Is Islamic Finance Suffering from the Wrong Model of Implementation?


One of the things that attract me to maintain this website on Islamic Banking is the opportunity to interact and share ideas with the various practitioners and academicians in the industry. There are many discussion topics and we intend to bring such discussions to the open table as constructive as possible. Interaction with Ms Rosana is always interesting as she dare explore the Islamic Banking model itself, making comparison to other similar models in the market across geographies. And I do share some of her views on the industry, and I have written about it to some extend in my earlier postings. What is interesting about Ms Rosana is that she is taking the discussion a necessary step further in evaluating the existing Banking model, as to whether it is the right model to begin with. She has written a short discourse on this topic and looking to explore in-depth its implication in the near future.

She welcomes constructive feedback, comment and discussion points for this posting and hopes to decide on the next step forward gauging from your kind response. Do read and give us your opinion and comments. Thank you.

Is Islamic Finance Suffering from the Wrong Model of Implementation?

By Rosana Gulzar Mohd

In this blog’s latest post ‘Disruption: Islamic contracts’, there holds an imminent danger. The Islamic banks in Malaysia are not so much inching towards becoming just like the interest-based conventional banks they were supposed to replace but in fact, running towards them. Even as the industry celebrates its trillion size assets and formerly astronomical growth, there lies a darker truth. In a recent class I taught on the dichotomy between Islamic banking theory and practice, a participant, a new ‘Islamic’ banker, came up to me and wanted to discuss commodity murabaha. She said her team had just tabled the product for the bank’s approval but she did not feel comfortable. The head of the Shariah committee also seemed disappointed. His comment, according to her, was that we no longer need Shariah advisers. The industry only needs commodity murabaha experts now.

Post-IFSA 2013 which fines and jails CEOs and everyone above and below for any wrongdoing and a flurry of policy documents telling banks how to implement Shariah contracts, ‘Islamic’ banks in Malaysia are seeking refuge in tawarruq. Musharakah and mudarabah? All that is left of profit and loss sharing contracts, which some scholars say are at the heart of the ideal Islamic financial system, is the policy documents by Bank Negara Malaysia (BNM). I would be pleasantly surprised if anyone can show me a bank which is genuinely implementing them. The supposed mudarabah-based products brought on by IFSA, namely the investment accounts and the IA platform, are currently being mutilated to look almost like any guaranteed and fixed return deposit. The IAP, I believe, are unlikely to be successful for laughable reasons.

When commercial banking, with its inherent tendencies for excesses, profit maximisation and desensitisation to social welfare, is the problem, how does crowdfunding through commercial banks become the solution? Won’t the banks still look for credit-worthy companies with an almost guaranteed future to fund? Who then takes care of the small and medium-sized entrepreneurs who are also seeking financing? Are not the SMEs the backbones of the economy? Not to mention, where is the upholding of Islamic values such as justice, equitability and social well-being? Granted there are other organisations in Malaysia meant to help the lower incomes and SMEs but why do ‘Islamic’ banks call themselves ‘Islamic’ if they are far from embodying the ideal values in Shariah? Unfortunately, this sad state of affairs extends to other parts of Islamic finance such as takaful (apparently ‘Islamic’ insurance), sukuk, the other beauty pageant contestant in this parade, and other capital market products such as interest rate, oh wait, ‘profit’ rate swaps.

How did BNM envision the success of IFSA with no changes to the current environment? We are still in a dual system where ‘Islamic’ banks are pitted head-to-head against interest-based conventional banks. ‘Islamic’ assets are still only a quarter of the entire system despite the country allowing all sorts of controversial contracts such as bai al dayn, bai al inah and the one that takes the cake, tawarruq. Where are the educational campaigns to explain to customers this shift in the industry that the central bank expects to happen?

When customers, including ‘Muslims’, have been accustomed to deposit guarantees and fixed returns their whole lives, how do banks suddenly sell them an ‘investment account’ that promises neither? Is it any surprise that conventional bankers are using this as a selling point? They are telling customers to avoid ‘Islamic’ products because there are no guarantees. Theirs still do. When the chiefs of ‘Islamic’ banks themselves seem cloudy in their understanding of the new regulations, how did BNM envision people on the street, who are banking with its ‘Islamic’ banks, to embrace the changes? A deputy director unfortunately got defensive when I asked. Other central bankers claimed ignorance because they “are not from that department”.

While BNM seems keen to reform the industry, perhaps the answer it has been looking for is that the Islamic finance industry, and within it, Islamic banking, has been built the wrong way. Trying to make it work in the commercial banking space is what has led to the frequent comment that it is like squeezing a square peg into a round hole. Commercial banking, with its profit maximisation mantra and desensitisation to social welfare, is antithetical to the Shariah ideals of justice, equitability and social well-being as embodied in the maqasid. And isn’t it the one that has been leading the world from one crisis to another? Why then are we so busy emulating them? Isn’t it time the powers that be wake up and face facts?

So why did all the big organisations in Islamic finance, from the global standard-setters such as AAOIFI and IFSB to each country’s central banks and each ‘Islamic’ banks’ Shariah committees condone these practices? Perhaps because they were the easiest thing to do and allows for a fast build if the intention is to grab fame and fortune through one’s achievements in Islamic finance. The countless Islamic finance awards and conferences and the effusive back slapping there are testaments to this. Bankers are such happy people.

So what is the solution? I believe it is cooperative banking. The true, genuine type practiced in Europe and not the ones in Muslim countries because they are largely used to fund political cronies and thus suffer from questionable management and corruption. My next article will thus explain cooperative banking, how the model works and why they are a better fit for Islamic finance than the current commercial banking model. In the meantime, I look forward to your thoughts. Students of Islamic finance intuitively get it when I explain these arguments while some practitioners acquiesce (quietly agree). Another group reminds me of this statement in a book by Upton Sinclair, who ironically was also an investigative journalist (uncovers scandals and corruption) as I was in my former life and whose solution to the 1930s Depression in California is to create cooperative ventures for the unemployed. The idea, to his surprise, received wide support but his bid to run as governor was waylaid, according to him, by the oppositions’ “dirty tricks”. He wrote this statement in his book about the political adventure, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” The reaction of the other group of bankers brings to mind this quote.

What do you think about her assessment and commentary on the Islamic Banking model? Do give us your feedback in the comment box. Thank you.

Check out her other contributions in the following page : Writings Rozana Gulzar Mohd 


22 thoughts on “Is Islamic Finance Suffering from the Wrong Model of Implementation?

  1. Thank you Sr for sharing this hard but rather honest opinion. I look forward to knowing more on the cooperative model in which Islamic banks need to adopt.


    • The writer, Ms Rosana is looking into the cooperative model as the real Islamic Banking backbone. And I agree that perhaps it was the right start many years ago to start emulating Conventional Banks, but now we have some clout and financial strength, perhaps it is time to expand that understanding to look at Islamic Banking at a more wholesome view. Do keep giving us your opinion and comments on the subject and our future postings.


      • Assalamualiakum. En emir. Sy student uitm. Yg attend seminar en emir kat fakulti business aagbs. Sy ad trdengar en. Emir brcakap tentang fintech issue. Currenlty sy buat assignment related with fintech. Boleh sy dapatkan article tentang issues of fintech among bankers..?? Terima kasih.


      • Salam. En fateha student master uitm..
        Boleh sy dpatkan aricle atau penjelasan tantang fintech yg en emir ckap dlam sminar last 2 weeks?? Sy sedang buat assignment berkaitan dengan issues fintech..


  2. Yes sister Suaad. That will be the next article inshaAllah. Stay tuned. I am being very honest and I know that may ruffle some feathers but I am looking at the overall good. I think we have danced enough around the issue and it is time for an open, honest and constructive conversation on what the Islamic finance industry has become and where it needs to be going. I believe everyone has a role to play and our stakes are equally high because we are all going back to Him so we need to have our answers ready on what did we do on the erroneous practices of IF having had the privilege of learning the ins and outs of the industry. My best wishes for everyone fighting this fight.


  3. Salamz sister (literally), alhamdulilah, very happy that you have been given yet another platform for your views. May the intellectual discourse bring you support, varied perspectives and constructive criticism. Looking forward to seeing you soon. Much love.

    Thank you Bro Amir Alfatakh for hosting Rosana’s writings/musings, JZK.


  4. Pingback: “Gotong Royong” Bank? | Islamic Bankers : Resource Centre

  5. Ruffle the feathers! You are absolutely correct. In the US where we are comparing AAOIFI and IFSB standards, we are not idiots and recognize Malaysian banks relabeling conventional finance as halal. AAOIFI has not approved tawaruq and in my opinion AAOIFI will emerge as the global industry standard.


    • Thank you brother. AAOIFI has not approved tawarruq? But in their latest Shariah standards (2015), there is a section on how to do tawarruq … SS(30): Monetization (tawarruq). Page 753.


      • Correct. AAOIFI has explained what the product and practice is, but their accredited and trained Sharia advisors don’t approve the product. There are very limited circumstances when it is appropriate, which is why their standards explain it.


    • Hi Obeid,

      I wouldn’t say that Malaysian Banks are re-labeling conventional finance. Being in the industry and seeing the work done, imitation do not mean the same. And AAOIFI, while do not address Tawarruq for Deposit, have allowances for Tawarruq financing (even as opinions are divided on arranged tawarruq). AAIOFI may be a global industry standard, but you know as well that Maslahah and Urf are valid considerations for the structuring and offering of products and services. So there will always be structures catered for the law of the land. Similar to the 4 great Imams having different point of views.

      What I agree with the writer is that there are some products offered that may be suitable in other types of financial institutions, not necessarily a full fit into the existing banking models. In my opinion Banks as financial intermediary serves a specific purpose, but may not be able to serve all purposes. Different model is needed for some of the structures. Debt-structures and financial services are most suitable for existing model banks, but the rest of the contracts? It is a possibility that has not yet been fully explored. What Rosana is proposing is that a more “cooperative” model will be more suitable, for example Mudharabah Structures or Musyarakah Structures. I imagine a whole range of products that is equally unsuitable for a Cooperative Bank.



      • I agree. A different model is needed, and not all banks will be able to offer the same products based on location and local laws. In the US, the concept of risk sharing will take time, and under our current laws it will be allowed only when there is a gain, but when there is a loss there are insurance requirements on deposits that the principal must be protected, and then we cross over into haram territory. I have a lot of respect for the Malaysian model of having both Islamic and conventional banks, what concerns me are products that are being overemphasized like Tawarruq and bank ledgers being 80% of that product! Malaysia is getting more accustomed to Mudarabah and Musharakah, but I don’t want developing Islamic finance markets in the west to think that their borderline and innovative (and in some opinion haram) products represent all of Islamic finance. AAOIFI is making incremental steps that may appear to be outpaced by the Malaysian market, but these steps are cautious, transparent, and what is needed in the US and UK right now.


  6. Assalamualiakum. En emir. Sy student uitm. Yg attend seminar en emir kat fakulti business aagbs. Sy ad trdengar en. Emir brcakap tentang fintech issue. Currenlty sy buat assignment related with fintech. Boleh sy dapatkan article tentang issues of fintech among bankers..?? Terima kasih.


  7. Pingback: Is Islamic Finance Suffering from the Wrong Model of Implementation? — Islamic Bankers Resource Centre – Ace Financial Advisory Limited

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