Understanding Islamic Finance - Doha Academy of Tertiary Studies

An Appraisal of Common Criticism 4354. Banks are intermediaries by nature and deal in documents only; they should not involvethemselves in trading or other direct business; otherwise they will be taking unnecessaryrisk exposure and leaving themselves open to possible loss to the investors and thefinancial system.5. There are differences of opinion in respect to a number of concepts, modes and productsof Islamic finance, due to which a standardized system cannot be developed. Manyproducts developed in the Far East and other parts of the world are almost identical tointerest-based products. Those products provide the same or similar return to the investorswithout any possible impact on socio-economic growth, as claimed by the pioneers ofIslamic finance. Examples of this are sale of debt and debt instruments, giving returnsto the investors in the form of gifts and last but not least, Tawarruq, for which Islamicbanks simply engage one or two brokers to sign a few documents to get or place liquidityat fixed rates of return.With regard to the practice of Islamic banking, the generally made criticism pertains tothe following:1. There is divergence between the theory of Islamic finance and its practices. The pioneersof the theory prescribed the use of Musharakah and Mudarabah (PLS modes); butpractically, the share of PLS modes is negligible and the mainstream business is basedon debt-creating modes to earn fixed returns as in the case of the interest-based system.2. Islamic financial institutions (IFIs) operate on the basis of predetermined and fixedrates and earn fixed returns. So-called Islamic Sukuk also carry fixed returns, just likeconventional fixed-income securities. How, then, are they Sharī´ah-compliant?3. Islamic banks price their products on the basis of interest-related benchmarks likeLIBOR; charge predetermined rates to the clients on the assets side and give benchmarkedrates to depositors, just as conventional banks give to their investors in a givenjurisdiction.4. There is no factual difference between the operations of conventional and Islamic banks.Islamic banks are performing as intermediaries working on the same grounds on whichthe conventional institutions are working.5. The net result of conventional and Islamic bank financing is the same. In leasing, forexample, Islamic banks add all costs, including insurance, transportation, registration ofthe leased assets, etc., to determine the rental related to the interest-based benchmark;and at the end, they transfer the leased asset to the client, as in the case of conventionallease finance. In mortgage financing also, they charge the profit/rent on the basis of anIRR/benchmark. Even in the case of Shirkah-based modes, their main concern is to geta market-based rate of return on their investment.6. IFIs do not actually get involved in trading activities. They have no inventories of thegoods to be sold, make the clients their agents for purchasing the goods requisitionedby them and many a time engage in buy-back and Tawarruq (monetization or cashprocurement through tailored trade contracts) activities.7. Islamic banks normally are working in the same regulatory frameworks in which theconventional banks are working. “Islamic windows” or stand-alone Islamic bankingbranches (IBBs), allocate interest income as the seed or base capital. By offering such“Windows” they are only befooling the public, who avoided interest on the basis ofbelief, for mobilizing petrodollars in the Middle East and the excess wealth in the Muslimmajority and minority countries. How can a Riba-based institution ensure Sharī´ah