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“Is Islamic banking viable?”

The following is my answer to a Quora question: “Is Islamic banking viable?”

If by viable, you mean to ask if there is there a market for it, then it is because enough people believe in it for it to exist. It is a growing field, and it is evolving. If by viable, you mean to ask if it will ever be a credible alternative to normal banking and finance, I am extremely sceptical. There are structural issues for many of the products and the investment products do not perform as well as equivalent products in normal banking. In some areas, it is far too inferior to be viable for a wider market.

One of the problems is the definition of riba’, usury. Does it include any and all forms of interest? If I send you money in another country, and the financial institution charges more than the principal, is that riba’, when we understand that there is an infrastructure cost involved? Another issue is that Islamic finance products, such as the sukuk are essentially the same thing as normal financial products but with an Arabic name, and higher distribution costs. There is the normal distribution costs, and then there is the distribution cost of the “Islamic” accrediting authority. We can also argue that there is a credibility issue with the accreditation of so-called Islamic products when the shari’ah compliance committees are not independent regulatory authorities, but paid for by the banks themselves.

Before Islamic banking, there was a movement towards ethical banking. Instead of reinventing the wheel for cosmetic and vanity purposes, it would make more sense to revisit ethical banking, and make it a standard throughout the industry.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Is Islamic Banking Viable?]

Image for illustrative purpose only.

I have to agree with the points mentioned by Terence. And I would add:

  • Riba is greatly misunderstood in current times to refer to any form of interest, due to lack of understanding and ignorance of the current financial system.
    • We really need to review and revisit the definition and understanding of riba and how it applies in the current system.
    • We also need to understand why Al-Azhar and Egyptian Fatwa House view mortgages and other banking transactions as permissible while others regard them as riba. When such a khilaf (scholarly disagreement) exists, we are allowed to take the easier or practical view that facilitates livelihood, especially for Muslim minorities.
  • The higher distribution costs is often either overlooked or regarded as a “necessary cost” to ensure “compliance”.
    • I personally would disagree. It is like saying “halal certification is necessary” for something that is halal in the first place. Like fish in the supermarket or a meat that is known to be slaughtered by a Muslim.
  • And yes, I strongly agree that we should revisit ethical banking & finance, rather than reinventing the wheel.
    • I have sat in a fund house presentation, from which I understood that the fund house’s philosophy in investing includes being ethical; it won’t invest in companies like tobacco which it feels to be detrimental to society.

Muslim consumers need to wake up. It is no longer about embracing and instilling financial literacy, but increasing our knowledge and understanding of the financial industry so as to better engage it in facilitating our livelihood.


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