Islamic Banking from the Ideal ‘Two-Tier Mudarabah’ to a Fixed Returns Model – Rationalizing the Blatant Divergence
12 Pages Posted: 24 Oct 2015
Date Written: October 22, 2015
The four decades old Islamic Banking Industry (IBI), despite of its double digit growth, efficiency and resilience, has attracted a lot of censure from scholars owing to its departure from the utopia of profit and loss sharing (PLS) and an equitable social-oriented institution, turning in to a profit maximizing debt based financial intermediary. We find plethora of research, anguished with sarcastic phrases like Shariah Arbritrage (Elgamal 2006), old-wine in new bottle, marriage of Convenience’ (Samers M., 2015) broadly due to its divergence from initially conceived two-tier Mudaraba structure to a fixed return asset and liability of an IB(Khan F. 2010).
This paper takes a pragmatist approach to contextualize and rationalize this deviation by highlighting the key internal and external challenges and anomalies that IBs are dealing with, and sets out the way forward to address them.
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