Bending the Rules: Guaranteeing Profits in the Islamic Financial System

Abstract

Islamic financing continues to grow worldwide and the system is seen by some as an alternative to the conventional financing system. With more financial institutions now offering Islamic financial products, the future for the system has never looked brighter. Yet there are real concerns that in order to make Islamic financing products competitive and accepted in the current conventional financial system, rules are been altered, which could do irreversible harm to the entire concept of Islamic banking. One such issue is that of guaranteeing profits in profit-and-loss sharing ventures. The paper analyses the features of the profit-and-loss sharing principle and discusses whether it is ethical for Islamic financial institutions to guarantee profits in a profit-and-loss sharing system. The paper concludes that while guaranteeing profits may provide benefits for Islamic banks in the short-run, the long-term effects of such actions may not only harm the future growth and reputation of Islamic finance, but may also threaten its very existence.

Keywords: Islamic finance, banking, profit and loss sharing, ethics

JEL Classification: F23, G21