Sources differ on whether Islamic banking is more stable and less risky than conventional banking. Some Islamic banking observers believe that the industry suffers from hand-picked and well-paid Sharia experts who approve financial products that use ḥiyal (legal strategies) to comply with Sharia law,[435] “avoid controversial issues” and/or “automatically approve” bank management decisions after superficial scrutiny,[436][437] and that the banking practices approved by this small number of Islamic jurists resemble the practices of conventional non-Islamic. In this context, it is important to stress the importance of the role of the social partners in the development of the European Union. [329] Islamic banking services date back to Sharia law, and all Islamic banking transactions must comply with Sharia law. In general, Islamic banking and finance have been described as having the “same purpose” as conventional banking, but operating in accordance with the rules of Sharia (Institute of Islamic Banking and Insurance)[101] or having the same “fundamental purpose” as other private enterprises, i.e. “maximizing shareholder wealth” (Mohamed Warsame). [102] Similarly, Mahmoud El-Gamal notes that Islamic finance “is not constructively built on classical jurisprudence.” It follows and deviates from conventional banks, “only to the extent that certain conventional practices are considered prohibited by Sharia law.” [Note 5] These are the emic (internal) issues discussed within the Islamic community to align Islamic banking and finance with Sharia and desired Islamic goals. According to Mr. O. Farooq, the Islamic financial movement`s “common explanations” for the shortcomings of the Islamic banking industry are that there are different Islamic banking system structures: In addition to the disadvantages for lenders, a critic of Islamic banking, Feisal Khan, argues that the widespread use of PLS could cause serious damage to economies by preventing central banks from expanding credit. Commercial paper, etc. – to prevent liquidity crises that occur from time to time in modern economies. [480] Islamic banking services are based on the principles of the Islamic faith insofar as they relate to commercial transactions.
The principles of Islamic banking are derived from the Qur`an – the central religious text of Islam. In Islamic banking, all transactions must comply with Sharia law, the legal code of Islam (based on the teachings of the Quran). The rules that govern Islamic banking are called fiqh al-Muamalat. One of the main differences between conventional banking systems and Islamic banks is that Islamic banking prohibits usury and speculation. Sharia law strictly forbids any form of speculation or gambling called maisir. Sharia law also prohibits accepting interest on loans. In addition, any investment in items or substances prohibited in the Qur`an – including alcohol, gambling, pork – is also prohibited. In this way, Islamic banking can be seen as a culturally distinct form of ethical investing.
El-Gama also argues that another source of higher inefficiency/costs in Islamic banking, and one of the reasons why its replications of conventional financial products in conventional industry are “always a step backwards,” is the industry`s reliance on classic “nominative contracts” (Murababahah loan sales, Imara rental, etc.). These treaties follow classical texts and were created at a time when financial markets were very limited. They are unable to “untangle various risks” for which “modern” financial markets and institutions (such as “money markets, capital markets, options markets, etc.”) are designed. On the other hand, making their contracts/products more efficient will alienate the pious clientele who want contracts/products to follow classic forms. [528] In any event, some Islamic banks have failed over the decades. In 1988, the Ar-Ryan Islamic investment company collapsed, causing thousands of retail investors to lose their savings (they were later compensated for their losses by an anonymous Gulf state donor)[510] and dealing a blow to the Islamic financial system of the time. In 1998, the management of Bank al Taqwa failed. The annual report states a “loss of more than 23% of the capital for depositors and shareholders of Mumaraba”. (It later turned out that management had violated the bank`s rules, “investing more than 60% of the bank`s assets in a single project.”) [460] [461] Islamic banking practices generally date back to Middle Eastern businessmen who began conducting financial transactions with their European counterparts in the Middle Ages.
Initially, they applied the same financial principles as the Europeans. However, over time, as trading systems developed and European countries began to establish local branches of their banks in the Middle East, some of these banks adopted the local customs of the region in which they were newly established, mainly interest-free financial systems operating on a profit-and-loss sharing basis. By adopting these practices, these European banks could also meet the needs of local Muslim businessmen. At the start of the 2007-2009 “Great Recession,” Islamic banks were “unscathed,” leading one Islamic banking supporter to write that the collapse of Wall Street`s major institutions, particularly Lehman Brothers, “should encourage economists around the world to focus on Islamic banking and finance as an alternative model.” [515] However, the impact of the financial downturn gradually shifted to the real sector and affected the Islamic banking sector. According to Ibrahim Warde, “this showed that Islamic finance is not only a panacea, and that a confessional system is not automatically immune to the vagaries of the financial system.” [516] [194] There is little data from countries with larger Muslim populations. A 2013 World Bank study of 64 of these countries found that Muslims were significantly less likely than non-Muslims to have formal bank accounts, but were no less likely to use financial services overall. It is not clear whether this simply indicates a preference for informal financial services or rather that customers might be attracted if the right compliant products were available. Four percent of the unbanked in non-Muslim countries cite religious reasons, according to the World Bank, but the figure rises to 7 percent in Organization of Islamic Cooperation countries, suggesting that Muslims are more likely to have religious reasons for avoiding formal financial services. There is no data on whether American Muslims are relatively bankless. Only one-third of American Muslims own their homes, compared to 58% of the general public, although this gap can be explained in part by the relatively young age of the American Muslim population (the average first American buyer is 34).
In the Philippines, judicial power is exercised by the Supreme Court and lower courts (e.g., metropolitan or municipal courts of first instance, regional trial courts, and the Court of Appeals).56 However, only Supreme Court decisions are part of the legal system.57 To date, the Supreme Court has not ruled on any cases involving or interpreting Islamic financial products and structures in the Philippines. In fact, there is still no body of jurisprudence on Islamic banking and finance. These prohibitions have always been enforced to varying degrees in Muslim countries/communities to prevent non-Islamic practices. In the late 20th century, as part of the revival of Islamic identity,[4][note 1] a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community. [6] [7] Their number and size have increased, so that in 2009 there were more than 300 banks and 250 investment funds in the world that adhered to Islamic principles,[8] and about $2 trillion were Sharia compliant in 2014. [9] Shariah-compliant financial institutions accounted for about 1% of total global wealth,[10] concentrated in the Gulf Cooperation Council (GCC) countries, Iran and Malaysia. [11] Although Islamic banks still represent only a fraction of Muslim banking wealth,[12] they have grown faster than total bank assets since their inception and are expected to continue to do so. [9] Many writings argue that the practice of Islamic banking is so far removed from his theory.
This article also explores whether the key issue in Islamic banking is to fulfill certain procedures or achieve the goals of Islamic law. Since Sharia membership is the raison d`être of Islamic finance, Islamic banks and banking institutions that provide Islamic banking products and services should establish a Shariah Board of Directors (SSB) – to advise them on whether or not the proposed transactions or products comply with Sharia law, and to ensure that the operations and activities of banking institutions comply with Sharia principles. [211] Mahmoud El-Gamal believes that from the 1970s to the 2000s, there was an evolution of the industry towards “increasingly close approximations” of conventional banking practices, endorsed by an “increasingly smaller” number of lawyers (only a small group approving “unsecured loans” to individuals and businesses via the Tawarruq mode in the early 2000s). [329] The lack of qualified Sharia supervisors – who need to be trained in both Islamic commercial law and contemporary financial practices – was noted.