Is Islamic banking really Islamic?

Published: June 25, 2010

Don't try to find Islam in Islamic Banking. Implement Islam on yourself, then your economy. Banking will automatically become Islamic.

The journey began with trying to establish Shariah compliant prudent banking opportunities. The concept was to provide Halal banking and safety from Riba (interest). The aim was to avoid foreign banks and their banking system in Muslims countries. The vision was to establish an Islamic Economic System.

After the initial stage, people started having questions in their minds: Is Islamic banking really is Islamic?

The matter is drawn from two aspects. First, what is the difference in the methodology the common man can see when he deals with an Islamic bank in comparison to a conventional commercial bank? And second, whether interest is completely weeded out, even at the benchmarking level, from the Islamic banking system?

The problem arises when the Islamic banking system is only considered to be a change of name.

When people come across such Islamic banking products as Ijarah or lease, they wonder if it’s the same that which a conventional bank offers. If we look closely Ijarah Muntahiya Bitamleek (Islamic Leasing Product) is very similar to the finance lease provided by a conventional financial institution, except the difference of the insurance cost (Takaful / Islamic Insurance) which has to be borne by the lessee in the Islamic mode and it is built in the rentals.

Here I would like to stress that people always try to compare an Islamic banking product with a conventional banking product, and it becomes critical when it has a fixed return embedded.

Regardless of the fact that many Islamic banking products have some embedded components of fixed return, there is another issue that is more objectionable of the current Islamic banking system. And, that is the use of interest rates as a benchmark. Being an investment banking professional of an Islamic bank in 2006, I prepared many term sheets based on KIBOR for benchmarking diminishing Musharika profits. It made me feel that we were working under the same capitalist system by giving it a different name for our own satisfaction i.e. Islamic.

A person can argue that for instance if the price of beef is benchmarked with that of pork, we cannot say that beef is prohibited just because of the pricing mechanism. There are two important points to consider here. First, the development of Islamic benchmarks and second, the tentative nature of the rates that are not a benchmark within, but rather a mere estimate assigned by relevant probabilities or there is a will of having something fix part and making the rest performance based.

Another objection against Islamic Banks is regarding their transactions with commercial banks including how some commercial banks have opened up Islamic banking branches. It makes one wonder whether the money being used in such transactions is free of interest or not?

Sometimes there is also doubt about the intentions of the seller of the banking product. While at one place a bank is selling conventional banking products, on other hand they also have Islamic Banking Products. It is same if Hamdard announce to sell wine with their parallel sale of Rooh-e-Afza. This point must be addressed by the existing Islamic banks and the regulators.

No matter how problematic the above mentioned issues seem, in my opinion the biggest point of concern is something else. The real issue is that we cannot establish an Islamic Banking System of the truest form without having a true Islamic Economy and we cannot establish a true Islamic Economy without surrendering our non-Islamic lifestyles and societies.

I don’t understand why we are more interested in names. No one can sell Halal Wine simply because we cannot make wine Shariah compliant. The same way we can not find a way to make interest Halal. An interest free banking system is correlated with the will of the economy to invest in risk. People cannot attain Islamic Banking with a will to have fixed income securities in their portfolio as well, tagged as “Islamic.” It is actually the risk that we fix rather than return on income. If the concept is risk sharing, we have to work far too long to make our society aware in this regard.

I do not say that we should discourage Islamic banks. We just need to learn and implement faster.

The more we emphasize on the Islamization of Islamic banking, the more we will need to have an Islamic economy and the more we would want an Islamic economy, the more we will have to be good Muslims in all aspects of our society. Otherwise it is all a never ending debate. Don’t try to find Islam in Islamic Banking. Implement Islam on yourself, then your economy. Banking will automatically become Islamic.


Saqib Omer Saeed

A financial researcher, analyst and adjunct faculty in CBM, SZABIST, BIZTEK & University of Karachi and blogs at

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • Amar Khan

    Well written and justified point outs Saqib. But question is rather difficult as our objectivity is not to implement Shariah, we are interested to defend our presence as Muslim only. Thanks for giving us an opportunity to think it.Recommend

  • anoop kumar

    sir nice and very help full material espically for comman man they dont know deeply regards banking system after read this whole article i high light just one thing (The real issue is that we cannot establish an Islamic Banking System of the truest form without having a true Islamic Economy and we cannot establish a true Islamic Economy without surrendering our non-Islamic lifestyles and societies.) in my openion sir this is vary important pointRecommend

  • http://.. Uzair Akbar Soomro


    well written.. noted good points.

    Islamic Banks are working on the benchmark. INSHALLAH near future the IBOR will be introduced as the benchmark of Islamic Banks.

    2ndly the conventional banks who opened Islamic branches these branches are under the Shariah Compliance and Shariah Advisor’s are monitoring each and every transaction are shariah compliance or not.
    if not the charity action are taken.

    The Islamic Banking is based on Asset Side Financing so the main goal of the shariah compliance to check the funds are utilized in Asset or not.

    The Islamic Banking System is the step to move the economy to Islamic system.

    Uzair Akbar

  • Maliha

    People in our country especially the lay person can easily be fooled in the name of Islamic banking.
    I agree with you Sir! we cannot truly establish an Islamic banking system unless we follow our religion with our hearts and soul. Changing names and changing faces will not change our fate unless we work hard for it.Recommend

  • Fahad Abbas

    I really like your article and the beautiful ending of the it,but my point is this we have a create or educate our people about Islamic Product, because whenever, loss occur in Islamic Bank, the deposit holders does not ready to take hit on their principal, it is one of the biggest reason for that Islamic Bank doces not offer or does not encourage or Reluctant to enter into euity particpation mode
    I think this is the area where we have to work hard to educate both, the deposit holder and borrower and once Islamic Banks starts enter in to Musharaka and Modaraba, this will bring an remarkable impression on the people and it will eliminate the confusion in the mind of many people that Islamic Banking is just a change of nameRecommend

  • Farrukh Qureshi

    First of all I appreciate your thoughts, which is a prove that there are peoples who really think for basic issues other wise we mostly very busy to meet our basic need and most of us hardly succeed.
    Topic of Islamic Banking is like a hot cake in current market situation. The topic you chose “Is it really Islamic” it’s a controversial, if we talk about practices which Islamic Banks are following, are not Islamic they are purely conventional. And the worse thing is , if someone ask about that practice they simply answer that Islamic Banks are trying to make it Islamic and Islamic Banking is new born baby in current market, its steady process to change the old practices so it takes time and all that.
    Guide Lines provided by Mufti Taqui Usmai are very strict and stright forward. I am an accountant in Islamic Bank and knew and witness lots of conventional practices in my bank but fore that conventional practices I answer that if some one is a teacher and not sincere with his/her profession than he/she also doing the same that peoples doing in Islamic Banks. I am satisfied with these guide lines by Mufti Taqui Usnmani execpt some products and thats why I can not say according to my knowledge and understanding that the current Islamic Banking in Pakistan is purely Islamic.
    Keep it up brother


  • Muhammad Ahmad Ansari

    you collect very good point in this page.
    But I want to say that Jews(yahoodi) wants muslims to eat intrest so by changing of name like ISLAMIC BANKING.
    Other hand I want to ask all islamic bank and bankers that IS THERE ANY BANK WHO COULD GIVE LOAN WITOUT INTREST????????
    If not how u are islamic bank and bankers.
    Thats all.Recommend

  • Think therefore

    Please dont undermine the islamic financial solutions. They are nascent and would take a few centuries (like jewish system) to take root. Please be aware that the threat of a parallel islamic economy was the biggest concern of the jews more than 1400 years ago and still is today. In times like today when your mind and the minds of so many others are clouded by zionist teachings and preaching (coaxing you to discourage/undermine/discount/discredit what is indeed their biggest future challenge) people like Mufti Taqi Usmani are chipping away the walls of jewsish economic detention centres that the world has become.Recommend

  • Saqib Omer Saeed

    Dear Think Therefore! Nice to hear your comments. INTEREST IS NOT THE TEACHING OF ISLAM and this is what [only] matters. Islamic Economic Model is beneficial for everyone. This is how we have to preach it. If it is a threat for someone so they can think their way but we don’t need to take tension of it neither we have to always hang on few points i.e. ZIONIST, ISRAEL, AMERICA, EUROPE or INDIA etc. Once we stand up as true Muslims everyone will disappear. Not a single spot in above write-up says that we have to dislodge Islamic mode of financing or economy. The discussion is about concerns of people about it. Kindly try to get out of involving ZIONIST in everything, what our Ummah is bearing is only because of our own attributes, behavior and performance. We just need to get our house in order and once we get enough strong then we can address other issues. I personally regard Mufti Taqi Usmani and Rafi Usmani Sahab, we are not talking about the banks where they are Shariah Advisor but there are many Isl. banks and Islamic Banking divisions of commercial banks that are the point of concern. Try to see a bigger picture. Narrow mindedness is not the call of time. There are no ZIONIST clouds brother! I even don’t give weight to them. Justice is everything! What is said can be discussed anywhere and can be proved. Have a nice day!!!!Recommend

  • islamic banking courses

    Islamic commercial banks enjoy the creation of money, as well as traditional commercial banks. The only sin is in itself sufficient to conclude that Islamic banking is not Islamic, but it shows the previous example, is a sin that requires interest-based loans, to make it profitable. Although Islamic banks do not realize the business model of banking based on interest is imposed and is the sharing of benefits out of reach.Recommend

  • Abu Warisha

    Assalam-O-Alaikum ya Akhi Umer Saeed

    Very attractive name of this article, but to me Mr Saeed, I sees a very much lack of homework and Knowledge not only regarding existing Islamic banks practice as well as Islamic Economic system (Iqtisadiat-e-islamia).

    I believe that Islamic Banks or you may name them Islamic Capitalization is the fitnah for Muslim Ummuh and May allah help us to way for this.

    You may consider working on following topic regarding Islamic Banks these are the major issues i.e Ltd. lib Concept. ,Inter mediator in Islam, No cost for Capital, Pure Trading nature of Bank (so the name of bank not exist as per its definition). IB shd involved in Manufacturing and Agri area. Not just a financier but on the Mudarba or Muskarika basis and many more.


    قَالَ رَبِّ إِنِّي أَعُوذُ بِكَ أَنْ أَسْأَلَكَ مَا لَيْسَ لِي بِهِ عِلْمٌ ۖ وَإِلَّا تَغْفِرْ لِي وَتَرْحَمْنِي أَكُنْ مِنَ الْخَاسِرِينَ (11:47

    Jazakumullah Khairan Recommend

  • Saqib Omer Saeed

    Wallehkoom Assalam! Thanks for your comments brother Abu Warisha. Your comments are indeed valuable for me. You are right but let me say that I didn’t included the hard core mechanism of Islamic Banking [IB] here because this post is something in more the reflection of people’s questions about Islamic Banking. Even some of my brothers thought that I passed a verdict that Islamic Banking is not Islamic but my writing is more a question and concerns of people. Neither at any point I justify a fact or answer the question. Just I put that concerns are there and we need to imporve or establish.

    Now when you said “I believe that Islamic Banks or you may name them Islamic Capitalization is the fitnah for Muslim Ummuh and May allah help us to way for this”. I respect your comments but even I shall not go there till that point, rather I like to get people study the transactional practices in the time of Prophet S.A.W. and Khulfa e Rashideen. The problem arises when we ignore the aspect of Prophet S.A.W’s life as Businessman. Indeed Muslims ruled the world’s business and economic scene for hundred of years but our universities are really not agree to explore the way of Muslims Business and Economy.

    In addition these days I am carrying a research on Mechanism of Islamic Banking and its comparitive analysis from Commercial Banking. I know it shall be a detailed study and that shall explore exactly the essence of the issue [to the extent of what I find out of that]. But again it shall be apart of journal because we can not enhance this kind of study on blogs but for sure I shall make it understandable & down-size to post on blog also.

    Brother! One thing in the end. You are right that the lack of knowledge is there on Islamic Economy. But very unfortunately that there is a lack of submission in Muslims. We are more BUGHZ E KUFR than HUB E ISLAM [again my opinion / not a binding on others]. I think all of us have to sit togather and sort out. Even if one of our Muslim brothers or entities is going wrong, so we don’t need to fight rather we need to create understanding. The same is the case in Islamic Banking or Economy. We need the same intellectual culture that we got in Prophet S.A.W’s time. Believe me Muslims have a great spark of Education and Economy hidden in their souls. They just need to explore and work it.

    I again thanks to all those who comment on my blog and I always seek your interaction openly because Knowledge is our way. Recommend

  • Think therefore

    Saquib first of all your poise is laudible. My final point is. Please dont critisize an economic system that is only just re-emerging after a long spell of drought. Infact you should spend your energies on highlighting its gains and accentuating the positive. Isnt that how we help the feeble rehabilitate themselves after a debilitiating period in degenerative diseaseRecommend

  • Talha Jamshaid

    This is a very informative article..I have made my effort in explaing the Islamic Banking

    and Financial System of Pakistan..The link is given below..

  • Sulaiman Dawood


    Great Post and people should realize how they are being fooled! The most funny thing what I heard from my Engineering Economics teacher that State Bank of Pakistan gives loan to the local banks on interest and asks a percentage more than given to them be it labeled Islamic Bank or UnIslamic Bank. So on this condition how can any bank be Islamic?

    Moreover, I encourage you people to study this article in PDF Format:

    May Allah reward you for identifying such an important issue here and hereafter. (Ameen)

    And please guys stop blRecommend