A Tale of Islamic Financing: Theory Vs Practice

Abstract

The purpose of this study is to understand the basic rules and sources of Islamic financing and to address the reason behind the gap between theory and practice in Islamic financing that violate the Islamic economic principles and why Islamic banks depend mostly in debt instruments more than equity instruments? Perspectives of the early scholars of Islamic management of an account concurred that the arrangement of organization partnership in general and MuIErabah (benefit sharing) specifically is the fundamental technique on which Islamic banks must depend on contributing their money related assets. This study found that financing under the Islamic management of an account has decreased intensely from the methodology created by the early scholars. In reality, these banks have received obligation based on financing techniques and underestimated the routines for financing taking into account benefit and loss sharing. This adjustment in financing technique has perversely influenced the bad name and the desire tied with the monetary part of these banks. The study focused on the reason behind the gap between theory and practice in Islamic finance. This study examined the practical part by analyzing and evaluating the relative distribu tion of Islamic financing methods in four famous Islamic banks. The study selected a group of Asian Islamic banks as a model for analysis and evaluation through the period from 2012 to 2014. The study concluded that the gaps result from the misuse of the roles and norms of Maqasid Al-Shariah along with the diversion in the relatively allocation of the financing methods toward debt instruments rather that equity instruments.