International Journal of Economics, Commerce and Management

United Kingdom Vol. III, Issue 4, April 2015

http://ijecm.co.uk/ ISSN 2348 0386

CURRENT ISSUES IN ISLAMIC BANKING AND FINANCE

A WAY FORWARD

Yusuff Jelili Amuda

Faculty of Law and International Relations
Sultan Zainal Abidin University, Terengganu, Malaysia
yusuffyja@unisza.edu.my; akorede4@yahoo.com

Abstract
Islamic banking and finance requires a global critical discussion on current issues and practices.
Islam encourages Muslims to engage in any lawful and profitable business and transaction in
order to enhance and enrich their daily income. However, Islam prohibits all elements of interest
(riba) in transaction and business. The prime difference between Islamic banking/finance and
conventional banking is the prohibition of interest. The research discusses current issues in
Islamic banking and finance such as home/vehicle financing, loans, and other related contract
with reference to the opinions of classical jurists. The question is whether Islamic banking and
finance is engaging in usury or interest (riba) or not. The study adopts qualitative and
quantitative methods in analysis. The key findings is that Islamic banking and finance system is
not fully implementing Shariah compliance in loan, home and vehicle financing which are
contrary to Islamic principles. Islamic banking and finance needs to be improved in line with
Shariah. It is recommended in these findings that Islamic banking and finance should strictly
implement Shariah compliance in order to uphold Islamic sanctity. Granting loan should not
attract any interest and must be free interest loan because an interest charge is totally
prohibited in Islam. Nevertheless, professional or processing charges should be equally charged
regardless of the amount of loan. It is better for the bank to engage in transaction in a way of
transfer of ownership rather than giving home or vehicle financing with interest. Finally, useful
suggestions were suggested on current issues in Islamic banking and finance in order to protect
the sanctity of Islamic values.

Keywords: Current Issues, Islamic Banking, Islamic Finance, Shariah, Riba and Conventional

Licensed under Creative Common Page 1

 © Yusuff

INTRODUCTION
Islam is a complete religion and comprehensive way of life whereby Muslim conduct and
character is controlled and guided by Islamic principles. Islam encourages Muslims to acquire
property in a lawful manner with the divine right to enjoy the acquired property in the best way.
Islamic banking and finance is categorized under contracts (Mu’amalat) where financial
activities generate income and change of ownership (Aznan, 2011). Islamic banking and finance
is widespread globally and requires critical discussion on current issues and practices in the
industry. Islam encourages Muslims to engage in any lawful and profitable business and
transaction in order to enhance and enrich their daily income. However, Islam prohibits all
elements of interest (riba) in transactions and business. The prime difference between Islamic
banking/finance and the conventional banking system is the prohibition of interest. The prime
objective of Islamic banking and finance is saving the deposited capital by the customer and
other related purposes. Islamic banking and finance should adhere to the code of conduct of
Islamic banking and financial system as stated in the sources of Islamic law. To this end, this
paper examines related issues through a mixed methods approach.

METHODOLOGICAL APPROACH
The study applied a qualitative and quantitative method throughout the discussion and analysis
on current issues in Islamic banking and finance in Muslim countries and beyond. Eighty
questionnaires were distributed to a purposively targeted sample from Asia, Middle East, Arica,
and others between 1st -30th of September, 2014 and 72 copies were collected from the
respondents. Five purposively selected experts were interviewed for their perceptions on the
current issues in Islamic banking and finance in order to improve the system and remove all
elements of interest from the Islamic banking and finance operations in Muslim countries. The
experts were drawn from practitioners and academicians based on their knowledge and
fieldwork experience in Shariah and Islamic banking and finance. All the experts have vast
knowledge of Islamic banking and finance especially Shariah issues. The survey consists of
open-ended questions. The respondents were contacted physically and through e-mail and
subjected to in-depth unstructured interviews. The essence of this method is to ascertain the
respondents‟ perceptions on the current. The collected data were then subjected to critical
analysis.

Conceptualisation of Islamic Contracts

The concept of Islamic contracts can be defined as the way or means of exchange of an owned
item, property or commodity with another for the exchange of ownership of both contracting

Licensed under Creative Common Page 2

 International Journal of Economics, Commerce and Management, United Kingdom

parties. Muslims are permitted to engage in any lucrative contract. There are evidences from
Quran in Q2:275, Q2:282, Q2: 198 and Q4:29 in support of Muslim involvement and in contract.
Similarly, the Prophet Mohammad (PBUH) was asked about the best form of sale and he replied
that devoid of cheating or treason. He further said that the truthful and honest trader is among
the Prophets, the righteous and martyrs in the Last Day. This means that traders or contracting
parties should base their contracts on mutual consent and there should not be any form of
cheating and exploitation in banking and finance activities. Both contracting parties should
uphold the ethical values of the contract such as the avoidance of excessive profit/gain, truthful
and complete disclosure of information, ease of conduct, avoidance of swearing even if it is
truthful, frequent paying of charity and documentation and witness of all debts. Similarly, the
cornerstones of contract in any financial activity must be upheld and maintained in the interest
of contracting parties. Rationally, no human being can singlehandedly depend on himself.
Contracts are a means to exchange or transfer ownership to another in mutual consent between
the two parties.

Prohibition of Interest (Riba) in Islamic Contracts

Under Islamic law, riba al-fadl, riba al-nasiah, riba al-buyu (sales) and riba al-yad are strictly
prohibited based on Quranic and Sunnanic evidences. Any increase or interest on leant capital
is prohibited in Islam.

Quranic evidence states to the effect that:

Those who eat riba (usury) will not stand (on the Day of Resurrection) except like the standing
of a person beaten by Shaitan (Satan) leading to insanity. That is because they say: “Trading is
only like riba,” whereas Allah has permitted trading and forbidden riba. So whosoever receives
an admonition from his Lord and stops eating riba shall not be punished for the past; his case is
for Allah (to judge); but whoever returns [to riba (usury)], such are the dwellers of the Fire they
will abide therein (Q2:275).
Allah will destroy riba and will give increase for Sadaqat (deeds of charity, alms, etc). And Allah
likes not the disbelievers, sinners (Q2:276).
Truly those who believe and do deeds of righteousness, and perform as-Salat (Iqamat-as-
Salat), and give Zakat, they will have their reward with their Lord. On them shall be no fear, nor
shall they grieve (Q2:277).
O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury)
(from now onward), if you are (really) believers (Q2: 278).

Licensed under Creative Common Page 3

 © Yusuff

And if you do not do it, then take notice of war from Allah and His Messenger but if you repent,
you shall have your capital sums. Deal not unjustly (by asking more than your capital sums),
and you shall not be dealt with unjustly (by receiving less than your capital sums) (Q2: 279).
And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to
repay, but if you remit it by way of charity, that is better for you if you did but know (Q2:280).
And be afraid of the Day when you shall be brought back to Allah. Then every person shall be
paid what he earned, and they shall not be dealt with unjustly (Q2:281).

Hadith
On the authority of Abu Said al-Khudriy “Do not trade gold for gold except in equal amounts,
with no increase of one over the other, and do not trade silver for silver except in equal amounts
with no increase of one over other”.
Hadith narrated by Al-Bukhari and Muslim “Gold for gold is riba unless it is hand to
hand”. On the authority of Abu Hurayrah that the Prophet Muhammad (PBUH) said: Avoid the
seven grave sins”. He said: They are associating others with Allah, engaging in magic, killing a
forbidden human soul without legal right, devouring riba, devouring the wealth of an orphan,
escaping on a day of religious battle and defamation of unsuspecting believing married women.
On the authority of Jabir that “Messenger of Allah cursed equally the one who devours riba, the
one who witnesses it, and the one who documents it.”
In view of the above verses from Quran and Hadith, it can be inferred and interpreted that any
channel, transaction, business, investment, or Islamic banking and finance activities that will
attract usury or interest is prohibited. It is unlawful to take advantage or exploit a customer or
client‟s wealth illegally. Islamic banking and finance should abide and implement a traditional
Islamic banking and financial system without mixing the conventional system with the Islamic
system. It is the duty of the Shariah advisory committee to stand firmly in giving correct fatwa
(ruling) on contemporary issues in Islamic banking. They should not politicise and play with
Islamic law. Even if it is difficult to correctly implement an Islamic banking and financial system
globally, Muslim scholars should not play with Islamic law. The principles and rulings must
organically be derived from Islamic sources. The qualified and competent person should
manage and run the Islamic banking and financial system.

Current Issues in Islamic Banking and Finance with reference to Classical Opinions
Islamic banking is defined as a system of banking which is in line with Islamic principles. The
Islamic principles encourage moral and ethical values in dealing with contacting parties while
prohibiting all sorts of interest. Any trade, contract, loan, and business activities that attract

Licensed under Creative Common Page 4

 International Journal of Economics, Commerce and Management, United Kingdom

interest is prohibited (Abdul Qadir. I.A, 2012, Onafowokan, 2003, Abdul Gafoor, 2003, Iqbal and
Mirakhor, 1987). It can be deduced from the above definition that Islamic banking and finance
practices and operations must be free from any sort of interest and there is no legal or rational
reason for Islamic bank operators to permit, justify or legalise interest in the industry. All
practices must be in line with Islamic law otherwise, it will be similar with the conventional
banking system. There is no justification for legalising interest in Islamic banking and finance. All
financial activities must be Islamic and strictly follow Islamic law. Alternatively, Islam permits and
encourages Muslims to engage in any lucrative business and transaction. There is no legal limit
for acquiring profit from business in so long as the profit is reasonable morally and ethically.
The opinions of classical Islamic jurists on usury/interest (riba) can be summarised and
simplified in that both Imam Hanafi and Imam Hanbali considered measurability such as volume
and weight as criteria for eligibility of usury/interest in contracts. Imam Malik argued that edibility
and storability are criteria for the prohibition of usury in any financial activities while the Zahiri
school of thought and Abu Bakar Ibn At-Tayyib restricted the eligibility of usury into the six (6)
foodstuffs stated in only Quran. The Zahiri school of thought is against any additional foodstuff
or items into the eligibility of usury/interest because they did not consider analogy as a source of
Islamic law (Al-Zuhayli, 2003). It can be concluded that all classical schools of thought including
the Zahiri school prohibit usury or interest. The researcher strongly agrees with all the above
views as measurability, edibility and storability should be considered as criteria for prohibition of
usury/interest in Islamic banking and financial activities. Islamic banks should refrain from usury
in terms of increment or reduction due to deferred payment or pre-payment.

Issues on Home/Vehicle Financing and Loan

Islamic banking home and vehicle financing is a way of averting and reducing home or vehicle
problems due to customer financial constraints to purchase the property by himself. In the
process all sorts or elements of usury must be eliminated from home and vehicle financing. To
illustrate the financing process, Mr. “Y” is in need of a house and he approached a developer.
The house price is 4000 dinar. The bank will pay the cost plus mark up or profit based on the
period of instalment payment. The margin will be based on the fixed interest. The argument
here is that the entire process is similar to interest in a loan. This study submits that Islamic
banks can re-structure home and vehicle financing according to Islamic law in a way that all
elements of usury would be removed in the interest of both parties involved. Islamic banks can
finance home/vehicle or any property in a legal way by applying the Murabaha model (cost plus
mark up/margin) where the bank purchases the property from the seller and resells it based on
an agreed price and period of payment.

Licensed under Creative Common Page 5

 © Yusuff

On that note, it is the duty of the Islamic bank to evaluate and access the value of the property
and later resell it to the buyer. Islamic banks are responsible for the any defect or damage that
occurs in the house. The buyer will later approach the bank directly to repair the damage. The
contract will be based on a Murabaha model with deferred payment after all logistic
documentation has completed. The problem is that the bank does not want to engage in
business due to self-imposed regulations and rules that are contrary to Islamic principles. The
illustration is applicable to all current property financing by Islamic banks.

Elements of Usury in Bay ‘Ina

It has been said in previous lines that usury is prohibited and Muslims are seriously warned not
to acquire their wealth or property through unlawful means. The acquired property would be
accounted for in the Last Day. Contracts or transactions are day to day activities that cannot be
avoided. There should be no elements of usury or exploitation of others‟ wealth. Islam urges
contracting parties to uphold the moral and ethical aspect of the contract. In the case of bay
„Ina, there is an element of usury and exploitation. In Islam, every act is considered devotional
and each person or Muslim must be conscious of their voluntary acts\. To illustrate the
argument, if Mr. A seeks financial aid or loan from B (bank), Mr. A is in need of 100,000 dinars
and the bank agreed to sell an asset or property to the customer equivalent to 150,000 dinar on
instalment payment and with the agreement to resell the asset to the bank at the rate 100,000
dinars which will pave the way for the customer to have access to the needed cash. If the
contract is concluded on that platform, the contract is invalid on the argument that there is an
element of usury or indirect loan with interest. The view of Islamic jurists on bay „Ina, is that the
majority of classical scholars such as Imam Malik, Hanafi and Hanbali considered bay „Ina
invalid and unlawful due to the element of usury and bad motive or intention of contracting
parties because they do not have sincere and good intention to transact together. The contract
is valid under Imam Shafi‟i. The authenticity of Imam Shafi‟i‟s opinion on the subject matter had
been questioned and critically examined by cotemporary scholars. This study supports the
prohibition of bay „Ina since it contains an element of usury (Mahmood .M.S, 2012).

Commercial Banking vs Riba

Islamic banking and finance‟s commercial activities must desist from any modern usury or
method of devouring customer or client wealth in an unlawful manner. Islamic banks should be
conscious and avoid any sort of interest on loan, home/vehicle financing and any other property
financing in order to protect the sanctity of Islamic values. This study submits that Islamic
banking and finance should not engage in any usury activities. Islamic banking and finance

Licensed under Creative Common Page 6

 International Journal of Economics, Commerce and Management, United Kingdom

should stand and fully implement Islamic rulings rather than regulations from the central bank
that may be contrary to Islamic principles. Islamic banks should not make the haram halal by
legalizing unlawful commercial activities. In addition, Islamic banking and finance must depart
from all types of predetermined interest, or fixed charges in any contract. Islamic legal principles
must be protected in the bank‟s relationship with customers such as trustee/beneficiary,
depositor/custodian, investor/entrepreneur, vendor/purchaser, lessor/lessee,
transferor/transferee, lender/borrower (Abdul Qadir. I.A, 2012, Asyraf .W.D. 2008). This study is
strongly against any form of commercial banking activities that attract devouring customer and
client wealth illegally.

ANALYSIS & FINDINGS

Analysis of Interview and questionnaire on current issues
on Islamic Banking and Finance

Tale 1: Current issues on Islamic Banking and Finance

No Item Strongly Agreed Disagreed None
Agreed
1 I understand concept of Islamic Banking and 18.1% 55.6% 1.4% 25%
Finance
2 Islamic Banking and Finance must be in line 76.4% 23.6% 0% 0%
with Islamic principles
3 Islamic Banking and Finance practices in the 83.3% 13.9% 0% 2.8%
Muslim world needs to be improved
4 Islamic Banking and Finance must not 72.2% 16.7% 5.6% 5.5%
engage in any unlawful practices
5 Present Islamic Banking and Finance practice 13.9% 33.3% 16.7% 36.1%
is still similar with conventional banking
system
6 Islamic Bank and finance is still engage in 6.9% 37.5% 25% 30.6%
interest charges
7 Islamic Banks profit rate is higher than 8.4% 20.8% 18.1% 52.8%
conventional bank‟s interest rate
8 I prefer to get a loan from conventional bank 30.3% 15.5% 36.1% 18.1%
than Islamic Bank due to mark-up
9 Islamic Banking and finance loan must not 48.6% 30.6% 11.1% 9.7%
attract any interest
10 Islamic bank and finance practices must be 75% 18% 2.8% 4.2%
completely Shariah-complaint
11 Current Islamic finance products are being 12.5% 38.9% 13.9% 34.7%
applied according to the true spirit of Shariah
12 Islamic finance transactions being practiced 5.6% 19.4% 36.1% 38.9%
today completely eliminate riba in all respects

Licensed under Creative Common Page 7

 © Yusuff

13 Trade-based Islamic financial instruments are 5.6% 29.2% 13.9% 51.4%

implemented by Islamic financial institutions
in strict accordance with the requisite Shariah
guidelines, such that they no longer involve
any money –to-money transactions with an
increase in amount
14 The ownership issues related to trade-based 5.6% 33.3% 9.7% 51.4%
Islamic financial instruments have been
effectively resolved and fully comply with the
Shariah
15 The existing Shariah governance frameworks 5.6% 27.8% 27.8% 38.9%
and the regulatory environment is sufficient in
ensuring that Islamic banking products are
practiced according to the letter and the spirit
of the Shariah
16 The Islamic home financing products being 7.1% 31.5% 30% 31.4%
practiced today, involve attributes of interest
(riba)
17 Islamic vehicle financing product is similar in 11.3 38% 23.9% 26.8%
practice to a loan with interest
18 Islamic banks should apply a non-interest 38.9% 38.9% 2.8% 19.4%
model
19 Islamic Bank should give non- interest loans 41.7% 34.7% 9.7% 13.9%
to the less privileged Muslim
20 Bay al-„Inah should be totally prohibited 19.4% 27.8% 11.1% 41.7%
21 Islamic banks can venture on profitable 27.8% 43.1% 6.9% 22.2%
contracts with their customers rather than
contracts that resemble loans with interest
22 Islamic Bank should apply Musharakah 25.4% 43.7% 2.8% 28.2%
Mutanaqisa model in property financing
rather than the current financing models
23 Islamic Bank should be a panacea to less 26.8% 47.9% 1.4% 23.9%
privileged customer‟s burden
24 Mudharabah/ Equity models are a more 34.3% 45.7% 1.4% 18.6%
Islamic way of generating income rather than
loan with interest
25 Shariah Advisory committee should be given 26.8% 47.9% 4.2% 21.1%
free hands to regulate Islamic Bank activities
26 There are aspects of current Islamic Banking 18.4% 56.3% 4.2% 21.1%
and finance practices that are not Shariah
compliant
27 Islamic Bank and finance should strictly 54.9% 25.4% 2.8% 16.9%
implement Shariah compliance in order to
uphold Islamic sanctity

Licensed under Creative Common Page 8

 International Journal of Economics, Commerce and Management, United Kingdom

28 Any condition or requirement that will impede 34.3% 32.9% 7.1% 25.7%
proper operation Islamic Banking and
Finance according to the Shariah principles
should be removed.
29 Islamic Banking and Finance should oblige 8.6% 28.6% 34.2% 28.6%
with central bank regulations, even if they
impede Shariah-compliant practices.
30 Islamic Banking and Finance should be 55.7% 31.5% 1.4% 11.4%
constitutionally permitted to operate in full
Shariah-compliance.

The data from the above table reveals that an overwhelming 55.6% (n= 40) of respondents
strongly agreed on their understanding about Islamic banking and finance and 18.1% (n=13)
agreed. The 1.4% of (n=1) disagreed with their knowledge about Islamic banking and finance
while 25% (n=18) answered none to the question. The majority of the respondents understood
the concept and practice of Islamic banking and finance. The majority of 76.4% of (n=55)
participants strongly agreed that the Islamic banking and finance system must be in line with
Islamic principles and 23.6% of (n=17) agreed with the question. However, 83.3% (n=60)
strongly agreed that Islamic banking and finance needs to be improved while 13.9% (n=10) also
agreed with majority and 2.8% (n=2) marked none as their answer to the question and no
participants disagreed with the improvement of Islamic banking practices across the world due
to some un-Islamic practices. Concerning the similarity between Islamic banking and finance
and conventional system, 13.9% of (n=10) strongly agreed the present and current practice in
Islamic banking and finance system is similar with the conventional and 33.3% (n=24) agreed,
16.7% (n=12) disagreed and 36.1% (n=26) ticked none to the similarity between the two
systems. Regarding interest charges, 6.9% of (n=5) and 37.5% (n=27) strongly agreed and
agreed that Islamic banking and finance is still engaged in interest charges compared to 25% of
respondents (n=18) disagreed with the majority while 30.6% (n=22) preferred none as their
answer. Similarly, 48.6% of (n=35) strongly agreed that Islamic banking and finance loan
system must not attract interest while 30.6% (n=22) agreed. The total of 11.1% of (n=8)
respondents disagreed with the question and 9.7% of (n=7) chose none respectfully. In addition,
75% of (n=54) and 18% (n=13) of respondents strongly agreed and agreed that Islamic banking
and finance be completely Shariah complaint while 2.8% (n=2) disagreed and 4.2% (n=3)
answered none to the question.
On the issue of Islamic home financing, 7.1% (n=5) strongly agreed that the system
involves attributes of interest (riba) and 31.5% (n=22) agreed, 30% (n=21) of respondents
disagreed and 31.4% (n=22) answered none on the issue of interest. Similarly, 11.3 (n=8)

Licensed under Creative Common Page 9

 © Yusuff

strongly agreed that Islamic vehicle financing is similar with loan with interest and 38% (n=27)
agreed to the question. Contrarily, 23.9% (n=17) of respondents disagreed with the view that
Islamic vehicle financing is similar with loans with interest and 26.8% (n=19) selected none as
their response to the question. The present study submits that both home/vehicle financing must
not attract any attributes of usury and industry must avoid any element of interest in the
home/vehicle financing activities. The majority of 38.9% (n=28) and 38.9% (n=28) of
respondents strongly agreed and agreed that Islamic banks should apply a non-interest model
in their system, 2.8% of (n=2) disagreed and 19.4% of total respondents (n=14) said none as
their answer.
Concerning Islamic banking and finance non-interest loan to the less privilege Muslim,
41.7% (n=30) strongly agreed that Islamic bank should non-interest loan to less privileged
customer, 34.7% of total respondents (n=25) agreed. The total of 9.7% of (n=7) disagreed while
13.9% (n=10) selected none as their respectful answer to the question. The researcher agreed
with the majority that Islamic banks should give non-interest to the customer. Loaning the
customer with interest is contrary to Islamic law and similar to conventional banking. Islamic
banks can venture on profitable contract using Islamic models rather than engaging in loans
with interest. The total participants 27.8% of (n=20) strongly agreed that Islamic bank should
venture on profitable contract and the majority of 43.7% of (n=31) agreed, 6.9% of (n=5)
disagreed while 22.2% (n=16) of total respondents responded none. In this study, Islamic bank
and finance should venture in profitable and lucrative business, transaction and investment by
using Islamic models. The business will also create job opportunities for the unemployed and
provide financial support to skilful businessmen who lack capital to run his or her business.
The table also indicates that 26.8% (n=19) strongly agreed that the Shariah advisory
committee should be given free hands to regulate Islamic banks activities without any
impediments and the majority 47.9% (n=34) of respondents agreed to the question. However,
4.2% (n=3) disagreed and 21.1% (n=15) answered none to the question. The majority 18.4%
(n=18) and 56.3% (n=40) of respondents strongly agreed and agreed that some aspects of
Islamic banking and finance are not Shariah complaint, 4.2% (n=3) disagreed and 21.1% (n=15)
said none.
On the implementation of Shariah compliance in the Islamic banking and finance
industry, the majority of 54.9% (n=39) and 25.4% (n=18) agreed that Islamic banks should
strictly implement Shariah compliance in order to uphold the sanctity of Islam, 2.8% (n=2)
disagreed and 16.9% (n=12) ticked none respectfully. In addition, 55.7% (n=39) strongly agreed
that banks should be constitutionally required to be fully Shariah compliant and 31.5% (n=22)
agreed, 1.4% (n=1) disagreed and 11.4% (n=8) of respondents said none to their answer.

Licensed under Creative Common Page 10

 International Journal of Economics, Commerce and Management, United Kingdom

Finally, the researcher strongly supports the view of the majority that the Islamic banking and
finance system should be constitutionally obliged to by fully Shariah compliant and any obstacle
to this should be removed. This will empower the Islamic banks to operate Islamically.
Otherwise, the system will be controlled by the Central Bank Act which is not absolutely in line
with Islamic principles.

Summary of the conducted interview on

current issues on Islamic banking and finance
Based on the expert interviews with academicians and practitioners of Islamic banking, several
key issues and challenges were identified. Regarding the current practices of Islamic banking
and finance in the Muslim world, all interviewee‟s agreed that the current practice needs
improvement. The main reasons given were that further efforts are required to completely
eliminate riba from the banking and financial system, and to ensure there is comprehensive
conformity with Shariah principles. Interviewee‟s also noted that even though Islamic banking
and finance products fulfil Shariah requirements, the products sometimes do not really serve to
help the Ummah. The key reasons identified for this problem were the high cost of financing of
Islamic products and their similarity with debt instruments. In addition to the need for gradual
improvements in the Islamic financial system, interviewee‟s also addressed the challenges
faced because Islamic finance has to operate under financial infrastructure which is different
from its norms and values. For this reason, much more effort will be required to fix or improve
the operation of Islamic finance within this dual system and to ensure Shariah compliance.
The expert opinions were divided regarding the argument that the present Islamic
banking and finance practices are very similar to the conventional banking system.
Interviewee‟s that disagreed with this statement argued that Islamic finance is different from
conventional system both in form and substance, pointing out that this perception of similarity is
often based on economic reasoning and not on the Shariah view. On the other hand,
interviewee‟s who agreed with the statement opined that Islamic Banks just use Arabic names
for similar riba-based products. Experts whose views were in the middle of the spectrum on this
issue reasoned that both banking systems have different approaches in terms of contract use
since conventional banks use debt contracts whilst Islamic banks use Muamalat contracts
without interest, but that there are still similarities between the two in terms of calculation of
financing because both use the method of compounding.
Interviewee‟s also differed on the question of whether Islamic banking and finance still
engage in interest charges. The majority of interviewee‟s stated that there are no interest
charges in Islamic finance, while a few stated that there is still some aspect of interest charges

Licensed under Creative Common Page 11

 © Yusuff

involved in Islamic banking and finance. Those who asserted that Islamic banks do not charge
or give interest in any form, reasoned that Islamic banks only give hibah or profit from
investment, or engage in sale transactions to make profit, and further argued that the scholars
with conventional economic background wrongfully understand it as interest. It was also stated
that the component in finance that reflects rate charge is commonly misinterpreted by the public
as interest.
In regards to the customer complaints regarding the higher profit rate of Islamic banks
compared to conventional interest rates, the major reason highlighted was the element of risk.
Interviewee‟s observed that although the complaint seems valid on comparison of the rates
alone, Islamic banks bear higher risk and the customers enter into a transaction being aware of
this higher risk. On the other hand, clients may not consider this element of risk and the amount
they need to pay in the case of default payment. However, it requires finance knowledge to
understand how banks calculate their rate of return or interest and other hidden costs, and
hence banks may need to provide further clarification to customers on how the rate charges are
computed to avoid this misperception. In addition, interviewee‟s also highlighted the challenge
faced by Islamic finance in that, it operates under a system designed for conventional finance
system which increases the cost for the industry, and this increased cost is reflected in the rate
of financing.
There is a divergence in opinions on whether Islamic finance has succeeded
incompletely eliminating riba in all respects. Interviewee‟s agreed that it has been eliminated to
an extent. However, it was also observed that riba can sometimes occur in the case of default
payment, although it is usually distributed back to charity. In other cases, riba may occur when
certain financing instruments are not applied properly, leading to money-with-money
transactions.
There was also consensus on the view that Musharakah Mutanaqisa/ Mudharabah/
Equity models are a more Islamic way of generating income rather than loan with interest.
However, it was also argued that it would create additional risk compared to a loan with interest
which is fixed. This additional risk is also the main reason for the lower adoption rate of equity
models by banks compared to trade-based/debt-based models.
All interviewee‟s stated that the existing Shariah governance frameworks and the
regulatory environment is insufficient in ensuring that Islamic banking products are practiced
according to the letter and the spirit of the Shariah. The key issue highlighted on this subject
was that Shariah governance frameworks in most jurisdictions are regulated by the conventional
banking laws, and hence the need for dualization initiative to create separate platform for both
banking systems. It was also noted that the Shariah governance framework is sufficient if

Licensed under Creative Common Page 12

 International Journal of Economics, Commerce and Management, United Kingdom

applied correctly. The regulatory environment still needs to be improved gradually and cannot
be done at once. Another issue that might create this problem in ensuring sufficient Shariah
compliance is that in some countries, the regulatory framework is not yet in place to
accommodate Islamic finance.
There is agreement among the interviewed experts that Shariah Advisory committee
should be given free hand to regulate Islamic Bank activities. However, it was underlined that
this should only be to the extent of Shariah matter‟s only. Interviewee‟s also stated that Islamic
finance should follow the rule of Shariah and abide by the regulation of Central Bank in
implementing and practising the Shariah instruments applicable to Islamic financial products.
Therefore, it is important to have Shariah board/council at the regulatory level that is tasked with
the duty of providing Shariah pronouncement to be incorporated from time to time into the
Regulation. It was also noted that previous issues arising on Shariah compliance could be due
to lack of understanding by Shariah scholars on how the instrument/product works. Therefore, it
underscores a need for the committee members to understand finance, as they can give advice
not only on the contract underlying the instrument but also the implication of the financing
techniques used in that instrument from a Shariah perspective.

SUGGESTIONS
It can be suggested that Islamic banking and finance should adhere to Islamic law without any
restriction.
Appointment of banker who are operating the Islamic banking and finance must be based on
merit and competency. In case of deficiency and inefficiency, the authorities must find solutions
in order to uphold the sanctity of the Islamic banking and financial system.
There should be training, seminars, and workshops for the bankers in order to upgrade their
knowledge and understanding about Shariah and finance for the smooth running of the industry.
Islamic banks should be firm and optimistic about the implementation of the real Islamic banking
and finance without mix-up or colouring conventional banks as Islamic banks globally.
The Shariah advisory committee should not be based on political appointment but based on
quality, competency, and merit. Otherwise, the wrong person would be in charge leading to
mismanagement and inefficiencies.
Muslim scholars should have a unanimous design of an Islamic banking and finance system
under the auspicious of Islamic Development Banks without interference from conventional
banks.

Licensed under Creative Common Page 13

 © Yusuff

There is a need for introducing the Baitul Mal across Muslim countries where the money should
be saved and kept. The World Baitul Mal should be placed in any Muslim country rather than
non-Muslim countries.

CONCLUSION
Based on the findings and analysis, it can be concluded that the Islamic banking and finance
system does not operate fully in line with Islamic principles. Therefore, there is a need to adjust
and remove any un-Islamic practices from contemporary Islamic banking and financial activities.
Methods of home, vehicle, and loan financing should be completely Islamic and there should be
no elements of usury. Islamic banking and finance should operate and display to the whole
world the real meaning of Islamic banking and finance rather than painting conventional banking
and finance as Islamic banking and finance. Islam has its own way of doing things and there is a
culture and custom of doing thing in Islam which is different from others. Islamic banking should
not be subjected to the dictates of conventional banks. Islamic banking and finance should be
strictly against interest but venture to profit in legal way.

LIMITATIONS OF STUDY
The research limited its discussion on current issues in Islamic banking and finance such as
home, vehicle financing, loans, and other related contract with reference to the opinions of
classical jurists. It is also analysed elements of usury in Bay ‘Ina, commercial banking vs riba
and conceptualisation of Islamic Contracts. Islamic banking and finance requires a global critical
discussion on current issues and practices in Muslim society. Islam encourages Muslims to
engage in any lawful and profitable business and transaction in order to enhance and enrich
their daily income. Sources of prohibition of interest (riba) in transaction and business were
critically discussed. The study only examined the issues in Islamic banking and finance only.

REFERENCES
Abdul Qadir. I.A. Islamic Banking as non-Interest Banking: Facts or Action. Shariah Law Reports, 2012,
3: i-xix.
Ala‟eddin Kharofa (2002), The Loan contract in Islamic Shari‟ah and Man-Made-Law (Roman-French-
Egyptian) A Comparative Study. (Kuala Lumpur, Malaysia: Leeds Publication),91-108.
Asyraf .W.D. (2008). Commodity Murabahah Program (CMP): An Innovative Approach to liquidity
Management‟, in Mohammed Daud Bakar and Engku Rabiah AEA(eds), Essential Readings in Islamic
Finance. Kuala Lumpur, Malaysia: CERT Publication, pp.173.
Aznan Hasan (2011) Fundamentals of Shari‟ah in Islamic Finance (Kuala Lumpur: IBFIM), 192-195.
Dandago, K.I, Muhammad, A.D, Oseni, U.A (2013) Essentials of Islamic Banking and Finance in Nigeria.
(Nigeria: Benchmark Publishers Limited),

Licensed under Creative Common Page 14

 International Journal of Economics, Commerce and Management, United Kingdom

Iqba, M. and Mirakhor, A. “Islamic Banking” The Islamic and Comparative Law Quarterly, 1987, 4 (3):3
Mahmood .M.S. (2012) Islamic Banking and Finance Shari‟ah & Legal: Issues and Challenges (Selangor,
Malaysia: ASLITA),53-65.
Muhammad S.T. (1997). Mu‟amalat al-Bank wa Ahkamuha al-Shar‟iyyah (Cairo, Egypt: Nahdat Misr).
143-149.
Nuarrual, H.M.D and Sharifah Zubaidah S.A.K.A (2010) “Shariah and Legal issues in the Bay‟ Bithaman
Al-Ajil (BBA): A Viewpoint”, Shariah Law Reports 3:93-102.
Ruzian Markom and Sharina Ali Pitchay (2010), “Enforcement of Islamic Banking and finance laws in the
civil courts of Malaysia”, Shariah Law Reports 3:62-64.
Wahbah Al-Zuhayli (2003), Financial Transactions in Islamic Jurisprudence. (Damascus, Syria: Dr al-Fikr)
Yusuf Al-Qardawi, (1986) The lawful and the Prohibited in Islam (Beirut: Dar al-Qutan al-Karim), 266.

Licensed under Creative Common Page 15