Shadow of Conventional Financial Industry on Islamic Banking: The Case against Market Competition and Concept of Risk in Islamic Financial Industry

Abstract

The purpose of this study is to explore why Islamic financial institutions are seen following the footsteps of conventional financial system in terms of product formulations, while ignoring equity-based investments and contributing in distributive justice in the economy. The study focuses on two factors (1) how competition with conventional banks in the same market, for the same customers and investors eventually forces Islamic banks to deliver the same output like conventional banks; and (2) the concept of risk, how it is evaluated and mitigated in Islamic banks and how this concept sets a tone and direction of Islamic banks. The nature of study is conceptual and uses the "maqasid-ul-shariah" framework as a criterion to evaluate the outcome of the two stated factors. This comparison clearly highlights the incoherence between the outcomes of the stated factors with the ideals of Islamic economics. The study also suggests various policy recommendations which may bring the necessary changes in the long run or at least start a thought process among the key stakeholders. Future studies would be required to work out a more comprehensive and concrete strategy. The nature of problem explored in this study has not been explored in any study as yet. Therefore, this study contributes in highlighting two key issues, previously unexplored, hindering the movement of Islamic financial institutions toward their ideological goals.