An Empirical Study of Shar¯ı‘ah Legitimacy of Islamic Banking Operations in Pakistan

Abstract

The legitimacy of Islamic banking refers to the compliance with the precepts of Shar¯ı‘ah (Islamic law) of the pronouncements and their implementation, requisites of various contracts, as well as, realization of the welfare objectives. Therefore, the Islamic banks are supposed to follow the Islamic values focused to bring benefit to the society alongside the commercial motive. These distinguishing features establish identity of the Islamic banks separate from their conventional counterparts and require pursuing normative values of Islamic injunctions. The primary focus of this research is two folds: firstly, considering the legitimacy of Islamic banking practices in holistic perspective including normative concerns directed by Shar¯ı‘ah, and secondly, to gauge the perception of the customers of Islamic and conventional banks about the aforementioned approach of Shar¯ı‘ah legitimacy. The research has been commissioned by developing the constructs of Shar¯ı‘ah legitimacy through extensive review of the relevant literature. At the same time, the empirical analysis based on the opinion of 836 customers of Islamic and conventional banks in all the four provinces and the capital city of Pakistan has produced important conclusions regarding their perception about legitimacy of the Islamic banking practices. The key finding in the theoretical perspective is that the value judgements have been grossly ignored by the Islamic banks. The empirical research indicated that about half of the customers perceived Islamic banking as Shar¯ı‘ah legitimate. On overall basis, the other half viewed contrary to this or preferred to remain indifferent. There is a dire need that Islamic banks should look into the desired goals of Shar¯ı‘ah legitimacy in both contexts; the value judgement and the perception of the customers.

Enhancing the Competence and Effectiveness of Shar¯ı‘ah Advisory Boards: Case of Islamic Banking Institutions in Pakistan

“…According to the Thomson Reuters (2018) "State of Global Islamic Economy, 2018-19", Pakistan ranks at the 7th position in Islamic finance, after Malaysia, UAE, Bahrain, Saudi Arabia, Kuwait, and even Oman that initiated its Islamic finance program in 2012. The main reason behind this slow growth is the lack of credibility of Islamic banks among the public in terms of the level of Sharī'ah compliance and Sharī'ah legitimacy (Khaleequzzaman, Mansuri & Rashid, 2016). Islamic banks have not been able to establish identity to offer really Sharī'ah compliant products to resolve the problems created by the interest based system.…”

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“…Currently, Islamic banks are being criticized on grounds of copying conventional products and focusing only on the legal form and ignoring the substance of transactions (Asutay, 2012;Qoyum, 2018) whereas, the inherent social orientation of Islamic economy, which is based on maqās . id al-Sharī'ah, suggests Islamic banking system to satisfy social needs of the society as well (Ibrahim & Momin, 2016;Khaleequzzaman, Mansoori, & Rashid, 2016). Therefore, there is a need to develop maqās .…”

Impact of Partnership Based and Non-Partnership Based Shariah Complaint Products on the Financial Performance of Islamic Banks

“…In the context of Islamic finance, Shariah compliance is described as "the compliance of operations and activities with the precepts of Shariah in terms of the pronouncements and their implementation, requisites of various contracts, as well as, fulfillment of the welfare objectives" (Khaleequzzaman et al, 2016). Therefore, Shariah compliance framework can be considered as a benchmark, which provides assurance regarding the Shariah legitimacy of financial products offered by Islamic banks.…”