Quora Answer: Is Islamic Banking Viable?

The following is my answer to a Quora question: “Is Islamic banking viable?”

If by viable, you mean to ask if there is a market for it, then it is because enough people believe in it for it to exist.  It is a growing field, and it is evolving.  If by viable, you mean to ask if it will ever be a credible alternative to normal banking and finance, I am extremely sceptical.  There are structural issues for many of the products, and the investment products do not perform as well as equivalent products in normal banking.  In some areas, it is far too inferior to be viable for a wider market.

One of the problems is the definition of riba’, usury.  Does it include any and all forms of interest?  If I send you money in another country, and the financial institution charges more than the principal, is that riba’, when we understand that there is an infrastructure cost involved?  Another issue is that Islamic finance products, such as the swukuk are essentially the same thing as normal financial products but with an Arabic name, and higher distribution costs.  There is the normal distribution costs, and then there is the distribution cost of the “Islamic” accrediting authority.  We can also argue that there is a credibility issue with the accreditation of so-called Islamic products when the shari’ah compliance committees are not independent regulatory authorities, but paid for by the banks themselves.

Before Islamic banking, there was a movement towards ethical banking.  Instead of reinventing the wheel for cosmetic and vanity purposes, it would make more sense to revisit ethical banking, and make it a standard throughout the industry.