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Islamic banking overpowers conventional banking

Published: 26/08/2012 05:55:00 PM GMT
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Karachi: There has been a tough competition between Islamic banking and conventional banking system as Islamic finance had to strive hard to create room for itself in the market and it seems that Islamic finance has overpowered its competitor in the countries where it exists.

By Farhan Iqbal


Karachi: There has been a tough competition between Islamic banking and conventional banking system as Islamic finance had to strive hard to create room for itself in the market and it seems that Islamic finance has overpowered its competitor in the countries where it exists.

The growing popularity of Islamic finance with its tremendous growth has proved the concept wrong that Islamic finance or banking is only for Muslims or Islamic countries. Now-a-days, non-Muslims are becoming consumers of shariah-compliant products in big numbers and non-Islamic governments are planning to introduce Islamic finance in their countries.

Islamic finance aims at providing a foundation for an ethical and fair financial system, which consequently affects the socio-economic conditions of the market it is implemented in. Islamic financing, hence, can rightly serve everyone irrespective of religious beliefs, wealth, ethnicity, caste or creed.

Yet, many countries are dubious in introducing Islamic finance as their thinking is only limited to the centuries-old financing methods which are firmly embedded within their economic system.

One of the reasons for this lack of awareness is that the concept of Islamic banking has been commercialized fairly recently. Banks and asset management companies globally are still struggling with how better to portray Islamic products for consumers’ understanding in minimal ad spaces. There is also a communication gap between the Shariah councils issuing the fatwas pursuant to Islamic Finance, and the managers drafting the advertisements.

A bigger issue is that even financial advisors lack awareness of the concepts behind Islamic finance. This expert will surely lose his customers.

“Islamic products do not offer interest (Riba).” The statement is without a doubt true, but this is not the sum total of Islamic finance.

Riba is indeed deemed impermissible (Haram) in Islam, for the reason that it is “unfairly” exploitive in nature. It is unfair because Riba requires the lender to return the borrowed money, plus an extra amount. This requires the borrower to work harder to return not just the principal, but also the interest or mark-up levied on the amount.

Secondly, interest is set arbitrarily. The concept treats money as a tradable entity which fluctuates volatilely in the markets. There is no set ceiling; meaning that loaning money may become cripplingly expensive for the borrower.

Islamic financing is asset-backed and believes that only assets with an intrinsic value may be sold for a profit, instead of exchanging money which is considered to have no intrinsic value for interest. Each unit of money has the same value as the other of the same denomination, which is simply why there cannot be a profit on its exchange. Hence, Islamic finance lays its foundation on real, non-liquid assets; the exchange and sales of which result in “fair” profits.

Stakeholders in the industry must now step forth and present a clear picture of Islamic finance: one which presents it as a way of rethinking economics and finance, instead of just as a cosmetic solution tailor-made for religious investors particular about where their money is going.


Islamic banks vs. Coventional banks

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