regard, they should conduct the free seminars, educate the investor about the differentiated nature of Islamic product at the time of investments and most importantly the members of Shariah Compliance Committee(Ulmas) should give the media appearances more often.
By doing so we can remove all the uncertainties and ambiguity regarding the Legitimacy of Islamic Banking in Pakistan.
Comments (23)
First of all hats off to Mr Yasir for writing on such a core issue.I 100% agree with him regarding the faked face of todays banking system around the globe.I seriously think the so called “Islamic banking” is yet another fluke by the western society to capture more into their trap.As for the religious community I think they seriously need to understand the present banking system if they wish to be parallel with them that is minimum of what they need to do and frankly I don’t think they have given any serious thoughts on it.you cannot challenge something unless you know em form A-Z.
Salaam
Well the questions raised by Mr. Yasir shows his interest in islamic banking and that must be answered accordingly and properly.
Islamic banking and Islamic Financial system is a true system not fake one as its foundations are according to the teachings of Quran n Sunnah. So far i have studied and learn from my respected teachers and from online sources, i will strongly recommend to adopt islamic financing.
If you people want to get in depth and complete picture of introduction to islamic financing you must read some good books on islamic finance as i am also providing a link here.
http://www.muslimtents.com/shaufi/b16/b16_20.htm
By the grace of God, my teachers effort and my learning has made me enough capable to defend islamic financing concept and ideas and the questions that are raised by our beloved brother Mr. yasir. I am having my paper today at 9.00 a.m. that’s why i am unable to reply for these questions right now.
Inshallah i will come next time and try to answer the above questions according to my best knowledge.
ali amjad
MBA & ACCA (continued)
aliamjad_87@hotmail.com
03434200024
Islamic Banking is totally the game of changing the name of different products of commercial banking and then saying it as the bank is islamic.
Agreed with qadir and most of the questions raised by Mr. Yasir need some serious answering.
Good job Yasir. Hope to hear from you more on issues
I am an ACCA and I once worked for a Islamic bank and I have to left because the reasons of joining the bank was never realized.
Ali Amjad, can you please tell me how ISLAMIC is ISLAMIC Banking? Much of the products are just keeping up to the minimum requirement and I don’t like being a consultant who would find you a way out of Islamic rules just to make a small buck.
Just search FORBES and search an article “How to disguise Islamic finance” and you might surprise yourself
Impressive Article by Mr. Yasir Maqbool highlighting the core connection between the two banking models. However, it would be useful to address the similarities between the islamic and conventional banking products for day-to-day consumers to understand.
Looking forward to more articles by Mr. Yasir.
I have no disagreement what so ever with the content of what you wrote but the topic i believe was romance between ACCA and Islamic banking, u never incorporated anything relating to ACCA..just confused :s
Thanks alot for appreciating my little effort.
@ Ali Amjad..
Its a nice platform and i would love to discuss this topic further. I believe i didn’t challenge the principal of Sharia infact i talked about its implementation and the fundamentals on which the whole system is based.
y_m_17@hotmail.com
0321-4836003
if islamic banks use the method of full reserve system then how they will be able to utilize the funds and generate the profits so that depositors will be paid off.????
islamic banking system is all about taking risk of ownership and reward. so the risk of liquidation( if any ) always remain there… but that could be mitigated through different techniques of portfolio management..
Thanks Muhammad Yasir Maqbool for sharing such valuable information ..
n I really appreciate logical arguments put forward by all forum fellows..
@ Mr. khalid mushtaq
as a studen What I think “Full Reserve System” means is to convert the depositors money into real asset or real investments in proportion to the deposit base for the sake of generating profit..
…resulting not that much expansion of money as in conventional banks credit creation with so drastic multiplier effect…Isn’t?
if im wrong inunderstanding…plz make me corect
I strongly agree with d writer in dismissing the founding premise of current sharia and Islamic banking,..
No doubt, very well structured Islamic products with all Complex techniques and procedures have been developed to carry them out but basic principles are still need to be laid down to practice Islamic banking in its desired spirit that unfolds its true economic potential resulting in prosperity of whole society. (the real logic of ribba prohibition rather than just changing procedure or methods resulting same outcome).
Beside this “Islamic banks do not practice what they preach: …majority of their financings fall under the category of Murabah and ijarah (modes of financing that are close to the familiar interest-based modes). … Only a negligible portion of Islamic bank financing is strictly ‘profit-and-loss sharing’ based…as Running & small scale businesses form a major part of a country’s productive sector so this is d sector where Islamic banks need to play their role by sharing in such business ventures can bring increase in the real GDP, this way real wealth can go into the ownership of lot of hands and the net export amount can become positive thus can help in reducing foreign debt burden and to strengthen d local currency…. Yet Islamic banks seem reluctant to make such financings…
Its really sounds crazy to talk about Legitimacy of Islamic banking of that country whose rulers keep on playing with interest based foreign loans and continuously contaminating the whole economic system.
I mean this system can’t be run in isolation so requires fiscal reforms to ensure that government is able to eliminate fiscal deficit… We should not take the Islamic economic & banking system in isolation, the
pre-requite of its implementation is that the whole society must be understand & act upon it from the core of their heart…( approach should be of getting HALAH munafa rather than of rate of returns comparison with convention). This is the way If we really wish to take the benefit of Islamic banking system. Othervise such deceptive games will be playing in the name of Islam.”
I’m looking forward to hearing their personal opinions from other forum fellows also on the same account.
Salaam to all of you
Nice to hear from all of you
In the name of ALLAH the most beneficient the most merciful
First of all to distinguish between any system you must be familiar with some basic concept:
what is ideology
what is islamic ideology
why do wo believe in islamic ideology
Difference between islamic system and conventional system (capitalism and socialism)
Islamic Concept of Success
Why interest is prohibited in Islam
Impact of interest economically and morally
Features of Islamic Economy
Concept of Zakat
Inshallah i will try my best to prepare a word file for you people (brothers and sisters) that will cover all these concept which will hopefully help you people a lot.
Thnx to all
Best Regards
ali amjad
aliamjad_87@hotmail.com
0343-4200024
@ khalid mushtaq :
Well! i believe Sara has explained it enough but just to add a little over it ” Full Reserve Banking” doesnt mean that you can not use the depositer funds its just like that you need to match the timings of your assets and liabilities (Asset Liability Management) . By doing so bank will be in a position to facilitate the withdrwals from all depositiors at a single point of time. (mitigating the risk of Run On Bank).
Secondly! Do you think that Current Account Holders should bear any risk,i mean they are certainly gettin no return. So, would it be justified if they will be bearing the risk of liquidation with all other depositors(who are getting any sort return or sharing risk & rewards with bank). Thats the case of fractional reserve system but not with Full Reserve Bank.
Regards
Muhammad Yasir Maqbool
0321-4836003
Brass tacks!! Well it seems Mr.Yasir ignited the long hidden controversy of today’s Islamic banking and I do accede to him
@Ali Amjad: brother you didn’t get yasir’s point, in his writing I didn’t see him criticizing sharia principals, he tried to unfold the wicked minds, manipulating with the minds of general public.
Brother problem is that we are just documenting issues for more than hundred years without implementation, by that I didn’t mean one should not acquaint himself with things like
what is ideology
what is islamic ideology
why do wo believe in islamic ideology etc
and I don’t think the writer isn’t aware of these things. IMPLEMWENTATION is the key.
Regards,
Mohsin Nabeel.
@Sara pervaiz@ as a studen What I think “Full Reserve System” means is to convert the depositors money into real asset or real investments in proportion to the deposit base for the sake of generating profit..
…resulting not that much expansion of money as in conventional banks credit creation with so drastic multiplier effect…Isn’t?
@Ysir @Full Reserve Banking” doesnt mean that you can not use the depositer funds its just like that you need to match the timings of your assets and liabilities (Asset Liability Management) . By doing so bank will be in a position to facilitate the withdrwals from all depositiors at a single point of time. (mitigating the risk of Run On Bank)
fo;;owing points eill be the basis of arguments and answer to you questns.
1 islamic bankng is a assest base banking( physical assest( tangible and intangible both) not a finanacial asset .).. and thy do have risk of ownership.
so
2 islam doesnt disallow taking market rate of returns,,
3 Islamic banking balance sheet both sides is of halal investment.
Now to the point of full reserve banking….. if islamic banking will go with the duration of investmentas suggested .. thn there will be no ATM . no deposit and no other banking facilites. like people cant have ther mony withdrawn from saving account dur to IB investment in Long term assest.. it means Their total depsit will be Time bound.. Work like saving house and nt as bank..
there is diff btw saving house and bankl( Savinbg house only go fro long terminvestment unlike bank who has to meets other financial needs..)
For current accounts .. yes thy have the risk of cash.. but after all their amount will be the liability of the bank and they have Ist right to claim unlike OLS who have 3 right to claim and the equity holder,, residual claimants….
so if you call for full reserve system thn that will not work like bank .. that will be a saving house….
Eg National saving has greater balance sheet value thna the banking sector of pakistan but that is not a bank…
Regards
Khalid mushtaq
khkhawaja@hotmail.com
sorry for tying erors.
@khalid Mushtaq
What ever u call it Full Reserve Bank or Saving House but thats the true system. And If depositor wants to use ATM they better put the cash in Current Account..or daily rollover saving accounts And I am sure that full reserve banking can provide such facilities.
Hey, Good evening i do dig your blog, i woudl feel honored if you would like to me blog a bloomy review about your awesome webblog on my would you grant me permission? Stock Market Forums is my main interest.
Please provide a backlink and you are on
I have been a victim of Islamic Banking deception and have been studying this phenomenon for last few years. Based on my research here is a good documentary about the foundation of banking industry:
Why Are We All in Debt Part
http://www.youtube.com/watch?v=dHJb8zLov88
http://www.youtube.com/watch?v=hNzDLbtmzZ4&feature=related
http://www.youtube.com/watch?v=KeM1wQiJKl8&feature=related
http://www.youtube.com/watch?v=GEeEek7FI0Y&feature=related
Another link explaining this mess: http://www.islamic-finance.com/item1_f.htm
And finally presentation given by Tarek El Diwany on the “History of Banking” at the “Viability of the Islamic Dinar” conference in Kuala Lumpur during August 2002:
http://www.islamic-finance.com/talks_kl_20020819.zip
Please have faith that there is an alternative available which is the true Islamic financial model and it will be implemented soon. Our duty as Muslims is to strive towards establishing this true Islamic financial model.
[...] raised many points in his article, Romance Over – Legitimacy of Islamic Finance and started a debate we never witnessed before. There were many emails the website receive after [...]
Found this blog on Twitter, and I just wanted to say that I appreciated the information!
http://WWW.INSPECTAGADGETS.COM...
**YOUTUBE VIDEO REVIEWS ON THE HOTTEST ELECTRONICS OUT**…
**YOUTUBE VIDEO REVIEWS ON THE HOTTEST ELECTRONICS OUT**…
#1 SITE FOR THE LATEST REVIEWS ON THE HOTTEST TECHNOLOGY HITTING THE MAINSTREAM!…