URDU: اسلامی بینکوں میں ڈپازٹرز کے نفع و نقصان کی تقسیم کا عملی طریقہ کار

A review of depositor’s profit distribution practices in Islamic Banks in Pakistan

Abstract

Islamic banking is often castigated for resorting to sophistry and ruses (Hiyals and Mubāḥ) to the extent of duping their Muslim customer base (Khan F. 2010)[i]. This criticism is attributed to its departure from the ideals of profit and loss sharing (PLS) modes, and similarities with the conventional banks. Authors have coined sarcastic phrases like ‘Old-wine in new bottle’, ‘Marriage of Convenience’ (Samers M., 2015)[ii] and Shari’ah Arbitrage (Elgamal 2006)[iii] to criticize the shari’ah authenticity of contemporary Islamic banks (IBs). This paper makes an informed endeavour to explicate the profit distribution mechanism for the depositors, and the underlying Shari’ah principles as practiced by IBs. Also, we present the economic intuition of the detailed mechanics of profit distribution mechanism, such as the mutually consented profit sharing ratio (PSR) between the depositor (rabb-ul-ma’al) and the bank (mudarib); smoothening reserves e.g. the profit equalization reserve (PER) and investment risk reserve (IRR); and Hiba that refers to the bank’s profit share foregone in favour of depositors to mitigate the displaced commercial risk. We also support our work with numerical illustrations and empirical review of data drawn from Islamic banks operating in Pakistan. Our findings can potentially address the widespread criticism levied on IBs by informing the stakeholders on the convergence of shari’ah ideals and pragmatic operationalization of depositor’s profit distribution in IBs.

[i] Khan, F. (2010). How “Islamic” is Islamic Banking? Journal of Economic Behavior and Organization, 76, 805-820.

[ii] Samers, M. (2015). A Marriage of Convenience? Islamic Banking and Finance Meet Neoliberalization. In The Changing World Religion Map (pp. 1173-1187). Springer Netherlands.

[iii] El-Gamal, M.A. (2006). An Attempt to Understand the Economic Wisdom (hikma) in the Prohibition of Ribā. In A.K. Thomas (Ed.) Interest in Islamic Economics: Understanding Ribā, (Pp. 111-123). New York: Routledge.