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Islamic banking is said to be based on justice and fairness. If this can be proved, conventional banking might have to operate side-by-side with Islamic banking, even in an 'unIslamic state'. However, the enabling laws would need to be legislated to allow for the establishment of Islamic banking institutions. In a liberal jurisdiction, this may be a non-issue. However, in certain Western countries, anything that could be interpreted as a support to a certain religious group exclusive of the others is deemed to be unconstitutional and therefore, illegal.
A possible solution is not to call it 'Islamic'. Islamic banking signifies the banking practice that is in line with Sharia. As long as the practice remains devoid of any transgression of Sharia, it is an Islamic banking practice, notwithstanding the name given to the practice. It may be called ethical banking, alternative banking or the likes. Naturally, people are attracted to everything that is ethical, fair and just. The banking practice that understands the concerns of the people will gain their interest and patronage.
However, if it is not called "Islamic banking', how then would it be possible to ascertain its compliancy with the Sharia? We cannot appoint a Sharia adviser or committee to supervise the practice since the name of such banking practice has nothing to do with Sharia. May be, a group of experts in the field of ethics could be appointed to do the supervision. One or two members could be chosen amongst the Sharia scholars. It is not a straight forward 'Sharia supervision', but something is better than nothing.
An argument may also be put forth, that Islamic banking may be allowed in such jurisdiction as part of the freedom of religion guaranteed by all (or almost all?) constitutions. If this is successful, then the above issue shall not arise.
Another issue is legal documentation. Since Islamic banking operates within the conventional legal framework, and this happens everywhere, civil law (as opposed to Sharia, be it Common Law System or Civil Law System) still plays a vital role in legal documentation and dispute resolutions. This is not wrong as only non-Shariah compliant parts of civil law need to be removed. Larger parts of civil law contain universal values that are not inconsistent with Sharia. Furthermore, as admitted by civil law experts themselves, certain concepts currently formed as integral parts of civil law were actually either derived from or inspired by Sharia concepts - eg. Law of Trust was based on Islamic concept of Waqaf. Waqaf concept in turn was originated in a Roman law concept that was subsequently validated by Islam with certain modifications.
Sometimes, certain legal provisions are not fully compatible with the Sharia. Under such cases, close scrutiny should be done to the relevant clauses. What is the actual implications? Will they invalidate, nullify or terminate any Sharia transaction, establishment or status? If yes, certain modifications would be imperative. If not, then preservation of the status quo would be the preference. Believe it or not, there are more common grounds than uncommon ones for us to find, if we care to go to the roots of both Sharia and civil law.
Islamic banking rules are modelled based on Mu’amalat (Commercial Law), a branch of Fiqh (Discipline of Islamic Laws), where the rules are less stringent unlike those under the branch of ‘Ibadat (Law of Worship). Finding solutions within the boundary of Sharia is mandatory for the avoidance of Riba (usury or interest). Islamic banking practice has been, all the while, a solution for the Muslims to free themselves from the shackles of Riba. Scholars of Fiqh have an important task of forming a new Mu’amalat doctrine of Islamic banking, a new commercial transaction the rule of whisch is not to be found in the classical literature of Fiqh. Until then, exceptions to original rules, or new interpretation of the rules, or adoption of minority opinions are there for the Sharia advisers to resort to.
Conventional banking forms an integral part of the economy. This is true in most part of the world today, be it a jurisdiction that claims to be 'Islamic' or otherwise. Abrupt replacement of conventional with Islamic banking would damage the economy of the state. A dual-banking system may be allowed to exist. Conventional banks may be encouraged to establish their own Islamic subsidiaries. As such, the growth of Islamic banking will not be at the expense of the conventional banks and the economic pie would not be less favorable to the conventional practice in conjunction with the growth of Islamic banking businesses.
Islamic banking practitioners, on the other hand, would need to be careful with their practice. Banking is banking, be it conventional or Islamic. Any misinterpretation of 'Shariah requirements' might jeopardize the well being of the state's economy. Banking practice exists when the mobilization of funds happens between the people with surplus funds and those with a deficit. Bankers come to connect the two as professional service providers - taking the deposit from the surplus units and giving the financing to the deficit units. Banking is not fund management, where the fund manager takes the funds from the surplus units and straight away invest it in enterprises or investment schemes. Under banking, deposits are taken at certain cost, used by the banks for their own business of giving financing to their financing customers,also at a cost corresponding to the cost of the fund. Banks operate under a strict regulation imposed by central banks or monetary authorities. Deposits are guaranteed by the system put in place by the central bank or monetary authority. Financing profits are formulated in accordance with the base rate imposed by the authority. Islamic banks need to comply with statutory reserve requirement imposed by the authority that impacts the cost of funds, which will be reflected in the profit rate offered to depositing customers and financing rates charged on the financing customers. This is what it takes to do banking, Islamic or otherwise.
The only difference between conventional banking and Islamic banking is the charging of interest in the conventional practice and its prohibition in the Islamic banking practice. All other things, as far as the core banking practice is concerned, remain the same. As such, when Islamic banks give financing to its financing customers, they are giving financing and not in any way, participating in the business undertakings of their financing customers. The popular demand for the Islamic banks to participate in the 'real economy' is without merit. Banking is a real economy, in its own right. Islamic banking should not be confused with Islamic finance. Islamic finance is a generic term to include all economic activities in accordance with the Sharia precepts, including Islamic banking activities. Therefore Islamic banking is a specific term forming part of Islamic finance. Other activities of Islamic finance are Islamic fund management, Islamic private equity, Islamic venture capital, and so on and so forth.
While marketing Islamic banking, the Islamic banking practitioners should avoid saying Islamic banking is cheaper than conventional banking. Cheaper banking has never been the intention. The intention is to have Islamic banking products that comply with Sharia. However, without compounding effects in the calculation of profit, Ta’widh (compensation) or Gharama (penalty), Islamic banking may happen to be cheaper than its conventional counterparts. Under a dual-banking system, like it or not, Islamic banking growth will never be allowed by the authority(ies) to cannibalise conventional banking. Under such system, Islamic banking will never replace conventional banking.
