Many industry observers assert that Islamic banking products in essence are replicas of conventional banking products, be it Islamic deposits or financing products based on leasing or trade-based contracts. A replica, however, by its very nature and definition is inferior to the original, and hence should be priced significantly lower. If viewed from this perspective, Islamic banking products are certainly not replicas as in most cases they happen to be more expensive than their conventional counterparts.
While structures of these products fulfil basic Shari’a requirements, they are not novel in their economic profiles. Islamic banking faces cynicism from those who expect it to be different from conventional banking not merely in terms of adherence to Shari’a principles but also in terms of its socio-economic implications. The severe criticism that it attracts is at times too harsh. As an advocate of Islamic banking and finance, I have always defended it from undue and harsh criticism by non-Muslims but more so by Muslims, a vast majority of whom sees no economic value added by Islamic banks.
Because of limited economic value addition by Islamic banks and financial institution and the relative dearness of Islamic financial products, Islamic banking and finance has emerged as an elitist phenomenon. As such it is no coincidence that it is more popular in countries where Muslims have higher per capita income and wealth. In other countries, Islamic banking and finance is serving the relatively affluent segments of the society.
It is only fair to accept that Islamic banks have retained basic features of conventional banks, of acting no more than money managers. Islamic banks, on the other hand, should have been structured as trading houses, which to date has not been the case, as they by and large are not involved directly in trading. They merely finance trading activities of their clients, with the help of contracts the likes of murabaha, salam etc. As such their returns are based on financing and not trading.
As financiers, managers of Islamic banks think like financiers and not traders. They act like financiers. They price their products like financiers. And, they happen to penalise defaulters akin to financiers1. In other words, they simply tap, i.e., think, act, price and penalise similar to financiers. When an Islamic banker thinks, acts, prices his products, and penalises defaulters like a financier, then he is said to be involved in tapping. Such an Islamic banker is then regarded as a tapper.
If an Islamic bank is involved in tapping, it does not add economic value to conventional banking. Tapping, in other words, is nothing more than simply meeting basic Shari’a requirements without any economic value being added.
In tapping-based Islamic banking and finance, the prohibition of interest is merely a Shari’a technicality without any substance. In this context, Islamic banking is little more than a sub-set of conventional banking and definitely not an alternative.
As long as Islamic banks remain involved in money management, they will do nothing more than tapping. For Islamic banks to add real value to the societies and communities they serve, they will have to add broader socio-economic services to their product offerings.
Many critics would argue that Islamic banking as a phrase is a contradiction in terms. On the basis of this argument, Islamic financial doctrines can then be best implemented outside a banking context. We have in our previous issues of ISFIRE, argued that a charity or donation-based model best suits Islamic financing. Here, we propose that an Islamic financing model could be based on a for-profit-philanthropy (FPP) model.
In tapping-based Islamic banking and finance, the prohibition of interest is merely a Shari’a technicality without any substance. In this context, Islamic banking is little more than a sub-set of conventional banking and definitely not an alternative.
For example, a FPP institution could open a new branch in a locality by first determining levels of employment, education and earnings per household therein, with a view to enrich the local lifestyle. All the branches could be categorised as tertiary, secondary and primary depending on their performance on the above criteria. Each new branch should be considered as tertiary with a target to move up the ladder to become secondary and primary.
An FPP branch could be deemed successful if it has improved levels of employment, education and earnings, and by doing so enriched the lifestyle in its catchment. With the increased use of FinTech in financial services, it is not only possible but also expected to drive businesses in the near future.
There have been some interesting initiatives that could have been developed into viable improvements to conventional banking, if not full-fledged Islamic alternatives. The initial thinking behind Mudaraba Companies in Pakistan was an excellent model for developing an alternative to conventional banking. But it received little strategic attention by the subsequent policymakers. Securities and Exchange Commission of Pakistan (SECP) remained indifferent to the recently exposed Mudaraba scandal in Pakistan, giving a bad name to an otherwise excellent business model. Furthermore, tax incentives given to Mudarabas and Mudaraba Companies were prematurely withdrawn, which resulted in the gradual decay of the sector rather than further developing it.
Mudaraba Companies, which are still operating in Pakistan, are seen to primarily target relatively sophisticated investors in the society. The proposed FPP-based model could be used as a financial inclusion tool to bring the masses and financial excluded segments of the society into the formal banking system. In Pakistan, there is no harm in patronising existing banks (conventional as well as Islamic) for basic banking needs (like current accounts and safe custody), as these banks are not heavily involved in financing anyway.
Islamic finance should reposition itself outside the banking sector. There is huge scope in this proposition as nearly two-thirds of bankable population is excluded from financial services. The question then arises: Is there any visionary individual or institution that has the guts to take up this challenge? Only time will tell.
