Problems with Islamic Finance: Dawn

By Syed Imad-ud-Din Asad

ISLAMIC banking has accomplished growth rates that tremendously outpace conventional banking. While there are banking norms common to both — Islamic and western financial systems — certain norms are exclusive to Islam. Some of the Islamic restrictions render certain western banking practices and transactions void.

The main prohibition are riba and gharar. Most of the present-day Islamic scholars are of the view that riba includes both interest and usury. Gharar signifies ambiguity, uncertainty or lack of specificity in the terms of a financial contract.

As riba is prohibited, suppliers of capital become investors instead of creditors. Also, investment can only be made in permitted commodities and activities. For instance, one cannot deal in import and export of alcohol and narcotic substances. Similarly, money is not allowed to be invested in a casino.

A variety of Islamic banking instruments and transactions are available in different markets. These may be classified as equity, debt or fee based services/ products. The first includes musharaka and mudaraba; the second consists of salam, istisna, istijrar, qard, murabaha, ijara, bai-bithaman-ajil, bai-al-einah, bai-al-dayn, and tawarruq; the third comprises services based on wakala and kafala.

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