Islamic banking prohibits charging interest (riba), promoting unethical or speculative behavior (gharar), and investing in activities that are contrary to Islamic values (haram), such as gambling, alcohol, and tobacco production. Instead, it operates based on the principles of risk sharing, which involves participating in profit and loss with customers, and financing based on actual underlying assets and the principles of mudaraba (partnership) and musharaka (joint venture).
Conventional banking, on the other hand, is based on paying of interest, which is the main source of income for the banks.
Conventional banks also often engage in speculative practices.
Operational Distinctiveness
Islamic banks offer profit and loss sharing (PLS) deposits, where depositors share in the profits generated by the bank, but also bear a portion of the losses in the event of unfavorable results.
Conventional banks, on the other hand, offer interest-bearing deposits, where depositors receive a fixed or variable rate of return on their deposits. Islamic banks offer financing based on the principles of mudaraba (partnership), musharaka (joint venture), and ijara (leasing), where the bank and the customer share the risk and rewards of the underlying project or asset. Conventional banks, on the other hand, offer loans based on the charging of interest, where the customer is solely responsible for repaying the loan plus interest.
Profit& Loss sharing and equity participation
PLS is a principle of Islamic finance in which profits and losses are shared between the bank and the customer in a specific ratio.
Equity participation is a form of investment in which the investor buys a share of the ownership of the business, rather than simply lending money to the business. This is different from conventional lending, where the lender simply receives interest on their loan.
Giant banks don’t like PLS and equity participation
PLS and equity participation require a deep understanding of the risks and rewards of particular investment, as well as the legal and regulatory frameworks that govern it.
Conventional banks may not have the necessary expertise in these areas to offer PLS and equity participation products.PLS and equity participation structures can be morecomplex than conventional lending structures, and may require moretime and resources to set up and manage. Conventional banks may prefer to offer simpler lending products that are easier to manage. They may face regulatory barriers to offering PLS and equity participation products, as these structures may not be recognized or supported by local or international regulatory frameworks. There may be less demand for PLS and equity participation products in conventional banking markets, as these concepts may be less familiar to customers and may require more education and awareness-raising.Conventional banks may be more focused on generating profits for their shareholders, and may prefer lending products that offer a more certain and predictable return on investment, rather than sharing risks and rewards with their customers.
Islamic banking vis-à-vis Islamization
Islamic banking may be seen as a niche or specialized market, and may not have a significant impact on the overall sense of Islamization or Islamic identity. Some people may view Islamic banking with skepticism or suspicion, either because they are not familiar with its principles and practices, or because they view it as a way to promote a particular religious or ideological agenda.
Prohibition of interest in other major religions
Many of the world’s major religions have prohibitions or restrictions on the charging of interest or usury.
Christianity has historically had mixed views on the charging of interest. While some early Christian theologians viewed charging interest as immoral, the Catholic Church later accepted the practice, with some restrictions. Today, most Christian denominations do not have an official position on interest, but some Christian individuals and organizations may choose to avoid it on moral grounds.
In the Bible, there are several passages that mention the prohibition of usury. For example, in the book of Exodus (22:25), it is said:
“If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him.”
In Judaism, charging interest (ribbit) is generally discouraged, as it is seen as exploitative and harmful to the community. However, there are some exceptions to this prohibition, such as when the loan is made to a non-Jew, or when the interest rate is modest and reasonable.
In the Torah, the prohibition of charging interest is mentioned in several places. For example, in the book of Leviticus (25:36-37), it is said:
“Take no interest from him or profit, but fear your God, that your brother may live beside you. You shall not lend him your money at interest, nor give him your food for profit.”
Although, there is no official prohibition on the charging of interest in their scripts In Hinduism and Buddhism usury is generally discouraged, as it is seen as exploitative and unjust
Establishing equal and just societies
Profit-based banking, as opposed to interest-based banking, can potentially help establish more equal and just societies. Profit-based banking involves risk-sharingbetween the bank and its clients, as opposed to interest-based banking where the risk is solely on the borrower. This can help reduce the burden on the borrower, as well as encourage more responsible lending and borrowing practices. it can help to redistribute wealth and promote a more equal distribution of resources. Profit-based banking can also promoteentrepreneurship and innovation, as it provides a means for individuals and businesses to access funding without having to take on the burden of interest payments. This can help to foster economic growth and development, as well as promote job creation and wealth generation. It can also promote ethical business practices, as it encourages the bank and its clients to work together to generate profits through legitimate means.
Some US banks have PLS projects
Profit and loss sharing (PLS) is a principle of Islamic finance, and it is not commonly practiced by conventional banks in the United States. Most banks in the US operate on an interest-based system, which is not in compliance with the principles of Islamic finance.
However, there are a few Islamic financial institutions operating in the United States that offer PLS-based products and services, such as Guidance Residential and University Islamic Financial (UIF), which offer home financing based on Musharakah Mutanaqisah (diminishing partnership). It is worth noting that the scope of PLS in the US is limited, and it is not as widely available as in other countries with larger Muslim populations.
If implemented effectively and with appropriate safeguards, PLS could potentially play a role in promoting a more equitable and sustainable economic system in the US and other big economies.
PLS is a financial model that seeks to promote a more equitable distribution of wealth and resources by allowing investors and entrepreneurs to share risks and rewards. While its primary aim is not necessarily financial progress, it could potentially contribute to economic growth and development by providing access to capital for new business ventures and stimulating entrepreneurship. However, the focus of PLS is not solely on financial gain but also on promoting social justice and economic empowerment, particularly for those who may not have access to traditional financing mechanisms
Therefore, PLS and equity participation may be encouraged in the western world. Providing education and raising awareness, creating effective marketing and advertising campaigns, building trust, collaborating with other financial institutions, demonstrating the effectiveness of the two instruments can show the world the secular face of this niche banking market.
