Islamic Banking – What’s at the backend?

By Muhammad Ali Nadeem


Like the other basic requirements of Islam, finance or financial transactions are one of the major activities that are needed to be compliant with Islamic modes. Riba wasn’t practiced in newly formed Islamic society of Medina soon after its abhorrence. Later, the religious scholars[1] have derived number of modes (of financing) to carry out financial transaction in line with Islamic Shari’ah needs.


The core essence of Islamic financials is to prohibit Riba, its elimination from Islamic society and availability of financial products complied with Shari’ah[2]. In today’s Islamic Banking philosophies, due to number of empirical reasons, though Islamic banks are offering Islamic financial products refraining from Riba factor; however its elimination is still at large! Conventional banking is getting new life with the advent of consumerism and the era of General ® Pervaiz Musharraf in Pakistan had endorsed the new paths for interest-based banking!



International Commercial banks[3], when realized the potential of wealthy Muslim customers (Net Worth Individuals having above than $100 million deposits) came forward and open another window of Islamic Banking within their commercial operation – without any need of Riba elimination because it wouldn’t be in their scope. From customer perspective, if you need Riba-free banking, here it is in parallel with interest-based banking – new window under same roof. This approach is accepted by many religious scholars as a transitional phase to get some evolution of Islamic banking through these famous brands.


Shari’ah boards were formed within foreign or commercial banks and Islamic compliant products are being offered covering Muslim band of customers. But a sound criticism[4] is being seen especially for mix institutions as how they are financing their Islamic Banking window – initially from the lending of conventional banking domain! Is this what Shari’ah demands?


Another aspect in today’s technological world is banking at your own comfort of home. Branchless banking is taking ground where electronic channels[5] such as phone, internet, or short messages or mobile phones are used heavily for banking – it is quite simply impossible to segregate Islamic or non-Islamic customers reaching the call centre of the bank (for their issues resolution) – having both modes of operations. So banks bearing conventional banking operation and having an Islamic window, servicing their two opposite (minded) customers through single source[6]. Is this in line with Shari’ah? Obviously a demarcation line is need however at the backend systems (software, applications, infrastructure etc.) it is pertinent that conventional banks (with Islamic window of operation) couldn’t count on true segregation, as needed by Shari’ah.



Another issue is the tapping of human resources jointly. Primarily the Islamic banking industry, in Pakistan since 1979, is based on conventional banking resources. So the trained resources are having their initial mind-set based on interest-based banking. Even though this risk has been minimized with the presence of Shari’ah board but the segregation of resources and their utilization is still not looked upon. Organization solely dedicated to Islamic mode of banking would not have this issue however those having Islamic window are inclined to that risk unintentionally. This not only covers the Human Resources function but as well as resources rotation within the same organization to other departments – even in conventional banking areas!



The concept of mass-appeal (for non-interest based banking) is still not yet initiated. Islamic Banking is primarily liked by those who are –somehow- having mind-set to go for non-interest based banking. A country like Pakistan, where religious awareness is less than 10% (in last elections, the religious alliance MMA[7] won 53 National Assembly seats comprising 9.74% of total vote) it is still in doubt to forecast penetration of Shari’ah compliant financial products. With a predominance of sectarian concept of religion, in remote towns or villages of Pakistan – a country mainly consist of 67% of rural population, it is yet to see the mass-movement against Riba. Religious political parties, even though their presence in metropolis is not very significant, could play some role in mobilizing the masses against Riba based economy but without a plan to manage the financials of a debt-burden (nearly US$55b foreign debts) country’s current financial system may end up in chaos.


The division of society into conservative, progressive, less-moderate and religious segments has affected the out come of Islamic finance too. Historic Judgment[8] against Riba by Shariat Applet bench and then by Supreme Court of Pakistan has made that distinction line more visible when one of the conventional bank[9], backed by the then government of Pakistan, approached the Supreme Court for (reversal of judgment[10]) and getting stayed out of that deadline of implementation. Number of progressive Muslims now ask as “what’s wrong in having bank interest especially on savings?” One of the non-Muslim[11] member of National Assembly when asked in house as “the bank interest is not under the definition of Riba, as per the verdict of Al Azhar main scholars” brought pandemonium and religious parties staged a walk out of the house.



The market standing of newly born Islamic banks is yet to take roots in masses heart to bring their deposits to pure Islamic banks. Foreign brands when tagged with pure Islamic banks or financial products (such as VISA or Master Debt Cards) may have created doubts in minds as “what’s the difference if both conventional and Islamic institutions are using same tags and offering similar products – as Visa or Master organization would work on interchange based transactions regardless of Riba!”


Knowledge propagation for Islamic products is not done at the beginners’ level. The backend chemistry of Islamic financial products formation is not made publically known hence has less impact upon society. Either Islamic Banking Seminars or Conferences are costly affairs (normally in Middle East the participation cost is above US$1,000) or institutions imparting that know-how (or similar trainings) are charging higher than normal fees. All this has made Islamic Banking professional learning a costly love affair for new comers or a lucrative career path for those who could afford that price!



Though it had minimal impact but the religious interpretations might impact the Islamic financial products in near future. These interpretational differences are visible between financial products of Malaysian model and products derived in Middle East by Islamic banks. This division is narrowed down further in Pakistan in Sunni school of thoughts with the origination of Dawood[12] Islamic bank – solely supervised by Barelvi[13] school of thought whereas Meezan, AlBarakh and similar are under the influence of Deubandi[14] school of Islamic interpretations.



With dual system of education in Pakistan, religious seminaries produce religious scholars only like the engineering universities engineers and medical colleges’ doctors. Arabic is always the language of religious seminaries in Pakistan and equally unknown to banking sector, since ages when Muhammad Ali Jinnah had inaugurated the building of State Bank of Pakistan in 1948. Since then, banking knowledge was imparted on an on-job learning[15] criteria with no intention to learn Arabic (to know the financial terms) or to setup professional institute to carry out banking degrees or diplomas like technical or professional educational institutions.



Shari’ah advisory boards –within the banks- have mitigated this gap however you may find all those professionals running the shows of Islamic Banking[16] (right from Retail to Corporate banking) may appear to be like traditional conventional bankers in terms of language (that is English), banking-terms, professionalism, even outlook. This is equally good and bad. Good in terms that religious segment of our society have accepted such hardcore conventional bankers to drive the ship of Islamic banking, even with outlook that doesn’t match the traditions of Islamic norms. And bad in a sense that this transition phase of transformation (from conventional to full Islamic) may eventually be a never ending story!






[1] Durr e Mukhtar, additionally see Shah Waliullah’s ‘Hujjatul Llah el Balaygha

[2] Islamic Finance by Justice Taqi Usmani

[3] Such as Citigroup, HSBC, ABNAMRO

[5] E-Channels are prime medium for all the banks in today’s environment

[6] Through same Contact centre using same backend applications for Credit Cards and Banking Functions

[7] Mutahidda Majlis e Amal

[9] United Bank Limited (UBL)

[11] Mr. M P Bhandara, a well known writer and member of National Assembly in 2004

[12] Mufti Muneeb ur Rehman who belongs to Ahl e Sunnat (Barelvi) school of thought is the Shari’ah advisor of Dawood Islamic Bank where as Mufti Taqi Usmani & his son Dr Imran Usmani adheres Deubandi interpretation of Islam supervise Meezan & AlBarakh Islamic banks

[13] Those who primarily follow the interpretation of Maulana Ahmed Raza Khan

[14] Followers of Haji Imdad ullah Mahajir Makki, Maulana Qasim Nanutvi & Maulana Ashraf Ali Thanvi comprising Madrash e Deuband, India

[15] See UBL former President Mushtaq Ahmed Yousufi’s book “Zarr Guzasht” (Money that is gone!)

[16] This covers Consumer, Corporate, Asset Management or Investment banking portfolios

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