Friday, 3 February 2012

Islamic Banking - Mindset

A while back I was invited to a dinner party at one of my friend’s place in Karachi. That was one of my cheerful days as my whole gang, my buddies were there at that lunch-cum-dinner party. Whenever we all are together , “one” has to be the centre of attention but mind it being such centre of attention  means quite a game of nerves and patience because all of us just pull leg of that centre of attention one way or other . I was that lucky centre of attention that day because of my very recent inclination and interest on Islamic banking.

All my friends present at dining table were one way or other linked with financial sector and I’m quite proud of their competencies, professional excellence and rationality. Though I knew that all of them were not convinced with Islamic banking, however their discussion /criticism that day was surprising and an eye opener for me. Questions like Islamic Banking is just a new way of these Mulanas to mix religion with everything to have their mass popularity, that Islamic Banking is a new way of exploitation by Mulas and that  Islamic Banking doesn’t even fulfill the definition of banking. I realized that if people educated, exposed and reasonably faith sensitive (most of them) were criticizing IB then how masses would perceive this new banking system?

I tried to clarify queries of my friends with my limited knowledge that like other economic and financial system, Islamic Economics/banking is a system that has got its unique characteristic and can be considerably different from all other prevailing systems. So even definition of banking can vary among different economic systems. I agreed then and still admit now that there are many problems and issues in practical implementation of this new financial system, but one would easily agree and accept the practicality, soundness and stability of the system if one thinks rationally and logically.

I sometimes fail to understand that why people forget the usual process of evolution and transformation to better systems when the older ones faced problems resulting into severe negative consequences. Even for economic systems, the world has seen various systems over different time periods, while improvements were made in each one of them following a crisis, the inherent weaknesses of these structures made them vulnerable during adverse economic conditions. Capitalism and Socialism have remained the two most prominent economic systems; we have seen them being implemented with various modifications however they have not been able to address basic economic evils resulting in often occurring financial crisis 

The significant variation in basic features of Islamic finance from its conventional counterparts depicts it as more sound and viable. Prohibition of Riba, Risk sharing, Asset Backing and Avoidance of Speculation of Islamic financial system ensure the positive impact of Islamic economic system. To make it more explicit I would like to mention some key distinguishing features between Islamic banking and Conventional banking
  • Conventional banking prices money while Islamic banking prices goods and services implying that Islamic banking supports real economic activity leading to overall economic well-being of the society by redistribution of wealth
  • Conventional banking is based on fixed returns while profit sharing is an essential element of Islamic banking for both asset and liability side of balance sheet
  •  Conventional banking works on the principle of risk transferring as it does not involve itself in trade and business while all participants of Islamic banking participate in trade and business and therefore all share the risk.
  • More stringent requirement of disclosure in Islamic banking as compared to Conventional banking make them less prone to financial fraud and crime.

However, still, Islamic Economic System is not as appealing as it should be even after multiple crisis of conventional system. One bitter realization that I had over that lunch discussion regarding the low acceptability of Islamic banking among masses is its “name”. A big majority including my “religiously” enlightened friends would have accepted this system wholeheartedly if there would have been a name other than Islamic banking. Replacement of this name of Islamic banking by any other name could have earned much greater acknowledgment and acceptability for the system.

So, It’s not only about Non-Muslim world, it’s a MINDSET which is not ready to accept this system. That mind set is the biggest challenge, a great impediment towards the growth of this industry.

I am absolutely not a religious person; rather my friends make fun of me indicating the conflict between my appearance and my inclination towards Islamic banking. My faith sensitivity has not driven me towards this system; I accidently got the opportunity to work for Islamic banking. Trust me the more I read and the more I get the comprehension of the subject I get more convinced with the sustainability of this system.

My growing interest in this new banking system and  my recent debate on these issues have made me initiate this blog which will have discussion and explanations on Islamic banking and for some time I will be posting about different aspects of Islamic banking. However, my blog is not just about changing the mindset with regards to Islamic banking but will encompass my personal experiences related to any area worth sharing. 


  1. I would very much agree that its the "Name" which confuses the masses...but also to add to it, I see a huge effort in Singapore with big Billboards negating the common belief that "Islamic Banking is for Muslims ONLY" and they are trying to gain traction with people who have already been hit by the Non-Islamic banking in any form ever. I wonder if its not easy to get through in Muslim category, how could it work elsewhere ?? Do share if you have any statistics on the adoption of Islamic banking among different demographics.


    1. The name "Islamic Banking" in the global environment where the image of Islam and Muslims has been tarnished appear as one of the great hurdles towards the acceptability of this new banking system. However, nobody can deny the fact that Islam provides all fundamentals and features of Islamic banking system and therefore the name of this refers to its origin which is Islam.

      Certainly, it is relatively easier to convince faith sensitive Muslims for Islamic banking system because of their religious beliefs , but i want to highlight here that even beyond religion Islamic Banking System is effective but there prevails lot of misperception about the system.

      Islamic Banking is Economically Viable and efficient for the main reason that that always works for creation of real business activity in the economy and that's why it has started gaining popularity even in non-Muslim countries. I will be providing statistics on adoption of Islamic banking among different demographics in my upcoming blogs

  2. عجب واعظ کي دينداري ہے يا رب
    ہے اسے سارے جہاں سے عداوت
    O Lord! Strange is the piety of the preacher
    He has animosity towards the whole world
    It’s not Islam or Islamic banking; its waaz (sermon) that gets to me. I believe in the right of people to have their own ideologies, your friends are just opinionated having their ideologies and beliefs. Islam has become a religion of sermons and pushing religion down people’s throats and the believers are not taking any criticism well. So is become the case for Islamic banking, the protagonists (like you) are preaching it and giving passionate sermons. You believe in it which is great, but you have to understand the sensitivities of your market. This is a product that you are selling and you have to treat it like one. You can’t just start saying that educated people are not buying your product so who will buy it. If you want to take on the role of marketing manager, than you have to act/work like one. There is a particular market for Islamic banking, I’m sure there are people interested in being educated on this; start there. It’s good that you are writing and educating people, but there will always be segment who will not want this particular product. Don’t keep butting your head trying to convince them.
    If Rumi hadn’t met his master the dervish he would have been long forgotten as some moulvi who gave sermons. We would have been deprived of his amazing poetry and works.
    Some Rumi for you
    so tell me the truth
    where is that fountainhead
    the one you've been drinking from
    don't hide this secret
    lead me to the source
    fill my jug over and over again
    last night i finally caught
    your attention in the crowd
    it was your image filling my dream
    telling me to stop this wandering
    stop this search for
    good and evil
    Congratulations on your blog. I am so happy that you are writing. Keep it up.

    1. Thanks for sharing wonderful rumi.....
      I absolutely do not wana say that educated people are not buying this; infact global statistics indicate that Islamic banking clientele is concentrated in educated and young people. I actually agree with you that Islamic banking is another kind of product and it should be perceived like that. i am against the bias which negates the basis or existence of this system though everybody has got the right to practice the system of his/her own choice.

  3. great stuff Bush!
    My case is just against the implementation. Whereas one would be understanding of any developmental changes in the system, exploiting a new name and using it to do the old stuff is not fair. that's my biggest complaint. they are doing nothing new, except using different names for the same stuff. what makes it worse is, the fact that they are appealing to people's religious sensitivities to buy their products. that, to me, is gross misrepresentation.
    your points are all true. and its a very long walk from here.

  4. The image of Islamic banking is what it is potrayed by its practioners, unfortunately, atleast in Pakistan it hasnt been promoted in its true spirit by Islamic bankers. Sharing my experience , when i intented to shift my salary account(which is still in conventional bank) to one of the growing Islamic bank, the reponse of customer services officer was quite shocking...He said "aik hi baat hai". Similar remarks by the higher management of these institutions has made Islamic banking confused religion banking. Though i agree, it is still not 100%...but there is no criteria to match its purity as yet. I believe it should be appreciated taht atleast some efforts have been made and we have entered in circle of Islamic economic system.


    1. Very true Fatima, the idea of IB got hurt since its launch, being a new product in Pakistan for customers and even promoters, most of the Bankers themselve tried to market it by associating two different approaches. The incidence "aik hi baat hai". happened with me also, when i visited an Islamic Bank to enquire about the Ijarah Financing (Islamic concept of Leasing).The Bank's representative tried to convince my by proving that "They at Islamic bank are using absolutely the same Lease Amortization Schedules to calculate the Principal and Interest adjustments towards the installments, and the difference between conventional and Islamic banking is merely of interpretations, so I should not hesitate to make my transaction purified and Riba free:)

  5. I do not know a lot about Islamic banking, but you wrote it very well, made a good flow and kept it interesting. GOOD JOB!

  6. Thanks for writing such a nice blog. I really appreciate your effort. I don’t know much about Islamic banking; I am commenting in order to understand more about the topic. I am somehow aware of some practical issues due to my experience from inspection of Islamic banking operations, however, here I will mostly comment on theory rather that the practice.

    I like Islamic financial system (including Islamic banking) because it hinders (excessive) growth by prohibiting speculation. Instead of steep growth and then sudden fall (which is generally known as crisis), it has potential of smooth and stable upward movement. From the records of history, banking was invented in order to protect the downside risk. For example, people used to deposit their valuables into the lockers at safer places. Later on in the early Renaissance Italy, the modern banking developed when the lenders used to provide loans purely for trade purposes. Therefore, Islamic banking seems more “back to the basics” of banking rather than anything else. In other words, the nascent form of so-called conventional banking is the same as today’s Islamic banking.

    The profit sharing concept of Islamic banks seems similar to the dividend, which shareholders of a public limited company receive on their investments based on the profit/loss of the company. So, depositors in Islamic banks are like shareholders in the public limited company. For the risk transferring, conventional banks transfer risk to the borrower, however, Islamic banks transfer risk to the depositors. For example, if somebody borrows for a house under conventional banking, the whole risk has to be assumed by the borrower in case of default. On the contrary, Islamic banks (so-called diminishing Musharika) share risk with the borrower. However, this risk assumed by Islamic banks is ultimately transferred to depositors in the form of probable loss. Consequently, the risk is being transferred. Is it so or am I mistaken? Please provide more information how Islamic banks are supposed to share risk in case of default.

    I am looking forward to having further insights into Islamic Banking.


  7. Bushra, in my opinion Islamic Banking is lagging behind becasue of the monoply of Mullas and Maulanas. Plus this concept needs clear and aggressive publicity regarding its difference with the commercial banking to attract the minds of intelligensia. Otherwise according to our experience, the words of 'Islam' and the Mulla appearance together are a confirm recipie of disaster. So i think this concept should be propogated in true spirit by the central bank.

    I appreciate your efforts in this regard.


  8. Very well composed and informative, excellent job Bushra and keep it up 

    I absolutely agree with the realization that low acceptability of Islamic banking among masses is its “name” and reasons are obvious that Islamic Banking was launched on the shoulders of Conventional Banking as absolutely HARAAM, so when you challenge something like this you should have been well prepared for the counter strikes, which in this case the embryonic Islamic banking system was not :( secondly, as the name refers as "ISLAMIC" it didn’t get any benefit of doubts and people perceived and interpreted it as something in absolute compliance with Quran and Hadees, so anything with even a minute deviation was referred as miscommunication, lie and even Fraud..... for example, one of the basic issues discussed in the beginning among people was" does it means that we can get loans with no interest at all, that would be awesome"

    Anyways we should look forward and hope for something good, may Allah enlighten our paths with luminosity of Hidayat and wisdom Ameen.