CHALLENGES FACING ISLAMIC BANKING

MUNAWAR IQBAL
AUSAF AHMAD
TARIQULLAH KHAN

Islamic banking practice, which started in early 1970s on a modest scale, has shown tremendous progress during the last 25 years. Serious research work of the past two and a half decades has established that Islamic banking is a viable and efficient way of financial intermediation. A number of Islamic banks have been established during this period under heterogeneous, social and economic milieu. Recently, many conventional banks, including some major multinational Western banks, have also started using Islamic banking techniques. All this is encouraging. However, the Islamic banking system, like any other system, has to be seen as an evolving reality. This experience needs to be evaluated objectively and the problems ought to be carefully identified and addressed to.

It is with this objective that the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IDB) presents this paper on Challenges Facing Islamic Banking, as decided by the IDB Board of Executive Directors. A team of IRTI researchers consisting of Munawar Iqbal, Ausaf Ahmad and Tariqullah Khan has prepared the paper. Munawar Iqbal, Chief of the Islamic Banking and Finance Division acted as the project leader. Two external scholars have also refereed the study. IRTI is grateful for the contribution of these referees. The final product is being issued as the Second Occasional Paper.

It is hoped that serious consideration will be given to the challenges facing Islamic banking identified in the paper. Theoreticians and practitioners in the field of Islamic banking and finance need to find ways and means to meet those challenges so that Islamic banking can keep on progressing as it enters the 21st Century.

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  1. Islamic commercial banks enjoy the creation of money, as well as traditional commercial banks. The only sin is in itself sufficient to conclude that Islamic banking is not Islamic, but it shows the previous example, is a sin that requires interest-based loans, to make it profitable. Although Islamic banks do not realize the business model of banking based on interest is imposed and is the sharing of benefits out of reach.

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