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IS ISLAMIC BANKING REALLY ISLAMIC

By

Kashif Shakeel

A Thesis Submitted to the Faculty of Institute Management Sciences, Peshawar, in the


Partial Fulfilment of the Requirements for the Degree of
BBS (Finance)

Institute of Management Sciences, Peshawar

2014-16

Certificate of Approval

I certify that I have read Is Islamic Banking Really Islamic by Kashif Shakeel, and
in my opinion this work meets the criteria for approving a thesis submitted in the
Partial Fulfilment of the Requirements for the Degree of BBS (Finance) at the
Institute of Management Sciences, Peshawar.

Supervisor
Name: Dr. Yasir Kamal
Designation: Assistant Professor
Signature:___________________
__

Coordinator Research &Development Department


Name:

Dr

Owais

Mufti

Signature:_____________________

Declaration

I, hereby declare that the research submitted to R&DD by me is my original work. I


am aware of the fact that in case if my work is found to be plagiarized or not genuine,
R&DD has the full authority to cancel my research work and I am liable to penal
action.

Students Name: Kashif Shakeel


Date: December 17, 2015

Dedication

This Research is dedicated to my Family, Friends and respected teachers for their
patient and support.

Abstract
This paper studies Islamic banking that whether it is pure Islamic or not. Some Islamic
scholars say that Islamic banks are pure Islamic while there are others which have
different views about Islamic banks. So to check this, questionnaire survey and
interviews of Islamic scholars, Islamic banks officials and conventional banks officials
are conducted. Sample size of 50 is taken through convenient sampling technique for
the questionnaire while 3 Islamic scholars, 2 Islamic bank officials and 2 conventional
bank officials are interviewed. After studying Islamic banking and the result of
questionnaires and surveys, it is revealed that Islamic banks are apparently working
according to shariah rules and regulations. And the result also shows that Islamic
banking is Asset backed banking and fulfils the Shariah requirements in its transactions.
But on the other hand, purposes of Islamic banks are not according to Islam which
makes difference of opinions among Islamic scholars and people. To maintain its
separate position, Islamic banks should avoid such practices which are not for the
welfare of people and made just to earn profit to make the purpose also Islamic.

Acknowledgment
I am grateful to Almighty ALLAH, Whose blessings have always been source of
encouragement for us and who gave us the ability to complete this task. I also wish my
heartiest thanks to my parents who supported me financially as well as morally
throughout my academic career and pray for me all the time. I can never turn down
their efforts they put forward for my bright and prosperous future.
I also dedicate this dissertation to my many friends and who have supported me
throughout the process. I will always appreciate all they have done, especially
I can never forget guidance the efforts of my humble teachers. I am very thankful to
them who helped me during the course of study and motivated me all the time. I am
thankful to my supervisor Sir Dr. Yasir Kamal for his kind support and help in this
thesis.

Kashif Shakeel

Table of contents

Declaration.................................................................................................................................ii
Dedication.................................................................................................................................iii
Abstract:....................................................................................................................................iv
Acknowledgment.......................................................................................................................v
Chapter 1: Introduction:.............................................................................................................1
1.1 Broad overview:.........................................................................................................1
1.2 Definition of Islamic banking:...................................................................................2
1.3 Islamic banking in Pakistan:......................................................................................3
1.4 Sariah compliance Modes of Islamic financing:.......................................................3
1.5 Importance of the topic:.............................................................................................5
1.6 Objectives:.................................................................................................................6
1.7 Research questions:...................................................................................................6
1.8 Scheme of Study:.......................................................................................................6
Chapter 2 Literature Review:.....................................................................................................6
Chapter 3: Methodology:.........................................................................................................13
3.1 Data sources:............................................................................................................13
3.2 Data types:...............................................................................................................13
3.3 Data collection and Sample size:.............................................................................13
Chapter 4: Analysis and Findings:...........................................................................................14

4.1 Interviews of Islamic scholars:................................................................................14


4.2 Interviews of Islamic bank officials:.......................................................................15
4.3 Interviews from Conventional banks officials:.......................................................16
4.4 Questionnaire:..........................................................................................................18
Chapter 5:.................................................................................................................................30
Conclusion.....................................................................................................................30
Recommendations:........................................................................................................30
References................................................................................................................................31

Chapter 1: Introduction

1.1 Broad Overview:


Islamic banking is very old concept. According to Khan (2011) the history of the
Islamic bank starts form Arabs era. Wealthy merchants gave money to poor people on
high riba and the poor people cannot return their debts. As a result they became their
slaves and even their grandchildren are unable to pay the debts. To prevent this Islam
give a solution in the form of a financial system which is made for the welfare of poor
people and based on Islamic rules and principles.
But unfortunately conventional banking replace Islamic banking and Islamic banking
became only a desire of Muslims. But in late 1970s in king Abdul Aziz university
Makkah Saudi Araba first Islamic conference was held. Because of this Islamic
conference first Islamic bank named Dubai Islamic bank was established. Thus from
this time Islamic banking again started in the world and Islamic banks were established
in many countries. The growth of Islamic banking continued at a very fast speed in a
little time or we can say in few years its deposits were grown from few thousands to
hundred million dollars. The growth of Islamic banking Islamic not only confined to
Islamic countries but some non-Muslim countries also started Islamic banking and
existing commercial banks also established their Islamic branches. It is also a fact that
the sum of all Islamic banks deposits is less than a single 50 big banks in the world but
still it is growing fast because just thirty or in forty years its growth is very good.

Besides this according to Mansoori, (2011) some religious scholars say that its
pure Islamic and they have arguments about its validity. On the other hand there are
other scholars which say that Islamic banking is not pure Islamic. It is just a copy of
conventional banking and is made to deceive people in the name of Islam and they also
have strong arguments to support their opinion.

1.2 Definition of Islamic banking:

According to State bank of Pakistan Karachi Islamic banking is defined as


banking system which is in consonance with the spirit, ethos and value system of
Islam and governed by the principles laid down by Islamic Shariah.
According to Institute of Islamic banking and Insurance, Islamic banking is the
banking system which is according to Shariah principles.
According to Al Barka bank Islamic bank is an institute which channelizes the
funds and invest them in accepted Islamic ways and achieve objectives which
are according to Islamic rules. And these all channelization and investments
must be according to shariah rules.
Islamic banks are based on shairah. Interest is strictly prohibited in Islam,
Islamic banking is based on equal share of profit and loss between giver of
capital and the person who use the money (Schaik 2001).
Islamic bank is the institution which works on basis of achieving the objectives
of Islamic in financial and banking sector (Hassan 2003).

1.3 Islamic Banking in Pakistan:


Pakistan is an Islamic country which is made on the name of Islam. It is very important
for such country to have such financing system which is based on Islamic rules. So for
this purpose Council of Islamic Ideology is conducted .As a result all conventional
banks convert their local Currency account into interest free accounts while the foreign
currency accounts are continuing in the same way means on interest based. But later on
the Federal Shairah Court declared this Un-Islamic.
According to Khan and Mirakhor (1990) Islamic banking starts in February 1997 in
Pakistan due to several years study of Council of Islamic ideology which is formed by
the government of pakistan after the announcement of president of pakistan that interest
should eliminate form the economy. And in 1997 the first Islamic bank (Meezan bank)
establish in Pakistan.

1.4 Sariah Compliance Modes of Islamic Financing:


There are some modes of Islamic banking which are discussed in this paper which are
Murabaha , Ijarah, Bai Muajjal, Salam, Diminishing Musharakah.
1) Murabaha:
Murabaha is most widely used mode of Islamic financing. In this contract the actual
cost of the asset is tell to customer and then add the profit (which include the late
payment premium) and sell to customer. In this bank don not give money to the
customer for use but instead of money, bank purchase the desired asset for the customer
and sell for late payment. The asset price cannot change in case of late payment or early
payment but to avoid late payment Islamic banks impose penalty for late payment but
the penalty amount is not include to income of the bank but give as charity to different
charity organization.

According to Khan( 2015) Murabaha means sale on profit, in Murabaha contract the
seller sell the product to buyer but also tell the actual price and the profit. But for the
valid Murabaha certain conditions are necessary which must be fulfilled 1) the asset
which is going to be sell or purchase must be exist. 2) And the asset must be in the
ownership of seller. 3) Buyer and seller must be agree on the price of the asset.
2) Ijarah:
According to Kamali H.M (2007)Ijarah derives from the root word ajara to
recompense, compensate or give a consideration and return. Ajr refers to a workers
wage, and ujrah to rental payment. In its juristic usage, ijarah primarily refers to both a
rental as well as a hire contract that engages the services of persons."
In this mode of financing Islamic banks lease a specific asset to a customer for a
specific rental payment but the ownership title and all the risk related to asset remained
with the bank and the customer (lessee) is responsible of that loss only which is caused
miss use of asset by the customer. The bench mark used for the payment of rent is
interbank rate. The leased property may be the in the ownership of joint partners and
the rental income is contributed among themselves according to the agreed rate. At the
end of the leased period the asset may return to lessor (bank) or purchased by the
customer or bank give the asset to client as gift.
3) Bai Muajjal:
This mode of financing is based on deferred payment in this type of Islamic financing
Islamic bank purchased the desired asset for the customer and the customer paid the
amount in some later date the only difference between Murabah and Muajjal is that in
Murabaha the cost of the asset is disclosed while in Muajjal the cost of the asset is not
disclosed to the customer.
4) Salam:
It is basically used for financing agriculture. In this type of financing the bank
purchased products for spot payment with deferred delivery. It fulfils the needs of
formers and also some small manufacturers. These manufacturers and formers get
funds for their productions and seeds and when the products are manufactured or the
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crops are grown then it is given to bank at the agreed price which is mostly less than
the market price of the product. To secure himself the bank can also ask for guarantor
which ensure the delivery of the goods or can also take some collaterals to as a security
which is sold in case if the goods are not delivered to bank up to agreed date and fulfil
his need by purchasing the same good from market or take his money.
5) Diminishing Musharakah:
Diminishing Musharakah is a mode of financing which basically finance people for the
purchase of houses. In this type of financing in which a contract is made between bank
and customer in this when a customer wants to purchase house then bank finance the
customer but some money also share of funds are paid by the purchaser and the
remaining is paid by bank and the ownership of the property is distributed among bank
and customer in the same proportion. Bank gives his share to customer on rent basis.
The portion of bank is divided in to small pieces. In this contract the customer promise
to buy the portion of bank gradually or we can say in instalments. Then customer
purchase the small pieces of land through periodic payments which include the
payment of rent and the purchase process continue until the ownership is completely
transferred to client from bank.

1.5 Significance of the Study:


We are Muslims and want to do every job according to the rules and principles of
Islam. So banking is big sector which fulfil the day to day needs of every person but
unfortunately before 1970s all the banking system is based on interest which is strongly
prohibited in Islam. So after a long time Islamic banking comes into practice on the
desire of Muslims. Muslims want such banking system which is free of interest and
based on shariah rules. So the current Islamic banking system claims that it is free of
interest and based on shariah rules and there are many Islamic scholars support this

type of banking system but there are some other Islamic scholars which says that
current Islamic banking is not according to purely Islamic it is made just to deceive
Muslims in the name of Islam. So my topic Is Islamic banking really Islamic will
help in determining that the current practices of Islamic banking fulfil the desire of
Muslims or not.

1.6 Objectives:
There is lot of confusion about Islamic banking. That whether the current Islamic
banking is pure Islamic or not and it work according to the rules of Islam and also
achieve the purpose of Islamic financing or not. The objective of my topic is this that
whether this current banking system is really Islamic or just a subterfuge.

1.7 Research Questions:

Research has the following questions.


Is Islamic banking really Islamic?
Is objectives of Islamic banking are Islamic?
Is there any significant difference between Islamic and conventional banking?

1.8 Scheme of Study:


The report consists of five chapters; each chapter convey different information. The
chapter 1 is about the introduction and history of the study, chapter 2 explains the
literature work done by scholars similar to this report. In addition, chapter 3 shows the
methodology and the next chapter 4 is about data collection through Questionnaire and
face to face and telephonic unstructured interviews and chapter 5 analyse the data and
in chapter 6 the report comes up with a conclusion and recommendation.

Chapter 2 Literature Review


This chapter aims to give a critical review of the literature which is related to Islamic
banking. The chapter first review the whole Islamic banking then come to its Shariah
compliance products.
According to Mansoori (2011) who examined Islamic banking that whether Islamic
banking is Islamic or not .And concluded that Islamic banking is free from interest,
gambling and other such activities which are forbidden by Islam and Islamic banking is
based on asset. Money has no value in Islamic banking it is only a medium of
exchange. But their purposes are not Islamic most of its transections did not give any
benefit to society so if Islamic banking wants to maintain its separate identity Islamic
banks should eliminate such transactions which are opposite to purposes of Islamic
finance.
Chong & Liu (2009) conducted a study in which they looked at Islamic banks that
whether Islamic banks are interest free or not. They focused on Malaysia in their study
and concluded this that there is no significant difference in Islamic deposit rates and
conventional they revealed that theoretically Islamic banking is totally based on profit
and loss sharing but in reality only a negligible portion follow this and most of its
transactions are not according to sharia principles. According to them the main reason
of this is competition and return on Islamic bank deposits are effectively pegged with
conventional banks return.
According to Hanif(2010), Islamic financial institutions work under shariah principles.
Islamic banks cannot issue loan on interest, it fulfils the need of people through
supplying the required asset or through profit and loss sharing activities. These

institutions cannot issue funds to non-Islamic activities such as gambling, pornography


and liquor. All the requirement of businesses can be fulfilled through Islamic financial
institutions but financing of not for profit organization is omitted in Islamic banking.
Islamic banking is not a copy of conventional banking it has its own rules which are
made under shariah and its own way of funding different activities which are according
to the rules set by shariah advisory board.
According to Afzal et al. (2015) Islamic banks are different form conventional banks
because Islamic banks are guided by Islam and Quran. Islam seeks the benefit of
everyone while conventional banks are not guided by any religion and seeks their own
benefit in all transactions only.
According to Khan ( 2015) Islamic banks are equity based and in crisis it proves good
than all other banks because the change in value of assets cause change the value of
shares owned by the people. And Islamic banks do not give a fixed amount interest to
its depositors and also not charge fixed amount of interest from its customers. The
value of real assets of Islamic banks is always equal to liabilities on them. So the main
difference between Islamic bank is not only the that one charge interest while the other
do not charge interest while the one conventional banks guarantee the nominal value of
the assets while conventional banks don not guarantee the nominal value of the assets
or deposits, they just treat it as share.
According to Khan(2011) who observed Islamic banking from the prospective that is
Islamic banking interest free or not and focus its studies on Murabahah which is the
most widely used mode of financing in Islamic banking. Muslim countries widely used
Islamic banking because Islamic banking fulfil their needs according to the teachings of
Islam by providing interest free loans but actually Islamic banking provide products
which are technically interest free but actually based on fixed return and use different
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name instead of those names which traditional conventional banks used in order to
make their product according to Islamic principles and rules. Islamic banking should
revise its different product specially Murabahah to make it pure Islamic and according
to Islam and sharih rules.
According to Shaikh (2011) who studied the most widely used mode of Islamic banking
and concluded that apparently Murabahah is not too much different from loan given by
banks but in reality it is not like conventional banks loan it has some good features
which differentiate Islamic banking from traditional conventional banking. But still
Islamic banks should use separate indexes for Murabahah and should also make some
operational changes to remove operational similarities with conventional banking and
to maintain its unique identity. Through this way Islamic banks can get more support
from depositors and improve the level of confidence of depositors.
Muajjal or baithaman is also a mode of Islamic financing which is based on deferred
payment in this the goods are immediately delivered and payment is made in some later
dates so for this delay of payment Islamic banks charge some extra money. And it is
permissible from Islamic point of view because in Islam one can charge high prices
than the current market price for deferred payment.(Ahmad, 1993)
Salam is also a mode of Islamic financing. In Salam payment is made in advance and
the delivery of goods is made in some later date and the bank give less price than they
can get in market by selling the product in the market by spot selling but according to
Islamic principles it is permissible profit for bank or any other financial institution
because of later delivery of products or goods one can get extra benefits. It is mostly
used to finance agriculture sector in which Islamic banks give money to formers for
purchase of seeds and minerals and make a contract with them to purchase an agreed
amount of product from them in the same amount of money Islamic banks also ask for
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a guarantee or mortgage to secure their money and ensure the delivery of products in
case of guarantor if the farmer default and cannot give goods to financer then Islamic
banks can ask guarantor to deliver the product and in case of mortgage if the former or
seller default then bank can sell the mortgaged item and can purchase the same amount
of product from the market or can get back their money. (Usmani, 2002)
According to Muhammad Hanif & Syed Tahir Hijazi, (2010) who conducted study on
Islamic house financing which is none as Diminishing Musharka. In every local
market there is large number of customers of house financing so to fulfil their needs
Islamic financial institutions start this mode of financing but it needs some serious
considerations and need some changes in the value and in variable rentals but if they
use real Musharaka then their demand effect. Islamic banks now competing with
conventional banking and thats why they offer such product and services which are
very close to conventional banking which a create a bad perception about Islamic
banking in the eyes of its customers. So to maintain a separate identity Islamic banks
should not follow the rules of capitalism and it must be visible from their practices. In
true Musharaka profit and loss must be shared between the partners and but in Islamic
house financing financer earn more money than conventional banks. The sole reason of
Islamic banks is that they must be shairh compliance. But due to fear of losing of
customers Islamic banks is not working purely according to shariah rules so Islamic
banks should not lose their identity due to this and Islamic finance practitioners should
do extra ordinary efforts to convert society to this new system.
Musharakah is contract in which two partners combined capital and share profit and
loss. Islamic banks introduced another form of Musharakah for those people who wants
to purchase house for residential purpose which is named as Diminishing Musharahkah
in which one partner (bank) do contract with another partner (customer) for the
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purchase of real estate for house in this some share is paid by purchaser of land and the
remaining is given by bank and then divide the full land into small pieces and fix the
price of these pieces the purchaser of land will purchased the land in instalments or in
lump sum the purchase of shares continues until all the shares purchased by the
purchaser of land from bank and this technique is approved since the first Islamic
conference held in Dubai of 23 to 25 of jumadu sanni 1399hijri.(Mahdi, 1995)
Ijarah is another form of Islamic financing which in this type of financing Islamic
bank don not directly provide funds to the client but instead of funds bank provide the
asset which is needed by the customer according to the specifications provided by the
customer and then give this asset on lease to the client against fix rental payments and
the time period of lease is determined by the mutual contract between bank and
customer which may be from 3 moths to 5 years or more which is determined
according to the nature of the asset. In the lease period the ownership of the asset is
remain with the bank but in the custody of customer (lessee) during this period the
maintenance of the asset is the responsibility of the bank because bank gets benefit of
the asset as a rent. And after the expiry of the leasing period the asset revert back to the
bank. This leasing of asset is permissible according to Islamic laws in which the user of
the asset gets benefit against the payment of rent (Ahmad, 1993).

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Chapter 3: Data and Methodology

3.1 Data Sources:


The data is collected from two sources one from questionnaires and the second is from
face to face and telephonic interviews. Questionnaires are made for general public and
Islamic bank customers and while religious scholars, Islamic bank employees and
conventional bank employees are interviewed.

3.2 Data Types:


Primary data is collected for this study.

3.3 Data Collection and Sample Size:


Correct and effective data is essential for any research and the use of correct tools is
also important. So in this section all the methods which are used to collect data are
explained. As mentioned before that Primary data collected through questionnaire.
Questionnaire is distributed among different people in whom customers of Islamic
banks are also included and employees of banking sectors and religious scholars are
interviewed to take some input from Islam and Quran. Sample size of 50 is taken
through Convenience Sampling and SPSS is used for the analysis and graphs making to
make the collected more informative. Convenience Sampling is used to collect data
from people because of limited time and limited resources. For the questionnaire, 4
banks employees of different banks and 3 religious scholars are interviewed.

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Chapter 4: Analysis and Findings


Data is collected through interviews and questionnaires with an objective to find
authentic data. The result of the interviews and questionnaires is in the following
sections.

4.1 Interviews of Islamic Scholars:


Three Islamic scholars are asked about the authenticity of Islamic banking system.
Scholar 1: Molana Abdur Rehman (Darul Uloom Karachi)
Scholar 2: Molana Rehmat Ullah
Scholar 3: Ibrahim Essa (Darul Uloom Karachi)
Question 1: Are Islamic banks interest free?
All the scholars unanimously agree to the fact that Islamic banks are interest free from
every possible perspective.
Question 2: What do you say about Islamic banking system? Is it in accordance with
Shariah principles?
Molana Abdur Rehman agrees that Islamic banking system follows Islamic Shariah
principles. It is also agreed upon that there are some factors which are unfair and
impure because Islamic banks charge almost equal to what conventional banks charge
for transaction. While Islamic principles stress on the welfare of the common people
but this factor is not apparent to the level in Islamic banking which is actually required
by Islamic principles.
Molana Rehmat Ullah also agrees with the fact that Islamic banks follow Shariah
principles. However it is stressed upon that Islamic banking system has some loopholes
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as us Muslims have that is why we cannot say that Islamic banks are un-Islamic
because of some loopholes. He also argues that all these loopholes and deficiencies in
Islamic banking system are all because of us because we as Muslims do not practice
Islam in a perfect way or near to perfect. If we go by Islamic rules and dedicate
attention towards Islamic banking system then these deficiencies in Islamic banking
system would vanish totally.
Ibrahim Essa also agrees that Islamic banking is totally in accordance with Shariah
principles and there is no loophole whatsoever in Islamic banking. It is also stressed
upon that Government of Pakistan should give unconditional support to Islamic banks
in order to keep them thrived and maintained as the Islamic principles propose.
Question 2: Should Islamic banks eliminate some of its practices? If yes then which
practices should be eliminated?
Molana Abdur Rehman and Molana Rehmatullah agree to the fact that debt instruments
of Islamic banks should be eliminated so that the purpose of Islamic banking system
could fully turn its way to Islamic principles and Islamic banks should instead divert
their practices to equity and profit & loss based. While Molana Ibraheem Essa argues
that Islamic banks are fully Islamic based and there are no practices that do not follow
Islamic principles.

4.2 Interviews of Islamic Bank Officials:


Two Islamic banks officials are interviewed.
Official 1: Muhammad Ismail (Operational officer of Meezan bank, Bannu)
Official 2: Muhammad Javaid (Manager of Meezan bank, Bannu)
Question 1: How do Islamic banks contribute to the welfare of the society? How do
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Islamic banks precede conventional banks in this regard?


Muhammad Ismail and Muhammad Javaid provide some facts about the working of
Islamic banks. Both of them argue that Islamic banks contribute to the society on many
fronts. One fact, where Islamic bank differentiate from conventional banks, is that
customers who pay their loans late are penalized for being late in payment. This
amount of penalty is added to the charity account and this balance of charity account is
usually given to charity organizations or as scholarships to students. Besides, Islamic
banks also provide cars, laptops etc. to its customers through Islamic ways.
Question 2: Is it Islamic to use KIBOR & LIBOR as a base of return on financing?
Both officials assent to the fact that it is Islamic to use KIBOR & LIBOR as a
benchmark. It is not against Islam because if there is no Riba or Gharar in transaction
itself, then one cannot name this activity as un-Islamic just because of benchmark.
These officials clarify this by giving an example that conventional banks directly
charge money for money which is totally against Islamic principles while Islamic banks
include commodity in a transaction and charge rent using the KIBOR & LIBOR rates,
which is not un-Islamic. Furthermore Islamic banks are in progress to develop their
own benchmarking system.

4.3 Interviews from Conventional Banks Officials:


Interviewer 1: Fazal Haq (Manager MCB Bannu)
Interviewer2: Alam Zeb (Operational Manager of MCB Bannu branch)
Same questions that are asked from Islamic bank officials are repeated here to know
Conventional banks officials view.
Question 1: How do Conventional banks contribute to the welfare of the society besides
the basic services?

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As per conventional banks officials, it is argued that conventional banks, besides


providing basic banking services, provide loans to those customers who have opened
salaried accounts with these banks. These customers are provided with loans and then
these loans are deducted from the customers accounts when their salaries are deposited
into their accounts. This is one of the services where conventional banks precede
Islamic banks because customers can get small loans to fulfil their needs and then pay
later when they are paid salaries at the end of the month.
Why do you think conventional banks are better than Islamic banks?
According to the conventional banks officials, Islamic banks are no different than
conventional banks because both banking systems use same method to give return to
their customers and charge customers for what services they have provided to them,
that rate which is being used by both is KIBOR & LIBOR.
Is profit and loss based system of Islamic banks better than conventional banks?
Conventional bank officials express that even conventional banks have profit and loss
accounts as claimed by Islamic banks. But there is a fact that Islamic banks are not
totally profit and loss based, it is just a meagre portion of the total system that is profit
and loss based which is around 3% to 4%.

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4.4 Questionnaire:
Questionnaire is made on the basis of following variables to check that is Islamic banks
work under perfect Shariah rules or not. All the Questions are made simple so that
everyone can understand it. To know the perception and experience of people about
Islamic banking.
a) Riba (interest) free banking. b) Equity based banking.

1.

c) Profit and loss based banking. d) Ethics


Interest is strictly prohibited in Islam for Islamic banks it is really necessary that its all
practices must be interest free. So first question of the questionnaire is that current
Islamic banking is totally interest free or not to check that is the current practices are
free from interest from all prospective or mere copy of conventional banking and use
other names for talking interest so this question asked form different people and they

give response on the basis of their experience.


2. Second question is about whether interest is the only factor which make a bank Islamic
of Un-Islamic or there are some other factors which make practices of bank Islamic or
Un-Islamic. As Islamic banks argues that interest is prohibited and our banking is
interest free so the current practices is Islamic is it true or not.
3. Third question is about interest elimination that whether people also want to eliminate
interest in banking practices or not. Because for any bank it is very difficult to continue
its interest free practices in such economy in which people are not in favour of interest
free banking, while in the same way interest free banking is widely acceptable in such
economy in which people are in favour of interest free banking.
4. Fourth question is, whether the current Islamic banking is really equity based or debt
based. Because Islamic banks claim that their practices are totally equity based.
5. Fifth question is about that Using commodity instead of money. Is this good for country
economy or not. Or they just do it to make their practices according to Islamic rules and
practices.
6. Sixth question is about whether money should be traded as commodity or not. To know
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that are people in favour of giving money on interest or not because trading of money
as commodity is prohibited and called it interest.
7. Seventh question is about the current Islamic banking practices are according to profit
and loss sharing basis or not which is the ideal way of financing in Islam. Or Islamic
banks do other than profit and loss sharing basis finance which is mostly criticised by
most of the religious scholars.
8. Eighth question is about whether the people are also in favour of profit and loss or they
want fixed return. To know that whether the people behaviour is suitable for Islamic
banks or not and also know that Islamic banks using profit and loss according to
Islamic practices are they just use the name and do something which is worse than
conventional banks.
9. Ninth question is about ethical consideration that is Islamic banks involved in corporate
social responsibility or not because Islam practices for the welfare of whole society not
only for the investors.
10. The last question is about the purpose of Islamic banking that is it beneficial for the
poor people of society as Shriah suggest or not.

The Questionnaire is made to know about the customer perception about the Islamic
banks.

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The current Islamic banking is totally Riba (interest free).

Valid

Frequency

Percent

Valid Percent

Cumulative Percent

Agree

27

54.0

54.0

54.0

Neutral

14.0

14.0

68.0

Disagree

16

32.0

32.0

100.0

Total

50

100.0

100.0

Interpretation:
The first question asked the respondents is about interest that whether the current
Islamic banking is interest free as they claim or not. So 27 people out of fifty are agree
that Islamic banking is really interest free while 7 people are neutral and 16 are
disagree with the statement.

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Is Riba the only factor that makes a bank Islamic or Un-Islamic?


Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

27

54.0

54.0

54.0

Neutral

11

22.0

22.0

76.0

Disagree

12

24.0

24.0

100.0

Total

50

100.0

100.0

Interpretation:
The second question asked the responds are also about interest that is interest is the
only factor which makes any bank Islamic or Un-Islamic to know that whether people
call it Islamic just because of interest or there any other factors of which are according
to Islam. In response of this 27 respondents are agree, 11 are neutral and 12 are
disagree that interest is not the only factor which makes a bank Islamic or Un-Islamic.

20

Should banks eliminate interest?


Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

36

72.0

72.0

72.0

Neutral

12.0

12.0

84.0

Disagree

16.0

16.0

100.0

Total

50

100.0

100.0

Interpretation:
Third question asked from people is that banks should eliminate interest or not to know
that whether people are in favour of interest free banking or not. Because an interest
free bank can does well in such society where people are in favour of Interest free
banking. In response of this question 36 respondents want to eliminate interest from
banking system, 6 people are neutral while 8 people are do not want that interest should
be eliminate.
21

Current Islamic banking is equity based.


Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

25

50.0

50.0

50.0

Neutral

18

36.0

36.0

86.0

Disagree

14.0

14.0

100.0

Total

50

100.0

100.0

Interpretation:
Fourth question about equity based banking whether the current Islamic banking is
really equity based as they claim or still based on debt transections. In response of this
25 people are agree that Islamic banking equity based, 18 are neutral while 7 are
disagree that Islamic banks are not totally equity based.

22

Using commodity instead of money is good for country's


economy.
Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

25

50.0

50.0

50.0

Neutral

18

36.0

36.0

86.0

Disagree

14.0

14.0

100.0

Total

50

100.0

100.0

Interpretation:
Fifth question is about whether Using commodity instead of money is good for country
economy or not because Islamic banks argue that financing which is baked by asset is
good for country economy instead of that selling and purchasing money make money
on money. So in response of this question 25 people are agree that it is good for
countries economy, 18 are neutral while 7 are disagree.
23

Money should be traded as commodity.


Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

21

42.0

42.0

42.0

Neutral

16.0

16.0

58.0

Disagree

21

42.0

42.0

100.0

Total

50

100.0

100.0

Interpretation:
Sixth question asked form the responds is that whether they agree or not that money
should be traded as commodity or not means they want return on their money or they
want to do trade and earn money. This question is asked from people that the current
situation is in favour of Islamic bank or people just want Islamic banking but they do
nothing for the Islamization of banking. In response of this 21 people are agree that
money should be traded as commodity, 8 are neutral while the remaining 21 are
disagree.
24

Islamic banking based on PLS (profit and loss sharing bases)


Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

31

62.0

62.0

62.0

Neutral

11

22.0

22.0

84.0

Disagree

16.0

16.0

100.0

Total

50

100.0

100.0

Interpretation:
Seventh question is asked about whether the current Islamic banking is Profit and Loss
Sharing bases or not. Profit and Loss Sharing is the ideal mode in Islam for financing
any business so if Islamic banks are based on profit and loss basis then it is good
otherwise it is not purely according to Islamic principles. So in response of this
question 31 of the respondents are agree that Islamic banking is Profit and loss sharing

25

basis 11 are neutral while the remaining 8 are disagree that current Islamic banking is
not based on Profit and Loss Sharing.
Do you prefer PLS (profit and loss sharing) return over
fixed return?
Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

33

66.0

66.0

66.0

Neutral

16.0

16.0

82.0

Disagree

18.0

18.0

100.0

Total

50

100.0

100.0

Interpretation:
In eighth question we asked that whether the people are also in favour of profit and loss
sharing based banking or they want fixed return which is interest free and they do not
want to take risk by investing their money in Profit and Loss Sharing based banking
transection. Through this it can be can be concluded that Islamic banks must be totally
profit and loss sharing basis or use other than PLS basis transections, for such people
which do not want to invest in profit and loss sharing basis and want interest free
26

income. But still Islamic banks transections have risk in contrast with conventional
banking. In response of this question 33 people are prefer PLS, 8 respondents neutral
while 9 respondents are disagree and give preference to fixed return.
Islamic banks involved in corporate social responsibility.
Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Agree

30

60.0

60.0

60.0

Neutral

15

30.0

30.0

90.0

Disagree

10.0

10.0

100.0

Total

50

100.0

100.0

Interpretation:
Islam seeks benefit of the whole society not only of few people so it is very important
for Islamic banks that they should include in corporate social responsibility to make the
purposes also Islamic because. Because Islamic banks use the name of Islam so they
should make their purposes of transections also Islamic to make this banking system
27

truly according to shairah rules and principles. So 30 respondents agree that Islamic
banks involved in corporate social responsibility, 15 are neutral while 5 respondents are
disagree.
Islamic banks are beneficial for poor people of the
society.
Cumulative
Frequency

Percent

Valid Percent

Percent

23

46.0

46.0

46.0

Neutral

18.0

18.0

64.0

Disagree

18

36.0

36.0

100.0

Total

50

100.0

100.0

Valid Agree

Interpretation of question 10:


Islam teaches to help poor people of the society and give financial help to them for
their needs. Islamic banks also operate in the name of Islam so they should also follow
the same teachings of Islam but in reality most of the people and Islamic scholars says
that Islamic banks give no benefit to poor people of the society which make confusion
about its position. So this question is asked to make clear this point of Islamic banking.
28

In response 23 respondents are agree that Islamic banks are beneficial for the poor
people of the society, 9 are neutral while 18 are disagree.

Chapter 5: Conclusion
Study of different articles about Islamic banking system and the results of
questionnaires and interviews show that current Islamic banking are apparently
working according to shariah rules and regulations. Islamic banking is asset based and
money has also no value in Islamic banking. It is only used as medium of exchange but
there are some flaws in Islamic banking means current Islamic banking is not ideal
banking of Islam. Current Islamic banking is not made for the purpose of welfare of
people. Islamic banking is doing all the same functions of the conventional banks but in
Islamic way, their transactions are according to the rules of shariah but not ideal
banking of Islam. On transaction basis it can be called as Islamic but on purpose basis
most of people and Islamic scholars have some queries about Islamic banking.

Recommendations:
Islamic banks are based on Islamic principles. So the first objective of Islamic banks
should be the benefit of the Muslims and benefit of the whole society as Islam teaches
us. And the purposes of Islamic banks should also be according to the Islamic
principles, and Islamic banks should also eliminate some of its practices which are very
much closer to conventional bank practices to maintain its separate identity. So to avoid
the confusion between Islamic banking and conventional banking, Islamic banks should
avoid all the agency relationships and also the debt modes of financing. Alongside this,
Islamic banks should make full banking system on profit and loss sharing basis but
Islamic banks alone cannot do this. But for the Implementation of this type of banking
system government support is very necessary, and the customers of Islamic banks
should also be loyal to bank and should also follow the sayings of Allah and
29

Muhammad (S.A.W) only in this case Islamic banks can work fully according to the
rules and teachings of Islamic.

References
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Ahmad, A. (1993). CONTEMPORARY PRACTICES OF.
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Pacific-Basin

Finance

Journal,

17(1),

125144.

http://doi.org/10.1016/j.pacfin.2007.12.003
CONTEMPORARY PRACTICES OF ISAMAIC FINANCING TECHNIQUES BY Dr.
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Hanif, M. (2010). Differences and similarities in Islamic and conventional banking.
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1712184
Khan, Madiha. 2015. Islamic Studies,. Islamic Law and Prohibition of Riba 50(3):
383411.
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FINANCING ISLAMIC RESEARCH AND TRAINING INSTITUTE ISLAMIC
DEVELOPMENT BANK JEDDAH, SAUDI ARABIA.
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Schaik, Diederik Van. 2001. Islamic Banking. 3(1): 4552.


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31

Retrieved

from

SURVEY QUESTIONNAIRE ON IS ISLAMIC BANKING REALLY ISLAMIC


December 10, 2015
Age:
Education:
Gender:

Part 1: Riba(interest) free banking


1. The current Islamic banking is totally Riba (interest) free.

2.Agree

3.Neutral

2.

4.Disagree

Is
(interest) the only factor that makes a bank Islamic or Un-Islamic?

2.Agree

3.

Riba

3.Neutral

4.Disagree

2.Agree

3.Neutral

4.Disagree

Part 2: Equity based banking


1.

Current Islamic banking is equity based.

2.Agree

3.Neutral

4.Disagree

32

Should
banks
eliminate
interest?

2.

Using commodity instead of money is good for countries economy.

2.Agree

3.Neutral

3.

4.Disagree

commodity.

2.Agree

3.Neutral

4.Disagree

Part 3: Profit and Loss based banking


1. Islamic banking based on PLS (profit and loss sharing bases)

2.Agree

3.Neutral

4.Disagree

2.

Do you prefer PLS (profit and Loss) return over fixed return?

2.Agree

3.Neutral

4.Disagree

Part 4: Ethics
1. Islamic banks involved in corporate social responsibility.

2.Agree

3.Neutral

4.Disagree

2.

Islamic banks are beneficial for poor people of the society.

2.Agree

3.Neutral

4.Disagree

33

Money
should be
traded as