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A common man, anywhere in the world, who knows a bit about Islamic
finance, may consider Islamic banking as a system based on the principle
of not charging interest, prohibited under Islam; instead, the lender shares
a part of the profit – or loss – with the borrower1
. Despite a basic flaw in
this layman definition – using the words lending and borrowing, as
nothing could be charged in lending, borrowing process – it points to the
fundamental principle of Islamic banking that the investor or financier has
to participate in the profit, or bear the loss, or take the business risk.
Islamic economics, banking or finance was conceived about seven /
eight decades ago to avoid the impacts of capitalism and its relationship to
inequality. The vision, in the words of Muhammad Ali Jinnah, the Father
of Pakistani nation, was “to work our destiny in our own way instead of
following the Western economic theory, and present to the world an
economic system based on true Islamic concepts of equality of manhood
and social justice” (Inaugural Speech at SBP, July 1, 1948)2
. Accordingly,
Islamic banking was launched originally with specific objectives of
replacing interest with profit / loss sharing and reducing inequalities.
The main problem, rather scourge of the conventional system is the
socialization of loss and privatization of gain. Banking and non-banking
financial institutions are earning huge profits using the tools of interest,
short selling, pre-mature off-setting of contracts and speculation, thus
rendering loss to the masses in general, and to the poor and the middle
1
See for example: Zia Haq; Islamic banking to make India debut in PM Modi’s home
state Gujarat; Hindustan Times June 01, 2016 http://www.hindustantimes.com/india/islamicbanking-to-make-india-debut-in-modi-s-home-state-gujarat/story-qp9TjJ5v9Hwmp3WM3iSPKI.html 2 This vision becomes preface of almost all strategic plans of the State Bank of Pakistan
for introducing and promoting Islamic banking and finance in the country even at present.
8 Journal of Islamic Business and Management Vol.6 No.1, 2016
income groups all over the world in particular. Islamic banking formally
emerged in 1970s and became a buzz word by the end of 20th century
when it started replicating conventional tools of producing money. The
Western / American economists are worried about the future of their own
nations due to problems created by the capitalistic system.
3 But Islamic
banks are increasingly following the conventional tools; they are doing
almost the same and, as such, they are generally criticized for replicating
the conventional products carrying fixed / inflexible rates of return and not
using the partnership based modes namely mushārakah and mu╔ārabah
for their financing operations, and not taking business risk even in debt
creating modes.
The objective of introducing Islamic banking is firstly to transform the
process and procedures of financing transaction to Islamic principle of
ribā prohibition, and secondly to realise ideal objectives of Sharī‘ah with
socio-economic benefits (Usmani4 : 24; also see Pp. 238-246) in the shape
of broad based financial inclusion and providing opportunities to all for
employment, income and growth. According to the Holy Qur’ān, those
who are unable to discharge their social obligations due to economic
constraints are to be accommodated while those who do not have such
constraint are not exempted from discharging their social responsibilities
Hasanuzzaman S.M; 1999: 148). Islamic banks could be the most
pertinent institutions to realise this objective.
Islamic banking was visualised as a means to end discrimination
against the down-trodden and the poor groups in the societies which
Qur’ān abhors and treats it equivalent to fasād (corruption) (2:27, 11:85;
28:4 and 77). The frequent mention in the Qur’ān that Allah does not like
fasād and ╘ulm (one meaning of ╘ulm is depriving others of their rights as
directed implicitly in verses 2:, 279, 282) make it obligatory for the State
and the management and Sharī‘ah boards of the IFIs to plug all loopholes
which make it possible for the people to indulge in corruption and unjust
economic practices.
3 Renowned French economist Piketty in his best-selling book “Capital in the TwentyFirst Century”, 2013 [English translation by Arthur Gold Hammer, Harvard University,
2014] uses over a century of data on US, Britain, France and other developed countries to
uncover a startling fact that an ever increasing inequality at the expense of majority in the
society is a natural state and the most likely outcome of the way capitalism has been
practiced throughout history (http://tribune.com.pk/story/701368/the-curse-of-inequality/. 4 Usmani, M. Taqi (2000); An Introduction to Islamic Finance, Karachi.
Running Mushārakah by Islamic Banks in Pakistan – Editorial 9
We may briefly indicate the some fundamental principles of Islamic
finance as: i) Prohibition of ribā5 and gharar6
; ii) Ban on short selling; iii)
Risk not to be separated from the ownership - business risk taking and
sharing - not risk transfer; iv) While conventional banks deal in money
and monetary papers only, Islamic banking is about asset-backed
financing; v) Exchange of real assets or Papers representing them – not
notional assets as in case of some kinds of Derivatives; vii) Finance to
increase ability to create wealth in the real sectors of production and
exchange; and viii) Truthful completion and efficacy of the contracts
Muhammad Ayub. (2016) Running Mushārakah’ by Islamic Banks in Pakistan: Running from Mushārakah or Moving back to Square One, Journal of Islamic Business and Management, Volume 6, Issue 1.
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