Recent discussions on platforms like YouTube and TikTok, led by religious scholars (Ustaz), influencers, and the public, have sparked significant debate regarding the halal (permissible) and haram (forbidden) status of modern Islamic banking.
Interestingly, when one prominent Ustaz was asked whether he should take a loan from an Islamic bank or a conventional bank, his answer was controversial: "Whichever is cheaper."
It is unclear whether he gave this answer because he views both systems as flawed (haram), or for other pragmatic reasons. However, from a technical perspective, his advice holds weight. As the Writer have demonstrated in previous analyses, Islamic banking often proves to be the cheaper option. (Please refer to my previous analysis: [Link -https://islamicbankingway.blogspot.com/2013/08/33cii-which-is-cheaper-islamic-or.html ]
Comparison: Why Islamic Banking is Often Cheaper
The "Tawarruq" Controversy in Restructuring
While the table above highlights the theoretical benefits of Islamic banking, a disturbing trend has emerged in practice.
When customers face payment difficulties, some Islamic banks structure the rescheduling using a Tawarruq facility. This involves creating a new purchase and sale agreement (a new contract) to pay off the old facility. In the Writer's opinion, this practice indirectly mirrors the loan restructuring of conventional banks
The Writer view this as a disguised sale that is functionally equivalent to Riba (usury). It is disappointing that Shariah advisors have allowed this mechanism to proliferate. Instead of genuine aid, it layers a new debt contract over an old one.
The "Money Creation" Dilemma
Beyond the specific product structures, we must address the macroeconomic elephant in the room: Fractional Reserve Banking.
Except for Tawarruq and Inah, (products created due to necessity when the Islamic bank started), most Islamic banking products are technically Shariah-compliant. However, because Islamic banks operate within the conventional fractional reserve framework, they are arguably participating in money creation—a process many consider connected to Riba.
Until there is the political will to enable Islamic banks to operate within a completely distinct financial framework—separate from conventional deposit creation—we have no choice but to accept the "pain" of utilising the current system.
As a Muslim with financial needs, one often has to choose the "lesser of two evils." While the Writer do not encourage crossing the Ribawi barrier, if one has no choice, Islamic banking remains the better option—not only ethically but, as shown above, often financially.
Areas Requiring Further Scrutiny
To alleviate the doubts held by scholars and the public, the industry must address the following:
Genuine Economic Purpose: Products like Tawarruq (Commodity Murabahah) are often used as a "legal trick" to validate debt transactions. Ideally, these should be replaced by Al-Qardhul Hassan (benevolent loans), though practically, this is difficult for commercial entities. In the next blog topic, the Writer will try to explore whether Al-Qardhul Hassan can be considered for the current Shariah Advisors to deliberate on replacing Tawarruq.
Treatment of Late Charges: We must ensure strict adherence to the rule that Gharamah (penalty) goes strictly to charity and never contributes to the bank's profit performance. Calculation of Ta'widh must be quantified instead of being put as a fixed percentage, for example, 1% as Ta'widh, while the rest is in Gharamah
Leverage & Gearing: The risk-sharing principles of Islamic finance are currently undermined by the leverage inherent in the fractional reserve model. This requires a fundamental re-examination.
Conclusion
By honestly addressing these systemic issues—specifically the over-reliance on Tawarruq for restructuring and the reliance on conventional money creation models—Islamic banking can move closer to its ethical foundations. Only then will it gain unequivocal acceptance across the diverse scholarly community.
Only Allah Knows Best
Islamicbankingway.blogspot.com
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