Al Qaradaghi: Islamic Banking Really Does Differ from Conventional Rival

Global Islamic Finance Magazine


Today an influential Shariah scholar responded to the criticism that Islamic banking mimics conventional finance by pointing out that murabaha is based on economic activity, therefore differing from interest-based lending.

Reuters reports that Prof. Ali Al Qaradaghi gave an interview whilst at the International Shariah Scholars Forum 09 (ISSF09), in which he said, "the issue is the structure of these instruments and contracts and who bears responsibility".

Al Qaradaghi continued, "the interest in interest-bearing loans is something that is guaranteed to the lender and he undertakes absolutely no risk at all. In murabaha, the bank undertakes responsibility if the commodity should be damaged or destroyed during the period".

By drawing this distinction between Islamic financing and its conventional counterpart, the scholar has perhaps pinpointed one of the reasons why more nations have been looking into Islamic finance since the financial crisis. They are looking for alternatives to the system that many believe caused the crisis in the first place. In Islamic finance, experts are increasingly seeing a sustainable, ethical alternative, which could also prove to be very profitable if the number of clients seeking Shariah-compliant products and services continues to grow at the rate it has been.

Criticism from sceptics who believe Islamic finance is too similar to conventional finance usually centres on the example of the conventional London Interbank Offered Rate being used to price Islamic products. The critics also cite Shariah banks’ preference for a predetermined return as opposed to the sharing of profits and losses.

They believe that Islamic finance mimics its conventional rival because the emerging industry wants to increase its share of the market and because it’s struggling to keep up with a boom in demand.

The Council of Islamic Ideology has elucidated the sceptics' fears by stating, " There is a genuine fear among Islamic circles that if interest is largely substituted by 'mark-up' under the profit and loss sharing operations, it would represent a change just in name rather than in substance".

The Council, quoted by Reuters, also said "profit and loss sharing under the mark-up system was in fact the perpetuation of the old system of interest under a new name".

Al Qaradaghi, however, is adamant that murabaha cannot be equated with conventional lending. The AAOIFI adviser states, "from an economic aspect, murabaha is linked to the real economy whereas the interest-based lending system is a step removed from that.

"It's money begetting money. Money doesn't beget money by itself, there has to be that intermediate step".


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