Why Prevailing Framework of Islamic Banks is Incoherent with Philosophy of Islamic Finance and Economics?

Abstract

Purpose of this paper is to analyze and suggest solutions to overcome the limitation of current framework of Islamic Banks in providing socially constructive alternatives. This paper is descriptive and conceptual in nature. It provides a comprehensive view of the macro-economic implications of the process adopted by prevailing Islamic Banking framework and how it has the propensity to violate some of the objective of Shariah including establishing socio-economic justice in society. The findings of the paper suggest that by adhering to neoclassical concept of banking intuitions and limiting the scope of Shariah to only Islamize the financial products; will make it difficult to develop a healthy socio-economic environment - close to the respective ideals of Islam. The paper takes a longitudinal view on the credit-money creation aspect of the banking system and incompatibility of resulting socio-economic scenario with the objectives of Islamic Shariah (Law). It is inferred therefore that it is imperative to holistically analyze the foundations of conventional financial and economic system, in the light of Shariah, before erecting workable alternatives over the same. In order to bring about the required changes new regulatory framework for Islamic banking has to be devised, which is Shariah compliant from all aspects. Before this occurs, the paper suggests some workable ideas which may help Islamic banks to move closer to bring socio-economic justice in the society while operating within the prevailing regulatory framework.