Few economic debates in Pakistan generate as much passion, confusion and political symbolism as Islamic banking.

More than four decades after the first attempt to Islamise Pakistan’s financial system and nearly twenty-five years after the emergence of modern Islamic banking, the debate remains unresolved. Supporters regard Islamic banking as a successful alternative to interest-based finance. Critics dismiss it as conventional banking wrapped in Arabic terminology. Both sides raise important points, yet both often overlook the larger question.

The real issue is not whether interest has been renamed profit, whether bonds have become Sukuk, or whether bank logos have changed from red to green.

The real issue is whether Islamic banking has transformed the allocation of capital in Pakistan and brought the economy closer to the Islamic ideals of justice, entrepreneurship, risk-sharing and shared prosperity.

Today, Islamic banking is no longer a niche industry. Islamic banking assets have grown to approximately Rs14.5 trillion, representing nearly a quarter of Pakistan’s banking assets, while deposits exceed Rs11 trillion. The industry’s rapid expansion reflects a genuine demand among Pakistanis for financial services that comply with Islamic principles.

Yet size alone does not answer the more important question of purpose.

The debate originates from Islam’s prohibition of riba. The Quran prohibits usury while permitting trade, partnership and investment. Contemporary Islamic finance, therefore, seeks to connect financial returns to ownership, trade and economic activity rather than lending money solely for a predetermined return.

This distinction explains why Islamic banking relies on contracts such as Murabaha, Ijara, Musharakah and Mudarabah.

Consider home financing. In a conventional mortgage, a bank lends Rs 10 million to purchase a house and charges interest over twenty years. The relationship is straightforward: lender and borrower.

In a typical Islamic home-financing arrangement, the bank and customer jointly acquire the property. The customer gradually purchases the bank’s ownership share over the same twenty-year period while paying rent on the share still owned by the bank. The relationship is based on co-ownership and leasing rather than lending.

The strongest criticism of modern Islamic banking is therefore not that it uses Murabaha or benchmarks such as KIBOR. The stronger criticism is that genuine profit and loss sharing remains limited

The strongest criticism of modern Islamic banking is therefore not that it uses Murabaha or benchmarks such as KIBOR. The stronger criticism is that genuine profit and loss sharing remains limited

The same principle applies to car financing. Under a conventional arrangement, the bank lends money for a vehicle purchase and earns interest. Under Islamic Ijara financing, the bank purchases the vehicle and leases it to the customer over five to seven........

© The Friday Times