Islamicity of Current Islamic Banking, Finance and Investment Practices

Abstract

In recent times, debate on the Islamicity of the current model of Islamic banking, finance and investment practices is gaining serious attention of academicians and practitioners. In most times, these stakeholders in Islamic finance industry believe that the current model has fail to meet the objectives of Islamic law (maqasid al-shariah) due to inherent defects of the world monetary system; characterized with interest charge on debt, fiat money and fractional reserve system, within which all banks operate. Majority of the arguments concentrate on the concept of riba (usury) as the main determinant of islamicity of Islamic banking, finance and investment practices of today. While this paper scum to the dangers of usury as a serious challenge of the current model in attaining the objectives of Islamic law (maqasid al-shariah), it further argues that usury (riba) alone is not sufficient to determine the islamicity of the current model of Islamic banking, finance and investment practices today. The problems of Fiat Money and Fractional Reserve Banking are equally relevant and important in this pursuit. Therefore, the paper uses quantity theory of money to conceptualize that, usury, fiat money and fractional reserve banking, are the three factors that pose serious challenges to the islamicity of the current model of Islamic banking, finance and investment practices. Thus, these three inherent factors of today’s monetary system need to be addressed, analyzed and revisited in order to have purely Islamic banking, finance and investment practice that will help in attaining the objectives of Islamic law (maqasid al-shariah) for the society.