Islamic banking has become an important and fast-growing segment of the global financial system. The growth is expected to accelerate further in the coming years as more countries are realising the potential of Islamic banking as an alternative to conventional banking. Based on Islamic Financial Services Board (IFSB), the global Islamic banking assets accounted for US$1.493 trillion in 2016 and constitute 78.9% of the Islamic financial industry’s assets. The development of Islamic banking first started in Egypt with the establishment of the Mit Gamr Local Savings Banks in 1963 by Ahmad El-Naggar. This was followed by the establishment of several Islamic banks in other countries including Asia, GCC, Africa and MENA region. There was a diversity of products including Mudaraba, Musyaraka, Murabaha, Ijarah, Salam, Istisna’, Wakalah and Wadiah contracts.
Despite considerable progress, the issue of sustainability has attracted considerable attention from academics, practitioners and policymakers. The concept of sustainability emphasises on the long-term relationship between economic, social and environmental protection. The impact of the financial crisis has lead banks to focus on long-term sustainability rather than short-term profitability.2 (Banerjee and Velamuri, 2015). Islamic banking has the potential to play a transformative role in ensuring long-term economic, social and environmental sustainability. Sustainability reflects the ability to enhance long-term survival and prosperity that would impact on societal well-being and environmental protection. The resilience of Islamic banking during the global financial crisis has increased its capability as an alternative to conventional banking systems. However, it is argued that Islamic banks are diverging from their theoretical business model, thereby, becoming no difference from
conventional banks in practice. Islamic banks are more inclined towards conventional banking products and practices in which their main focus turns into providing Shari’a-compliant versions of conventional products. The role of the Islamic banking system is now seen as simply to offer Shari’a-compliant financial products and services. Whilst Islamic banking contracts differ from conventional banking, the use of equity financing contracts (profit and loss sharing) such as Mudarabahand Musyaraka is less. Conversely, debt financing contracts such as Tawarruq, Murabahah and Ijarah dominate Islamic financing.
Furthermore, studies show that the margins of Islamic banks are higher than conventional banks. Higher margins reflect higher costs of financial intermediation that can prevent customers from using Islamic banking services. Islamic banks are unable to effectively carry out the role as financial intermediaries in mobilising deposits and providing financing at a lower cost, which is linked to efficient allocation of financial resources. This leads us to question whether Islamic banking serves its social orientation in reducing poverty, creating employment opportunities, providing the necessary requirement funds, promoting financial inclusion, enhancing financial development and adding to general prosperity. The high cost of intermediation remains a challenge for Islamic banks preventing them from achieving their potential of providing financial services to society at an affordable cost thereby contributing to economic development. Thus, it is imperative to find solutions that will contribute to the sustainability in the Islamic banking system. The proposed sustainable banking model for Islamic banking has seven key elements which include growth, Maqasid Shari’a, financial inclusion, stability, Shari’a governance, product innovation and efficiency.
