Question

The recurrent financial crises that have had devastating impact on the real economy have provided an opportunity for many to claim that Islamic Banking and Finance (IBF) is a more stable and just an alternative. However, of late, there are also an increasing number of voices criticizing its development, saying that it is merely ‘conventional banking in Islamic clothing’ (paraphrased), and hence cannot achieve noble goals Islamic economics has set out.
Required: Fully Discuss Using your own words, what is one specific criticism leveled against Islamic Banking and Finance (IBF)?

Answer 1

As Islam prohibits lending on high interest, the Islamic countries follow a different system of banking called Islamic banking. In this system, the Capital is given by the saver and the entrepreneur who is willing to take risk act as a borrower. There is no interest charged on the loan but a share of profit is distributed among the bank and the depositor(in this case the lender).

People save money in order to satisfy their buying target or in anticipation of any future need. The traditional banking provides a safe place for depositors to park their money and earn some interest and allows them predictability on their future value of funds which helps them in planning their future. But in Islamic banking due to the inherent risk involved in being invested in an entrepreneur depending upon the agreement between the borrower and lender and the banking institution in between, the agreements can wary. And depending upon the agreements it could lead to full capital erosion for depositor in worst cases and also may lead to loss absorption by the entrepreneur from his personal assets.