Islamic Banking - A Myth or Delusion

Arabic Banking which has now graduated to become known as Islamic Banking.

In my view, if riba is not interest , as promulgated by the Grand Sheikh of Al Azhar University, Sayyed Muhammad Thantawi, then the whole concept of Arabic Banking; that is, being practised now just falls flat on the proponents’faces.

Worse of all, Arabic Banking and Islamic Banking have become synonymous and interchangeable in Malaysia. Somehow, the Malaysian Religionist Bankers prefer to use the term, Islamic Banking to refer to this rising, fast expanding and newly-found banking system.

And, the lecturers and scholars on Islamic Banking continue unabashedly to promote this new found banking system far and wide. When cornered, they just bluff their ways through using bombastic financial terms they can only understand.

In place of the purportedly illicit interest which conventional banks are paying out to their clients for fixed deposits, the Islamic Bank just replaces the said term by the familiar business term, ‘dividend’.

The rate of interest and dividend payable by both the conventional and Islamic Banks are comparable if not the same and they are calculated using the familiar formula, I or D = PRT/100 where I stands for Interest, D = Dividend, P for Principal, R for Rate of Interest and T the term.

At a certain seminar, I spoke out that Islamic Banking should and must be made to differ from conventional banking if it wishes to court consideration, attention or acceptance by those who are knowledgeable in banking, accounts or finance.

The computation and payment of dividend must be different and more than the illicit interest quantum paid by conventional banks. My argument is that dividend is based on profit generated through real, sound and honest management practices, which makes the dividend halal.

In order for Islamic Banking to stand alone and tall on the long term, there must be two or more dividend payments per year depending on the generated profits. In so doing, this practice will become more Islamic; that is, in consonance with the exhortations of Surah 3:130 and Surah 11:85 of the Holy Koran.

The Islamic Bank must guarantee firstly the minimum payment equivalent to the prevailing dividend rate which shall not be less than the illicit interest rate to the depositors as fixed by the central bank. Then, Islamic Banking must work out the profit and pay the second or third dividends to her depositors. In this way, Islamic Banking ensures that the money of the deposits shall multiply and not be nullified through inflation.