Is Islamic banking Islamic?

Islamic banking, initiated in Pakistan in 1979, has undergone a complex evolution. Early attempts in the 1980s replaced the term 'interest' with 'mark-up,' a change that proved superficial, leading to the establishment of fully Islamic banks starting in 2002.

Today, Islamic banking in Pakistan is characterized by rapid growth and profitability, driven by significant demand among the populace. The system now includes Sharia boards that vet banking practices for compliance with Islamic law, supported by an advisory committee at the State Bank of Pakistan. This framework extends beyond traditional banking to encompass Islamic leasing (Ijara) and insurance (Takaful), alongside government-issued sukuks.

However, as the industry prepares to celebrate its silver jubilee, questions persist about its true adherence to Islamic ideals. The article points to practices like Istisna financing, where a bank ostensibly buys and sells goods like cotton to a company, with the profit margin tied to the State Bank's policy rate. This structure, similar to conventional lending, raises concerns about whether it truly reflects the spirit of Islamic finance, especially since the bank, like a conventional lender, faces no downside risk if the client incurs losses.

The core question remains: how closely does modern Islamic banking align with the Quranic edicts it purports to follow? The article suggests that while the industry has expanded and diversified, a deeper examination is necessary to ensure its practices are genuinely Islamic and not merely a rebranding of conventional financial instruments.

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Buying and selling is but a kind of usury, the while God has made buying and selling lawful and usury unlawful. … If, however, [the debtor] is in straitened circumstances, [grant him] a delay until a time of ease… .