The rise of Islamic Banking over the past 40 years into an institutional financial structure spread over the globe has been a phenomenon that has attracted lots of interest. As is often the case whenever a new idea arises it s rise is associated with many falsehoods, half truths and unfulfilled promises. The whole concept of Islamic Banking rests on 4 Qoranic verses that speak against Ribaa (2275-81; 3:130-2; 4:161 and 30:39). Although the Arabic word Ribaa does not mean interest rate yet the four schools of Islamic jurisprudence have interpreted Ribaa to imply interest rates. In the opinions of many that interpretation could easily have been usury. In that case the idea of “Islamic Banking” would no longer appear to be inviolable.
The Islamic Development Bank, the largest Islamic Bank, is a breath of fresh air in the stultified field of economic development. How appropriate it is to give interest free loans to the developing nations instead of burdening them with huge debt service and strict conditionalities a la World Bank and the IMF. But this idea of interest free banking which rests strongly on the two sources of (1) Ijma, Consensus, and (2) Qiyas, analogy, becomes more problematic in other areas.
".. many techniques that the interest-free banks are practicing are not either in full conformity with the spirit of Shari’ah or practicable in the case of large banks or the entire banking system. Moreover, they have failed to do away with undesirable aspects of interest. Thus, they have retained what an Islamic bank should eliminate. "
The current Sharia prohibition on Ribaa renders consumption loans very difficult to structure and as a result the practice of financing trips and personal purchases under Islamic Banking rules becomes harder to structure and implement. Furthermore, a real challenge of Islamic Banking is the ability to develop effective tools that Central Banks can employ in transacting their monetary policies.