Dichotomy between Sharī‘ah Compliance and the Economic Goals of Islamic Finance Institutions

Abstract

From forty years Islamic banks are working since the Dubai Islamic Bank and the Islamic Development Bank were established in 1975. Islamic banking windows, standalone Islamic banking systems and even full-fledged Islamic banks, are operating as a part of global finance industry in the scenario wherein interest based institutions capture the overwhelming part of the business. Islamic Banking Institutions (IBIs) use Islamic equivalents of almost all conventional finance products for financing and liquidity and risk management, from ‘over draft’ to the most toxic derivatives like swaps to compete with the conventional banks in profitability. For commercial necessity and the need to compete for profitability, many Islamic finance professionals, academics and some Sharī‘ah scholars advocate for the use of such products and devices treating it ‘hājjah’ for risk hedging on the basis of ‘maslabah’ or ‘umūm balwa’. This paper discusses the severity of the dichotomy between economic goals and the Sharī‘ah compliance focusing on the negative impact of financial derivatives and suggests some policy initiatives and steps to reduce it and make Islamic banking and finance an increasingly sustainable global discipline based on sound principles. It recommends that the jurists and Islamic finance professionals should explore the Sharī‘ah rules and real business potentials to find answers to the current Islamic banking conundrum and lead the industry on the right path of developing Sharī‘ah based ethical products and using really Sharī‘ah based devices to hedge risk.