Product Development in Islamic Banks

By Habib Ahmed | Go to book overview

legal requirements, an Islamic financial system should also cater to the social needs of a society. Other than Islamic economists and scholars, many other stakeholders of the industry expect the Islamic financial sector to play this social role. This is evident from a survey of 1,500 stakeholders conducted by Dusuki (2008) in Malaysia, who finds that the bulk of the local communities, customers and depositors identify alleviating poverty, contributing to social welfare and promoting sustainable development projects among the key goals of Islamic banking.

From the legal perspective, the contention is that the Shari'ah requirements are being diluted. The crux of the condemnation is focused on the products offered by the Islamic financial sector, which increasingly appear to be mimicking those of conventional finance. In doing so, the legalistic forms of contracts are fulfilled but the substance and spirit are not. For example, in a recent study Dusuki and Mokhtar (2010) find that only 11 out of a total of 560 sukuk (Islamic bond) issues (or around 2 per cent of the total) qualify to be asset-backed as these fulfil the legal Shari'ah requirements of an actual sale of the underlying asset to the investors. The remaining 98 per cent of the sukuk replicates conventional unsecured bonds with the sale of the underlying asset not being actual, from both accounting and legal perspectives.

The failure of Islamic finance to fulfil the legal requirements has generated criticism from both detractors and proponents of the industry. At the extreme end of the spectrum, the Islamic financial industry has been denounced as a ‘deception’ and ‘charade’ (Saleem 2006a,b). Seniawski (2001) and Holden (2007) identify the current practice in the Islamic financial industry as ‘legal hypocrisy’ and Hamoudi (2007) calls it ‘semantic fantasy’ and ‘jurisprudential schizophrenia’. ElGamal (2007a, 2008) claims that Islamic financial institutions are ‘rent-seeking Shari'a arbitrageurs’ using

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