Kashif Nisar – Islamic Finance News
Since their inception, Islamic banks have been criticised for not using participatory (profit and loss sharing) modes of financing such as musharakah and mudharabah. Generally, scholars argue that participatory financing is the key to achieve the main goal of equitable distribution of wealth in society. There has been little progress in this area and Islamic banks still heavily rely on less risky financing modes such as murabahah and Ijarah. Hence, there is a need to revisit the whole process to find out whether the criticism of Islamic banks is justified and whether the current commercial Islamic banking model can alone achieve an equitable distribution of wealth.
Any person would feel reluctant before handing over his life savings and expensive belongings to another individual for safekeeping. The reason for such reluctance is the ‘trust’ factor as it is possible that the person responsible for safekeeping may not return the belongings back to the actual owner. But when we talk about the commercial banking model, the same owner would readily deposit his funds and keep his belongings in lockers with a bank and would feel very secure after doing so. The commercial banking model exists on the basis of ‘trust’. A depositor may have opened an account to avail certain banking services or to earn periodical profit on his funds. But in either case, he trusts the bank to prudently manage his funds and ensure that his principal funds remain intact. Imagine a depositor entering in an Islamic bank branch to withdraw part of his funds. He is, however, informed at the cash counter that out of the total PKR500,000 (US$6,000) deposited by him, only PKR300,000 (US$3,512) were available in the account due to the default of a corporate client, with whom the Islamic bank had entered into a musharakah transaction.
In spite of signing the mudharabah contract at the time of account opening and knowing about the possibility of loss in mudharabah, it is much likely that the depositor may not accept such loss. He may question the prudence and risk management exercised by the Islamic bank while investing his funds. He may even doubt the integrity of that Islamic bank and feel that the bank is deceiving him. Once the trust level is shaken, the existence of that Islamic bank may be in jeopardy as other depositors may also approach the bank for withdrawal of their funds.
Similarly, the shareholders would generally expect the bank to perform better or at least at par with other competitor banks. They would have a certain expected return in mind as they have invested large amounts of funds and may also look towards alternative investment opportunities in case the Islamic banks fail to provide the desired return. So there is a dilemma for the Islamic banks. The fund providers (depositors and equity holders) are generally risk averse, whereas other stakeholders expect Islamic banks to deploy funds in participatory modes of finance which are riskier in nature.
