Expert View

The Tiger and The Lion

Some commentators accuse Islamic Banks of being shrouded in a cloak of piety.
They accuse them of using the word Shariah as nothing more than a marketing gimmick.
These critics assert that Islamic Banks offer conventional banking products wrapped in hollow fatwas written by dishonest or unknowledgeable scholars.

They say that Islamic Banks simply use classical Arabic words for commercial transactions to give their products an Islamic flavor.

Some even claim that there can be no Islamic Banks since there were no Banks in the first centuries of Islam.

Here are a few examples of the criticism that I have seen:

“Interest-based loans with Islamic labels…”

“The products that modern-day Islamic bankers have created are very similar to conventional products.”

“the products promoted by the Islamic finance industry are sometimes indistinguishable from those of interest-based institutions.”

“The foundation of Islamic banking…is…based on execution of…documents. On the basis of which…a haram…gets…to be…halal.”

“…the Islamic banking system is only considered to be a change of name.”

“normal banking sprinkled with holy water.”

I absolutely reject these unfounded accusations. It’s one thing to criticize a specific product or a specific institution; it’s another to disparage a whole industry.

These criticisms usually have a lot in common. They have no knowledge of historical commercial transactions. They make serious mistakes in the understanding of Shariah. For example confusing between acceptable debt and forbidden interest, or assuming Shariah must be only equity financing. Many have mysterious sources either “an Islamic banker I know” or a “western banker with knowledge of Islamic banking”, which are always nameless. These sources seem to know everything but say nothing accurate and have concluded it’s a scam but without providing a shred of evidence. What one never sees in these articles is any detailed analysis of an Islamic product and how it breaks any Shariah rules. They are mainly based on anecdotes and innuendos.

It seems to be a widely held view that there’s no such thing as Islamic Banking as it looks similar to Conventional Banking. If it truly existed then the critics hold that it would look 180 degrees different.

The critics who hold this view have a problem with Islamic Banking because they see many similarities with Conventional Banking, and given their false idea that Islamic must be very different, therefore they assert it must be false. This bias is flawed and is built on weak fundamentals of a lack of knowledge of historical commercial transactions and weaker ones of knowledge of Shariah.

I will mention but a few examples to make my case.

  • What’s in a name?

One of the accusations is that Islamic Banks simply use the same conventional commercial agreements but change the name to an Arabic/Islamic title. Of course this is untrue. All one has to do is to study the documentation and see some differences in clauses. The Arabic names used are not invented names, they are actual names of commercial transactions used for over a thousand years and well described in history books and classical literature on jurisprudence.

But so what if agreements look the same? Both are based on commercial transactions. Commerce is how people have interacted with each other for millennia. It’s not unusual at all to see similarities in the types of transactions and their evolution over time between different societies. In many places around the world, we see evidence of the history of commerce and the laws enacted for the purpose of protecting all parties in a transaction. After all, people have always bought and sold goods such as food and clothes, hired others for services such as transportation, and rented to others the use of a product such as property and tools.

So it’s not strange at all to see a conventional leasing contract with the same clauses as an Islamic one called “Ijara”. One should find similar terms such as: identification of the parties involved, specifications of the item to be leased, period of time, pricing, conditions of return, etc. But what one also sees is how “late payment interest” is dealt with in the Islamic Ijara contract. However, the intent or the spirit, and much of the clauses are similar.

2) International Equities

Islamic Banks are criticized for buying international equities and offering equity investment funds to its clients. The critics say some investment is made in companies that earn interest, and perform some forbidden business.

Islamic Banks cannot change the world but can take precautions and establish guidelines to limit and potentially eliminate this problem. They do this through strict guidelines of stock selection from the beginning, which forbids certain industries, and then from purification of income derived from interest. I launched a number of such funds with clear guidelines from our Shariah committee.  These criteria and purification is what makes investment in international equities Shariah compliant.

There are plenty of sources on this issue; I would recommend anyone to simply look up the literature on equity guidelines. I would also recommend a paper written in 2000 by Dr. Mohamed Elgari for Harvard University entitled ” Purification of Islamic Equity Funds – Methodology and Shariah Foundation ”


A usual accusation concerns the conventional benchmarks used for some Islamic financial products. As if using LIBOR as a benchmark suddenly makes the transaction non-Shariah compliant. Islamic Banks are part of the global financial services industry, and they must fit their methods within the normal practices elsewhere in the world, up to a certain point. They also have Central Banks observing and regulating their business as well as financial and stock market regulators. There’s a limit to being outside of the system.

As one commentator put it quite succinctly, “Does consumption of beef suddenly become forbidden if its price was based on the price movement of Pork?”

Sheikh Yusuf DeLorenzo summarized it best: ” A benchmark is no more than a number, and therefore non-objectionable from a sharia perspective. If it is used to determine the rate of repayment on a loan, then it is the interest-bearing loan that will be haram. LIBOR as a mere benchmark has nothing to do with actual transaction or, more specifically with the creation of revenue or return. ”

4) Debt versus Interest

It’s surprising how many critics misunderstand the difference between debt and interest. Shariah does not prohibit commercial transactions that create debt or obligations of payment between people, so long as it does not create interest. One can buy a good on deferred payment, and one can rent a house for a number of years. Both create a debt obligation without interest. Even a simple taxi ride creates debt as the customer watches the increasing amount on the taximeter.

Debt obligations are even recognized in The Holy Quran in verse 282 of Surat Al-Baqara, in fact the longest verse in The Holy Quran.

4) Risk/Return Profile

Another common criticism is concluding that Islamic and Conventional are exactly the same since many investment products seem similar because they serve the same function. Yes they do and deliberately so. But replicating the same risk and return profile to achieve a specific investment objective does not make them the same. How you achieve that profile is what makes one Shariah compliant.

After all, if two individuals traded in the same amounts on the same days and made the same exact profit, would that be the same deal? Only until you find out that one is dealing in illegal narcotics while the other is selling food items. What’s different is called the

” subject matter ” and that’s what forbids one and allows the other. It’s like that in every legal jurisdiction in the world, so why the confusion in the case of Islamic products?

A Deferred Payment Sale and an Interest Bearing Loan both create debt and an obligation for the Buyer and Borrower. That’s the “Economic Effect”, but they are different according to Shariah. The Sale is permitted whilst the Loan is forbidden. Who says? The Holy Quran says so in Surat Al-Baqara verse 275.

Close to two decades ago I was involved in creating the first Islamic Capital Protected Fund. The Conventional ones usually involve a guarantee from an issuing bank and a call option on an equity index, or sometimes the whole deal is issued as a note. We replicated the structure’s risk and return profile through a Deferred Payment Sale for the capital protection and an Arboon Sale for a screened equity basket. Innovation is hardly Haram in Islam.

Dr. Azeemuddin Subhani, Assistant Professor of Islamic Finance at Ajman University of Science and Technology, and Shariah Compliance Advisor, provides a perfect quote on this subject: ” The prohibition of Riba lies not in the quantum of the financial return or its similarity or equality with something else but entirely in the method of its generation.”

5) Islamic Banking Services

Some critics seem to get confused when entering a branch of an Islamic Bank, as they witness many of the services available in a Conventional Bank. This led one commentator to question the Islamic authenticity of any bank since there were no Banks in the first centuries of Islam.

There were also no radios, televisions, cars, cameras, or computers either but none are Haram. Islamic Banks cater to clients on an international basis in offering services at a profit like any other enterprise. They have the same rights to offer these services as long as it’s Shariah compliant. Cannot there be a supermarket that only offers halal foods, or will we also be reminded there were no supermarkets back then?

Banking services or intermediation aren’t unknown in the history of Islam, there are many examples if one were to spend some time reading history and classical jurisprudence. Even as early as the late 7th Century, during the reign of the Khalifa Marwan Ibn Al-Hakam, and during the Abbasid rule, a transaction known as “Suftajah” was well known, otherwise a bill of exchange, debt Transfer, or Money Transfer by merchants, also known as Hawala. There were also commercial papers giving title to goods traded.

6) It’s Haram

I believe part of the problem rests with the concept of “Haram”. Too many people misuse the term, using it too often and very loosely. Shariah permits more than it forbids. So it’s not unusual to find many modern day commercial and financial transactions being accepted. Haram is the exception, “Halal” is generally the rule. This has always been the case and repeated often for more than 1400 years, but for some reason, many still decide Haram unless proven otherwise.

The basis of commercial transactions in Shariah is permissibility unless there is a reason to forbid. As Dr. Saad Al-Khathlan, a former member of Saudi Arabia’s Council of Senior Scholars states: ” if two individuals differ as to the permissibility of a transaction, the one who is asked for proof is the one who claims it is forbidden.

Islamic Banking and Conventional Banking are of the same genus and family. Much the same as the tiger and the lion are both animals of the same genus and same family, but are different species. Anyone who looks upon them can see they are quite different animals.

Islamic Banking is no more than just Conventional Banking with the label Islamic placed upon it than a tiger is a lion with stripes painted on.


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