The document discusses whether conventional banks that do not deal in riba (interest) can be considered Islamic banks. It argues that while avoiding riba is necessary, it is not sufficient - Islamic banks must be established based on sharia principles regarding objectives, operations and social goals. Standardization of Islamic bank products worldwide is also not realistic due to differences in interpretations of sharia sources and schools of thought. Harmonization cannot overcome human nature and diversity in culture, environment and political systems.

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PRINCIPLES AND PRACTICE OF ISLAMIC BANKING
(MIFB 6023)
ASSIGNMENT 1
Prepared by
Mohamed Ibrahim Ismail
Matric Number: A1111477M04
Prepared for:
Dr. Ahmad Fauzi bin Idris

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Question 2
Allah SWT has forbidden usury/riba onto the Muslim Ummah. Currently the traditional banking
system is practicing usury in their banking operations. Would you agree if all conventional banks
in Malaysia do not at all give neither take riba can consider it as Islamic bank?
Discuss
The answer to this question is in the next three pages, please turn over

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In 1983 the Malaysian parliament passed IBA ACT 1983 (now replaced by BAFIA ACT 1989)
stating that: “any company which carries on Islamic banking business and hold a valid license,
and all the offices and branches in Malaysia of such a bank shall be deemed to be a bank”1, but
this definition to me is not comprehensive. The fact that conventional banks do not give or take
any form of usury (riba) does not make a bank Islamic but instead we should say, bilateral
trading between Conventional banks and Muslim Ummah, in this case Muslim Customers, is
permissible as long as the products are halal, free from excessive gharar and all games of chance
and do not involve taking or giving usury (riba).
However, it is not only riba what makes contracts confront with the Shariah Principles but to
conform to Shariah principles business transactions must not contain excessive gharar
(transactions with extreme uncertainty and ignorance, gambling, speculations). Another
important aspect is the consideration of the permissibility (lawfulness/ being halal) of the
commodities and dealings. Things such as pork, alcohol, pornography and all other prohibited
commodities/goods must be avoided in Islamic business transactions.
Even though, the above conditions must be fulfilled for a certain bank to be considered Islamic,
the attribute of an Islamic bank cannot be given if the objectives of the institutions are not
according to the Shariah.
Ibrahim Warde a scholar in the University of Edinburgh defines Islamic financial institutions
(including banks) as: “Islamic financial institutions are those that are based, in their objectives
and operations, on Koranic principles. They are thus set apart from ‘conventional’ institutions,
which have no such preoccupations.2”
This definition goes beyond riba free banking and takes into account transactions which may or
may not be involved in riba.
Another important issue which should be considered is moral and ethical values and social
responsibility. A conventional bank may not be involved in any form of riba in its transactions
but it is purely driven by profit maximization and lacks moral values and social responsibility.
On the other hand, a true Islamic bank is established on shariah basis and thus apart from profit
1
Assoc.Prof.Dr. Ahmad Fauzi bin Idris, chapter Two, Regulatory Frame, Class notes
2
Ibrahim Warde, Islamic finance in the global economy, Edinburgh, 2000, p.5.

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making, strives to ensure justice, promotes economic development, social welfare through
specific business practices and through Zakat and channels resources from the rich to the poor.
An Islamic bank avoids all forms of exploitation and, unlike a riba-free conventional bank
attempts to reduce the gap between the haves and have-nots.
In a real world situation, conventional banks, even though all their transactions are not involved
in riba, would ultimately be regulated by conventional laws (man-made) which do not take
justice in all its forms into account. Therefore one should realize the defining difference between
riba-free conventional banks and Islamic banks. Conventional banks solely aim at profit
maximization within a specific regulatory framework whereas Islamic banks are guided by
religiously-inspired goals.
However, one should not mix the permissibility of trading with conventional banks if the
transactions fulfil the requirement of shariah principles and labelling it with Islamic name. In
other words a bank cannot become Islamic by offering halal and interest (riba) free products.
In essence, the point that I categorically reject is associating interest-free /riba-free conventional
banks with Islam. Because the term Islamic is an attribute of Islam which covers not only trading
and financing but the objectives, or the intent as well as issues of morality and submission to
Allah. Attributes such as Islamic go beyond banking and financial activities and extend to the
system of belief and performance of a wide range of activities. An issue which many people may
overlook is that an Islamic bank represents the Muslim Ummah and its success and failure will
directly or indirectly affect the Muslims. For example if a conventional bank is given the name
Islamic just because of riba-free transactions, non-Muslim customers may blame Islam because
of fraudulent acts and exploitations made by that bank without differentiating Islamic bank from
Islam.
In the process of promoting Islamic banking system, banks which are not based on Al-Quran and
Sunnah both in their objectives and operations, should be given other names such as interest-free
banks, riba-free banks, shariah-complaint banks, halal-product offering banks or any other name
tailored for them and that suits them other than Islamic banks.

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To sum up, based on this reasonable analysis and logically convincing evidences, I hope one
should fully understand why conventional banks should not be called Islamic even if they are
not taking or giving riba in all their business transactions and financing modes.

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Question 3
Based on legal frameworks and Shariah principles, would you agree that the possibility of
standardization or harmonization of all Islamic banks products throughout the world in its
meanings and operations could happens in real life?
Discuss
The answer to this question is in the next 2 pages, please turn over

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Standardization or harmonization is discussed at a great length in various issues ranging from
religious harmonization to product harmonization such as the products offered by Islamic banks.
Harmonization among other things, is aimed at finding reasonable and attainable solutions to
human differences and disagreements either in their system of believes, worldly matters or
business and economic activities, but the important question is, what is the basis of these
disagreements. The answer to this question lies in the Al-Quran Al-karim. Allah says (SWT):
“And if your Lord had (so) decided, He would indeed have made mankind one nation; and they
do not cease differing (among themselves)3”
The above verse clearly depicts that the reason why humans differ is due to the creation of Allah
and the nature of people is created in such a way that they always have different views, thinking,
preferences and the like. The focal point of this difference is due to their different minds.
Apart from human nature, there are other factors which lead to disagreements such differences in
culture and customs, situational and environmental differences and variations in political set-up.
Standardizing and harmonizing Islamic banking products through the world is not realistic and
cannot materialize or happen in real life but arguments for this matter if any are based on
idealism. The path towards harmonization of Islamic banking products is fraught with
interpretations of the fiqh and pluralism of the fatwahs.
The rulings and interpretations from various schools of Islamic Jurisprudence are the prime
sources that will always engineer the products of Islamic banks. The fuqaha (Muslim scholars of
Islamic jurisprudence) use of a range of methods such as interpretation of revealed sources
(itjihad), choice (ikhtiyar) necessity (darura) and artifice (hiyal) in the process of decision
making or issuing legal judgments (fatwahs). The selection of one technique over another to get
3
Surah Hud: 118

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more favorable decision, according to the circumstances affects the type of product that a certain
bank has to offer to its customers.4
The adherence to specific Islamic school of thought (madhab) such as Hanafi school or Shafi’i
school also affects product standardization. For example the followers of Shafi’i would favor to
adopt Bai inah in line with the view of Shafi’i and the followers of Hanbali school consider it to
be a way of manipulating prohibited riba to portray it as halal or permissible. Such differences in
the schools of fiqh would finally lead to the development of controversial products and this will
make harmonization and standardization difficult.
Many Islamic economic specialists talk about the concept of convergence, standardization and
harmonization at the international conferences and economic forums but their theories and
suggestions are far from practicality and confront the human nature of having opposing views
and objectives.
In conclusion, the differences in culture, environment, situation and circumstance, political sep-
up, ,variations in the interpretation of Shariah sources among the fuqaha, different schools of
Islamic thought(madhab) and the great western influence on the Muslim World make
standardization and harmonization of the products across the Islamic banks unattainable and
almost impossible.
4
See also Verandos, A. (2005) Islamic Banking and Finance in South-East Asia its Development and Future, P.95

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References
Ayub, M. (2007), Understanding Islamic Finance, London, Wiley
El-Gamal, M. (2006), Islamic Finance Law, economics and Practice, Cambridge, Cambridge University
Press
Fauzi, A. (2011), Class notes, Chapter 2, Regulatory Framework
Mahmud, M. (2008), Towards Understanding the Ever-Glorious Qur’an, fifth Edition, Cairo,
Dar An-Nashr Liljami’at
Verandos, A. (2005) Islamic Banking and Finance in South-East Asia its Development and
Future, Singapore, World Scientific Publishing
Warde, I. (2000), Islamic finance in the global economy, Edinburgh, Edinburgh University Press
Abdulaziz , I.(2000) Qawaa’id al-ahkam fi masalihil-anam, Jeddah, Dar-al-Bashir

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Appendix 1
darura overriding necessity
fatwahs/fatwas authoritative guidance, legal opinions from a jurist
fiqh Islamic Jurisprudence
fuqaha Muslim scholars of Islamic jurisprudence
hila legal artifice, device
ikhtiyar choice
itjihad reasoning and interpretation of the sources of law, which is the Quran
and Sunnah
madhab one of the schools of Islamic thought (plural madahib)
riba interest, usury as forbidden in the Quran
Appendix 2
BAFIA Banking Financial Institutions Act
IBA Islamic Banking Act