Islamic Modes of Financing: Issues in Contemporary practices

Abstract

This research initially explores the misgivings/issues in the contemporary practices of Islamic modes of financing on the basis of the model agreements applied by Islamic banks in Pakistan. Then this research solicits the expert opinion of the Shari‟ah scholars regarding the misgivings/issues identified in the contemporary practices of Islamic modes of financing. The expert opinions of the Shari‟ah scholars is primarily explored for the purpose of verifying these misgivings/issues as Shari‟ah issues or clarifying them as no Shari‟ah issues in the light of the Shari‟ah principles. Predominantly, this research may be categorized as qualitative research primarily exploring, describing and analyzing issues in the contemporary practices of Islamic modes of financing in Pakistan. The structure of the current research incorporates the essential features of both exploratory and descriptive research paradigm due to the practically jumbling nature of exploratory and descriptive research. The current research premeditated to explore contemporary practices of Islamic modes of financing following an inductive approach attached to the interpretivist philosophy of research. The study was cross-sectional in nature collecting data at a single point of time. Theoretically, all the full-fledged Islamic banks, and those conventional banks which operate Islamic banking branches in Pakistan constituted the population of this study. Currently they all are 21 in number including 5 full-fledged Islamic banks and 16 conventional banks operating Islamic banking branches. However, in this research, the Islamic modes of financing were examined on the basis of data collected from the model agreements/documents in order to identify the issues in the contemporary practices. Therefore, the group of model agreements/documents of all the Islamic banks but not the „people‟ actually constituted the population in the first phase of this study. Subsequent to identifying the issues in the contemporary practices of Islamic modes of financing, a list of open-ended questions was developed for soliciting the expert opinion of Shari‟ah scholars through semi-structured interviews regarding these issues. Thus, the Shari‟ah scholars having expertise in banking and finance, working in Islamic banks or serving in Dar ul Uloom, and academic researchers, constituted population for the second stage of this study. The researcher intended to examine the contemporary practices of Islamic modes of financing on the basis of the model agreements developed by SBP and principal documents collected from the Islamic banks working in Pakistan. Therefore, purposive sampling, a non-probability sampling technique was used. However, the model agreements/documents could be collected only from the SBP website and only two Islamic banks. The other Islamic banks and some of the conventional banks operating Islamic banking branches either did not respond or refused to share their principal documents on the pretext of the so-called confidentiality. Thus, the analysis is based on the SBP model agreements and documents obtained from only two Islamic banks, IB-I and IB-II, practically using convenience sampling as a strategy after selecting sample through purposive sampling technique in this research. Six Islamic modes of financing were examined on the basis of their respective model agreements/documents downloaded from the SBP website and two Islamic banks (IB-I and IB-II). These six modes included Murabaha, Salam, Istisna, Tijara/Karobar kinance, Ijara/leasing and Musharaka (and running Musharaka). The model agreements/documents were analyzed on the basis of content analysis. A total of 50 misgivings/issues were identified in the contemporary practices of Islamic modes of financing on the basis of content analysis of the model agreements. This list of open ended questions was used for obtaining the expert opinion of a diverse group of Sharia scholars regarding the issues in the contemporary practices of Islamic modes of financing. Thus, a sample was required to be selected from the Sharia scholars of the country for this purpose. Accordingly a sample of 30 Shari‟ah scholars was approached using purposive sampling from all over the country for inviting their scholarly but independent opinions regarding the issues in the contemporary practices of the Islamic modes of financing. The misgivings/issues are discussed in detail with a diverse group of Shari‟ah scholars and Islamic banking researchers. Semi-structured interview were conducted in this phase of the research. The respondents were selected on the basis of purposive/judgmental sampling. The interview data were analyzed by the researcher qualitatively as well as by using the NVivo. The software results may not necessarily supplement the researcher‟s findings owing to the technical limitation of the software. However, the overall findings of the study were mixed in nature. In many instances, a divergence of opinion was observed among the respondents from Shari‟ah point of view. Some of the contemporary practices of Islamic modes of financing either directly violated the principles of Shari‟ah and created serious Shri‟ah issues or indirectly resulted in violation of the Shari‟ah principles. Some of the practices did not create any Shari‟ah issues but were declared unethical and seemed exploitative in nature. Islamic banks always used to shift all types of risks to the customer and imposed stringent conditions to secure their interest at any cost, owing to their stronger position against the customer. Thus, it was safely concluded that Islamic banks were not ready to share any risks with the customers or even with the partner in Musharaka. They were therefore found short of following the fundamental principles of Islamic finance i.e. profit and loss sharing. However, it was unanimously ascertained that Islamic banking was the need of the hour and must continue to exist. Nevertheless, it should be monitored on continuous basis for complete Shari‟ah compliance and achieving the actual objectives of Shari‟ah (maqasid e Shari‟ah). For this purpose certain practical measures were recommended on the basis of this research as a step towards making Islamic banking truly Islamic in practice. The current research has threefold implication. First, this research is an important addition to the literature in Islamic banking for comparing the bank approach in Murabaha and Salam, Istisna, etc. critically examining the role of agent in Murabaha, Salam, Istisna and Tijara and identifying issues in this arrangement. Second, the management of Islamic banks can remove all misgivings/ambiguities from the contemporary practices of Islamic modes of financing on the basis of this research. The policy makers including the SAC, Shari‟ah board members and Shari‟ah advisors should pay attention to the model agreements in order to make them fully Shari‟ah complaint. Third, from methodological point of view, the application of the two-stage methodology is a good addition to the research in social sciences, particularly Islamic banking.