Signature Qualification

that Empowers to Lead Islamic Banking & Finance

Islamic Banking System -

Reality vs. Deception
Shahbaz Farooq, ACA

Today’s Economic Structure

Today, we are living in an era where there are two predominant economic systems The Islamic
controlling the overall social, political and monetary infrastructure. On one side, we Banks or Islamic
have Capitalism which introduces global financial crises after every couple of decades
to ensure its survival. Whereas, on the other side, we have Socialism which miserably Windows of
failed in the 18th and 19th centuries but recently regained its powers in China and
Russia. There are, however, advocates and critics of both systems in the world. But the Conventional
question is, why are these systems so important for us. Although Pakistan was founded
on the ideology of Islam, still, we as a nation have failed to introduce any Islamic Banks are
economic system based on our foundational ideology. Whereas, if we look at the
Muslim world, majority of the countries are primarily following mainstream Capitalism.
operating under
the current
Does Islam Provide any Alternative Economic System?
In reality, the Muslim world today does not have any theoretical or practical economic
international
system in place. There is no mainstream research going on which can claim to be a banking
competitor of either Capitalism or Socialism. Was this the situation from the beginning or
did we lose the economic race in the last few centuries? Let’s take a look. system.

The Pakistan Accountant Oct-Dec 2021 36

Signature Qualification
that Empowers to Lead Islamic Banking & Finance

Interest is prohibited in Islam;

There is consensus among all
Islamic scholars regarding the
prohibition of interest.
The human history shows us that all the prophets/leaders
(revolutionaries for their nation) who succeeded in bringing a
change in their society covered all aspects of human life, especially
the economic and social aspects. Each religion or ideology, when it
was truly implemented, provided a comprehensive solution to their
society.
However, the day it (or its followers) failed to provide a solution, a
gap was created which was then filled by a succeeding
ideology/religion. The same process was applied to Islam. Today
the Islamic world has failed to provide any ideological solution to
the increasing economic problems of industrial & digital age. This,
in turn, gave an opportunity to Capitalism & Socialism to lead our
social & economic systems for the last 200 years.

Until the agricultural economic era, Islamic political infrastructure

succeeded in providing a comprehensive economic system to the
society. The ability to provide a system for the society was one of
the primary reasons for Islamic ideology to spread and rule across
major regions of the globe. However, after industrial revolution, the
Islamic community did not provide any economic system
sufficiently addressing the world’s needs. Therefore, similar to
other religions, today Muslims can practice certain rituals and
prayers of their religion which are related to individual deeds. But
they are absolutely unfamiliar whether Islam provides any
alternative solution to today’s Capitalism or Socialism.

Why do Muslims Detest the Banking System?

We, as Muslims, believe that interest is prohibited in Islam; There is
consensus among all Islamic scholars regarding the prohibition of
interest. Therefore, as a society we discourage the banking
system, we even discourage our youth who consider career
opportunities in banks or related financial industries. Due to this,
we try to avoid dealing with banks to the maximum extent possible.

Under these circumstances, instead of providing a comprehensive

economic solution, the Islamic world began to come up with
principles of Islamic Banking (IB). The objective of IB was not to
provide an alternative economic system in comparison to either
socialism or capitalism, but to capture the untapped wealth of
Muslim population, which is currently not a part of the mainstream
banking system. Therefore, we can see that major western banks
spent millions of dollars in research to open their IB arms, although
they have no interest in Islam.

The Deception of IB System

In order to understand the deception of the IB system, let’s take a
quick example of the current IB system in which all principles of IB
are compiled without challenging the overall banking infrastructure.
Therefore, the results received from IB are even worse than the
outcomes of Conventional Banking (CB) system.

37 The Pakistan Accountant Oct-Dec 2021

Signature Qualification
that Empowers to Lead Islamic Banking & Finance

As per the above example, a borrower has to pay the

All Islamic laws came with an interest/mark up of PKR 20.6 million to an IB in comparison to
PKR 19.9 million to a CB. Coincidently, the rent charged by an
objective; they are introduced IB is very close to the interest charged by a CB. Whereas, the
mark up rate of an IB is very close to the interest rate of a CB.
to implement an outcome, not How can this be possible if Islamic Bank is following Islamic
mere rituals. principles rather than CB principles? In reality, these
outcomes of IB and CB are based on principles of interest, as
The Islamic Banks or Islamic Windows of Conventional Banks both are part of the same monetary and economic system.
are operating under the current international banking system.
Where, each bank has to follow respective central bank’s Generally, a person can purchase a 151 square yard (5 marla)
monetary policy. This means that IB cannot lend to its double portion house for PKR 10 million in Lahore,
customers with interest (mark-up) rates less than the central Pakistan. In 2019, the average rent of this house is PKR 40k.
bank’s monetary policy. In Pakistan, any Islamic Bank today, If a bank charges PKR 40k as rent per month for the whole
cannot lend money on less than 13.5% interest (mark-up) loan period i.e. 20 years, then the total rental payment will be
rate.1 PKR 9.6 million which is PKR 11 million (114.5%) less than
the mark-up (interest) charged by an IB (in the above
As many preachers of IB believe that the difference between example). This rental amount of PKR 9.6 million can further
IB and CB is similar to the difference between ‘Marriage’ and reduce if we use proportionate ownership of borrower over
‘Adultery’. In marriage, all matters are properly documented the period of loan tenure. So, in substance, if IB system is
whereas in adultery documentation is missing. Unfortunately, truly based on Islamic principles or working under an Islamic
the slavery of the last 250 years has taken our ability to Economic System, then extra payment from the borrower
understand the substance of law instead of its form. All would not be more than the market rent of the property
Islamic laws came with an objective; they are introduced to purchased by the bank.
implement an outcome, not mere rituals. The primary
objective (among others) of a marriage is to create a Where does the problem lie?
responsible society where a man takes responsibility for
In the above example, it is clear that there is no difference
economic and physical security of his wife and children. If the
institution of marriage fails to achieve this objective, then it is, between the outcome of an IB vs. CB. If we do a little
in no way better than adultery, irrespective of the nature or research, similar results would be received on other IB
comprehensiveness of its documentation. Now, irrespective products. The issue does not lie with Islamic banks but it lies
of the nature of documentation in IB, if IB has the same with the fundamental problem of our economic system. In
exploitative role as practiced by CB, then it is a mere Capitalism, whatever principles one uses, the result will
deception to the general public. always be in favour of the base economic system. One cannot
implement true IB unless the fundamental economic
A Shocking Comparison principles are redefined; which provide alternative solutions to
problems currently addressed by Capitalism and Socialism.
The principle of house loan the IB system is that the house Otherwise, the deception of IB is good for spiritual peace but
will be owned by the bank and will be rented to in essence, it is a younger sibling of CB.
the borrower. Based on a unit rate methodology, rent will be
calculated for each unit. The borrower shall purchase the The Way Forward
units from the bank through monthly instalments and pay
the rent for the units owned by the bank. In this way, the In order to define a fair economic system based on righteous
borrower is paying rent instead of interest for the principles of Islam, our universities need to play a great role in
house/funds supplied by the bank. Let’s take an example of this transformation, especially Islam in order to formulate an
a house loan and see the comparison between a CB and an interest free economic system addressing today’s economic
IB: problems. They need to collaborate with religious and historical
institutions to understand how successful societies in the past
Nature Islamic Conventional have lived a prosperous life and which economic principles
Bank Bank
they have used. It is inevitably a long journey but if we go
H ouseVal ue PK R m ill
ion PK R m ill
ion
towards the right direction, we can come up with a real IB
E quit
y Portion PK R m il
lion PK R m il
lion
system, not a deception.
Loan Portion PKR 7.5 million PKR 7.5 million
1
September 12, 2019 – 1 year KIBOR
L oanD urat
ion y ears y ears
Int
erest M arkup R at e
Totalpay m entfrom t he PK R m il
lion PK R m il
lion
borrow eroverperiod of l oan Shahbaz Farooq is a Chartered Accountant
tenure working as manager in PwC - Middle East
Total Interest / Extra PKR 20.6 million PKR19.9 million (Abu Dhabi). He is also a member of ICAP
Paymentover 20 years Economic Advisory and Government Relations
Committee.
Source m aw az ana com Sept
em ber

The Pakistan Accountant Oct-Dec 2021 38