Question

Though the industry of Islamic banking and Finance has been growing for the past 30-40 years, some Shariah scholars have openly refused to accept its role on both levels:

a) Macro level (there can be no Islamic banking and finance under a Conventional Central Bank)

b) Micro level (products such as Bay’ Einah, Tawarruq etc are nothing but legal tricks and a backdoor for Riba).

Based on your knowledge, provide four arguments (two on Macro and two on Micro levels) either to support or refute the above statements.

Answer 1

                                    Islamic banking refers to such a banking process which operates in accordance with the Shariat system of rule wherein the money has no intrinsic value and thus cannot be sold for a profit. Since, the Islamic banking system prohibits any fee for renting of money, it is entirely different from the normal banking system and thus has a varied approach at the macro and micro level. Thus, the following are the arguments that supports the first statement

a)

1) A conventional central bank works on the normal banking principle and thus provides the rate of interest to the customers which is entirely different from the Islamic banking method which doesn’t give interests to the consumers and also accepts interests although it is based on the banking regulations

2) A conventional banking system makes profits from the interests that are charged on lending whereas the Islamic banking system makes profits from investments

b)

1) Tawarruq is a financial instrument in which a buyer purchases the commodity from a seller on deferred payment basis and sells the same commodity on spot payment basis to another buyer. Since it results in generation of profits, it can be said as another legal or technical trick as a backdoor to ribla

2) Various instruments like Murabaha [cost plus profit], ijara [letting on lease] works on a different approach and hence works on a different mode when compared to the normal banking

                                    Although the given cases reflects that the Islamic banking method is different, the new banking methods have been incorporated in to the system so as to have a compliance with the conventional banking mechanism.