Running head: ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION

Islamic Banking: An Islamic Perception or an Innovated Form of Conventional

Banking

Muhammad Hassan Dar

University of Central Punjab

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 2

Abstract

Islamic banking is growing rapidly day by day in Pakistan. This study discusses the behavior of

the people towards the Islamic factor of Islamic banking. Literature was reviewed regarding the

behavior of different people towards Islamic banking that what they think about the Islamic

nature of Islamic banking. The study was carried out in Lahore, Pakistan and the bankers with

complete knowledge of Islamic banking were interviewed regarding nature of Islamic banking,

their choice, Islamic value and prohibition of interest. Transcriptions were made from the

recordings of the interviews conducted. Due to shortage of time, only 4 interviews were

conducted. All these interviews were from the bankers of different banks. Themes were prepared

from the transcriptions and these were formatted question wise. The findings show that most of

the parts of Islamic banking are Islamic and they follow Islamic rules but these need to be

followed in a non-compromising way to make Islamic banking more transparent.

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 3

Introduction

A bank acts as a financial intermediary who deals with deposits, advances and other related

services. The investors perceive that the banks could help them in earning reasonable profit

without bearing unnecessary risk. On the other hand, lenders perceive banks as their major

source of borrowings. Overall, in Pakistan, banking sector has attracted considerable attention

from lenders as well as investors.

The journey of Islamic banking system that exists today was started in the 1970s when the King

Abdul Aziz University in Mecca, Saudi Arabia organized First international Islamic Economic

Conference, followed by the establishment of the pioneer commercial Islamic bank, with the

name of Dubai Islamic Bank and Islamic Development Bank, in Saudi Arabia. Since then many

other Islamic banks were established in Muslim countries like Kuwait, Egypt, Bahrain, and

Sudan etc. The evolution of Islamic banking into modern banking that exists today is the

continuation of the steps taken in the decade of seventies of the twentieth century (Iqbal, 1997).

Islamic banking has gained a lot of popularity these days especially in Pakistan. It’s growing at a

very quick pace across the world and in Pakistan specially. Assets of Islamic banking grew by

Rs. 150 billion during the quarter April to June 2017 and were recorded at Rs. 2,035 billion

compared to Rs. 1,885 billion in the previous quarter. Deposit of Islamic banking industry

increased by Rs. 156 billion during the review quarter to reach Rs. 1,720 billion compared to Rs.

1,564 billion in the previous quarter which shows an increasing trust of customers towards

Islamic banking (Banking, 2017).

Islamic banks are comparatively exposed to higher risk than the conventional banks, because

they operate on the profit and loss sharing basis and they do not receive a fixed or pre-

determined rate of return like conventional banks. But on the other hand, they have a very good
ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 4

opportunity to operate in the Islamic countries because they can gain more attention of customers

than the conventional banks. Islamic banks have more growth opportunity in the Islamic

countries therefore it’s necessary for these banks to know about the degree of acceptance of

Islamic banks in these countries and devise their strategies accordingly (SBP, 2017).

C.E.O of one of the largest Islamic bank of the world i.e. Dubai Islamic bank, called Pakistan

one of the fastest growing Islamic banking market. He further called Pakistan as their best

strategic partner and announced more investment in Pakistani market. (DIB, 2017).

There are five full-fledged Islamic banks in Pakistan. Meezan bank, Bank Islamic, Dubai Islamic

bank, Albaraka bank and MCB Islamic bank with ranking of 1, 2, 3, 4 and 5 respectively.

Following chart in table I show the growth of these Islamic banks (KPMG, 2017):

Table I

Increase in Indicators

Dubai MCB
Albaraka
Meezan Bank Bank Islami Islamic Islamic
Bank
Bank Bank
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
Net Assets
11.1 12.7 11.3
(Bn.) 34.7 29.68 12.45 7.79 6.27 10.2 9.98
8 1 9
No. of
Branches 571 551 321 317 200 200 224 135 66 06

Deposits 471.9 154.4 129. 136. 105.

564 153 71.6 14.2 9.45
(Bn.) 9 0 2 7 8

The choice of availing the product and services of conventional or Islamic banks depends on the

well-functioning of these two different modes of banking (Usman, 2012).

Conventional mode of financing system is focused and relies only on interest rate, whereas, the

Islamic mode of financial system offers loan excluding any interest and focus on covering
ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 5

administrative cost. It is further reported that although market imperfection appeared beneficial

for Islamic banks, however, Islamic banks’ performance is not up to par in terms of assets,

liabilities and liquidity concentrations and efficiency in operational activities (Khan, 2010).

Depositors of conventional banks might expose to lesser degree of risk then the depositors of

Islamic banks, consequently, the customers of Islamic banks might demand higher rate of return

in relation to bearing extra risks (Iqbal, 1997).

In order to highlight the variations between Islamic and conventional banking systems, (Hanif,

2012) asserted that the Islamic banking imposes certain restrictions drawn from Islamic

principles and laws, therefore, a number of large businesses would not perceive Islamic banking

as convenient. Keeping in view the study objectives and extant literature, this research study

focuses on assessing the Conventional and Islamic banking differences and customer’s

perception regarding the Islamic perception of Islamic banking, either it is Islamic or not.
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Literature Review

Islamic banking theoretically differs in many aspects from conventional banking. Principles,

rules and regulations have been made by Islamic Shari’ah council regarding Islamic finance to

get it differed from conventional banking. Islamic rules on transactions; known as Fiqh-ul-

Mua’malat, guides about how non shari’ah compliant transactions can be made shari’ah

compliant. Similarly AAOIFII Shari’ah standards give a complete guideline to make

conventional transactions shari’ah compliant (Aman, 2012).

The basic pillar of Islamic banking is prohibition of interest i.e. Riba. Making money on money

is prohibited is Islam (Khan, 2010). Contrary to Conventional banking, Islamic banking

encourages profit and loss sharing in all kinds of transaction rather than interest based activities

(Siddiqi, 1983). The original beauty of Islamic banking is PLS (Profit & loss sharing) which

truly is reflected from their basic two products i.e. Mudarbah and Musharakah. According to this,

borrowers are supposed to share profit and loss, which is supposed to arise from the investments

made with the banks and banks are to share this profit or loss with their depositors (Iqbal, 1997).

It is said in the favor of Islamic banks that Islamic banks has more capacity to bear financial

crisis situation as it is pillared on PLS basis. Although the basic motive of both conventional and

Islamic banking is to make profits but Islamic banking does this by remaining under the umbrella

of Shari’ah (Mirakhor, 1999). Islamic banking denies the certainty of returns on deposits and

works on the principle of dividing the risks and rewards. Similarly, it does not make most of the

persons who fail to pay in time. Islamic banking denies late payment incomes (Aburime & Alio,

2009).
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Advocates of conventional banking often claim that Islamic banking is just another type of

conventional banking. In practice, it is found that both of them are not much different. Islamic

resurgence is the basic element behind emergence of Islamic banking rather than other key

differences (Chong & Liu, 2008).

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Research Methodology

The design of this study is exploratory research. Exploratory research is used to explore those

areas that have not been studied deeply. The nature of this study is qualitative research.

Qualitative research is that type of research in which mathematical figures are not involved but it

uses the behavioral study approach to identify the ideology or perception going on in the society.

In this article, we want to know the behavior of people towards Islamic banking. What people

think about its Islamic feature and why they think that way?

Population of this study is all the employees of Islamic banking as we want information rich

people to guide us whether the banking being done under the umbrella of Islamic banking is

really Islamic or not? We have adopted purposive sampling technique for our research just

because purposive sampling is a non-probability sampling technique and we can sort out our

samples according to their characteristics which could lead us to information rich people.

Semi structured interviews are designed of around 20-25 minutes. Transcription and themes were

prepared to analyze the data interviewed.

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Data Analysis

Question No. 1: Knowledge about Islamic Banking

The basic purpose of this question is to get the knowledge of the respondents about Islamic

banking, to get an idea of the differences between Islamic banking and conventional banking in

their minds and what according to them should be the differences?

All of the respondents agreed that Islamic banking is based upon shari’ah laws. The rules for

Islamic banking have been designed by keeping in mind the teachings of Holy Quran and

Sunnah. Respondents also showed their consent on the fact that Islamic banking is riba free

banking. One of the respondents said, “Major difference between Islamic and conventional

banking is that Islamic Banking is based on Shari’ah rules and is riba free but conventional

banking contains the elements of riba Qimar and Gharar. Prices are fixed and there is no risk

sharing”.

Islamic banking is asset based banking. The transactions in Islamic banking are backed by assets

which are according to the shari’ah principles. Islamic banking does not charge price on money.

In fact it makes transactions asset based and earns profit on it. One of our respondents stated:

“Conventional banking deals in money. They charge price on money by lending it whereas

Islamic banking does not charge price on money. Islamic banking promotes trade and deals in

assets”.
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The following image has been made using the website http://www.wordclouds.com to highlight

the keywords used by our respondents to identify the differences between conventional and

Islamic banking.

Tag Cloud 1: Knowledge about Islamic Banking

According to the respondents, Islamic banking is based on shari’ah principles, it is riba free, it is

backed by asset and it works on profit and loss sharing. But they think that Islamic banks should

follow the Islamic rules more strictly and focus on making the banking more Halal and Islamic

rather than just following the trend of conventional banking i.e. to make profits and profits only.

One of the respondents quoted that “Islamic banking should be more strictly Islamic as the sole

purpose of it should be the welfare of people instead of making profits”.

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Question No. 2: Why Islamic Banking?

This question was asked to the respondents to get knowledge about the choices of customers that

why they have chosen Islamic banking and in what form they are associated with Islamic

banking? This question was necessary in the sense that it would have enabled us to make the plot

of our research. This is the basic thing which can make us able to read the perception engraved in

the mind of respondent regarding Islamic banking. Respondents agreed that they work in an

Islamic bank which is the reason they are associated with it. There isn’t any other reason to be a

part of it. They got a job opportunity and they can switch to conventional if they find any good

opportunity. A respondent said that:

“I have worked in an Islamic bank for around 2.5 years. I was introduced to

Islamic banking when I was hired there. There wasn’t as such any specific

purpose to join Islamic banking. It was just a job opportunity. I was a customer

of conventional banking before that”.

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 12

Tag Cloud 2: Why Islamic Banking?

Besides the fact that most of the respondents joined Islamic banking as an employee but some

respondents also presented the view that they wanted to be a part of Islamic banking and they

have switched from conventional to Islamic. One of the respondents said:

“As I work in a bank and deputed for the work at Trade & Credits Hub which

comprise of 13 Branches in which 05 Islamic branches and 07 are conventional

branches, and looking after funded and non-funded facilities of both domains

along trade procedures. I am assigned to Islamic branches. I was working in

conventional branch before. I wanted to be in Islamic banking anyways”.

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Question No. 3: Is Islamic Banking Really Islamic?

This was the most targeted question of our research. The purpose of this question was to gain

hands on knowledge regarding the non-acceptance of Islamic banking as pure Islamic banking.

The respondents gave a mix view over it. None of them agreed completely to the idea that

Islamic banking is purely Islamic but all of them agreed on the fact that Islamic banks further

invests in Halal businesses only. One of the respondents said that:

“As it is the core responsibility of Mudarib (Investor or Bank) to invest money in

halal business. Customer can ask bank anytime to provide details of investment

which makes Islamic banking more transparent. Bank is accountable to show

their investment records”.

No respondent denied the fact that Islamic banking is based upon Shari’ah laws but some of

them argued that Islamic banking is still at its pre mature stage and some of the Islamic banking

products are not fully covered by Shari’ah laws. Instead they follow a conventional approach to

make as much profit. One of the respondents quoted:

“Currently in Pakistan Islamic banking is in its growth phase. It is not fully

matured yet. They are working on Islamic shari’ah laws but some of Islamic

products are not fully covered by shari’ah rules. There is some ambiguity in some

Islamic products but after sometime when Islamic banking will capture share

market they can run on fully Islamic shari’ah rules”.

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 14

Tag Cloud 3: Is Islamic Banking Really Islamic?

Besides the mixed views, few of our respondents gave more weightage to the Islamic aspect of

Islamic banking. They thought that Islamic banking follows complete code of Islamic rules. The

difference arises when they want to be steady in the market captured by conventional banking.

Otherwise, each and every perspective in Islamic banking follows complete Shari’ah code.

“Yes, Islamic banking is reality. Its designs and procedures are based on Shari’ah

rules and regulation. Yes it works according to teaching of Quran and Sunnah. As

already mentioned that Islamic banking is based on Shari’ah rules, Shari’ah rules

are derived from Quran, Sunnah, Ijma and Qyas”.

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Question No. 4: Interest Prohibition:

This question was related to the views of respondents whether profit distribution made by

Islamic bank is different from conventional bank or it’s just a change of name from interest to

profit. Respondents responded positively in favor of Islamic banking as most of the respondents

agreed that profit is not guaranteed in Islamic banking at all. Whereas, in conventional banking,

pre-determined profit is given which is against the essence of Islam. Respondents also agreed to

the fact that Islamic banks avoid to share losses to the customer to be competitive in the market.

They share their own sharing with the customers in such adverse situations. One of the

respondents stated:

“Islamic banking does not guarantee profit at all. In case of loss, they are supposed

to distribute loss amount to the customers. But to be competitive in market and to

retain the business, they follow a market practice to share bank’s share of profit from

any venture, to the account holders”.

Respondents described that the mechanism behind distribution of profits of Islamic banks is

totally different from that of conventional banking. Conventional banks are to give pre-

determined profit but Islamic banks work on profit loss sharing basis. They make a pool and

distribute profits according to the weightages of their investments. A respondent said:

“It is not the change of name only from interest to profit but the mechanism behind

the procedures is also different. Islamic Bank creates pool in which they share the

profit according to investment ratio then meet the market rate by making hiba to

their depositors for making relationship strong”.

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 16

Tag Cloud 4: Interest Prohibition

The agreement of respondents to the profit sharing aspect of Islamic banking was strengthened

when one of the respondents said that nobody can get a profit more than the investment ratio

either its bank or the customer. A banker from a renowned banked stated: “Return in Islamic

banking cannot be above the invested ratio as it is on partnership basis but one partner can

make hiba to other partners”.

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 17

Discussions and Findings:

According to the literature of this study, the banking world is divided into two categories. One is

of conventional banking and the other is of Islamic banking. As banks are the service providers,

so for banks, rules on which the transactions are based are very important. For Islamic banks,

this factor is even more important because, now, with the arrival of Islamic banks, especially

from the last two decades, the competition has gained tremendous importance. As per this

research, the objective is to know whether the Islamic banking in our society today is really

Islamic or just an innovated form of conventional banking? Interviews were conducted from the

employees of Islamic banks. Interview comprised of four main questions. 1. What is Islamic

banking? 2. Why Islamic banking? 3. Is Islamic banking really Islamic? 4. Islamic banking

prohibits interest or it has just changed the name from interest to profit?

The interviews were conducted on the employees’ premises. Recording were done. Transcription

and themes were prepared for data analysis. Question wise data was analyzed. According to the

respondents, Islamic banking is based on shari’ah principles, it is riba free, it is backed by asset

and it works on profit and loss sharing all the four variables have a significant impact in

choosing Islamic bank. Most of the respondents joined Islamic banking as an employee but some

respondents also presented the view that they wanted to be a part of Islamic banking and they

have switched from conventional to Islamic. When asked about Islamic perception, few of our

respondents gave more weightage to the Islamic aspect of Islamic banking. They thought that

Islamic banking follows complete code of Islamic rules. The difference arises when they want to

be steady in the market captured by conventional banking. Respondents described that the

mechanism behind distribution of profits of Islamic banks is totally different from that of

conventional banking. Conventional banks are to give pre- determined profit but Islamic banks

work on profit loss sharing basis.

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 18

Conclusion:

The observations and the literature presented in this study suggest that the concept of Islamic

banking is one of the most emerging and the most out-bursting concepts in global economies.

Numerous studies show that the Islamic banking is gaining wider acceptance and inspiration

throughout the world especially in the areas occupied by Muslim communities which enlightens

the fact that religion is the core attraction behind Islamic banking but recent studies denies this

only reason and agrees with the fact that it is not only the religion that is attracting the people

towards Islamic banking but the core thing is the processes carried out for the transactions which

makes conventional banking Islamic and Halal. This research provides some important

information regarding the behavior of the people towards the Islamic banking. The processes

carried out in Islamic banking are based on Shari’ah laws. The concept behind the transaction is

to make it riba free and to mold it according to the teachings of Islam. But to be competitive in

market, Islamic banks sometimes show leniency towards the rules which make the minds of the

people doubtful. To clear this confusion, Islamic banks should follow the Islamic rules more

strictly rather than finding out of a profitable way. The result will help the relevant parties to

further enhance the development of Islamic banking in Pakistan.

ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 19

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ISLAMIC BANKING: ISLAMIC PERCEPTION OR DISGUISED VERSION 20

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