Title: Islamic Banking (A Realistic Analysis)
Author: Maulana Dr. Ijaz Ahmed Samdani
Publisher: Idarae-Islamiat, 2006
In this book, the learned author evaluates Islamic banking from a realistic perspective. He explains that Islamic banking is after all, a commercial enterprise. It cannot be expected to work like a charitable trust. It will offer products which are commercially viable and competitive.
Having said that, Islamic banking gives utmost significance to Shari’ah compliance at every level. It does not and cannot compromise on that. However, it is not duty bound to make its products catering to all the financial and social needs of the masses.
Poverty alleviation and income redistribution are maybe desirable goals, but in Islamic finance, there are different other social finance institutions to take care of these needs. Furthermore, the true fruits of Islamic financial, Islamic economics and in a larger context, Islamic social system will be achieved when there is Islamization of other institutions, government administration and public and economic policy.
The author argues that Islamic banking working in dual banking system which is dominated by conventional banking cannot be expected to make a larger influence in achieving socio-economic goals in short period of time in a policy-neutral or policy adverse environment.
Serving both depositors and clients needing finance, returns on Islamic banking deposits and financing cost in Islamic financing products will converge to the market rates.
Any positive or negative deviation will affect one of the two clients, i.e. depositor or the client requiring finance. For instance, if lower finance cost is charged as compared to market, then the depositors will also suffer with lower returns.
On the other hand, if depositors are to be provided with higher returns, then finance cost will have to increase to generate higher income.
The author also emphasizes the fact that modern day banking performs many functions. Some functions are compliant from the point of view of Shari’ah. For instance, transfer of funds, payment of bills, collecting payments, disbursing payments and facilitating cross-border trade. But, in sourcing deposits and providing finance, conventional bank indulges in Riba.
Therefore, if Riba-free products are developed, then pooling of funds from the masses to invest in real economy and assets is not only Shari’ah compliant, but also conducive for industrialization, capital formation, productivity enhancement and employment creation.
Having said that, the author also emphasizes that the fuller and wider benefits of Islamic finance will be realized when equity based modes of financing become more prominently used modes of finance.
Equity based modes of financing are inclusive, egalitarian and based on the true and genuine essence of risk sharing. But, for short term asset acquisition needs, sale based and lease based modes of financing are more effective for both the bank as financier and for the client as well. The author also summarizes the process flows of major contracts for the benefit of readers in this short book.
All in all, it is a good summary of Islamic finance concepts. The author has presented the view of realists well.
Nonetheless, as author also cautions, there is no room for complacency. Islamic banks shall try to achieve more than competitiveness. They should strive to make efforts towards contributing to the higher objectives, which include inclusivity, equitable distribution of income and basic need fulfilment.