PRACTICES OF ISLAMIC BANKING IN THE LIGHT OF ISLAMIC ETHICS: A CRITICAL REVIEW

The purpose of this paper is to critically evaluate the practices of Islamicbanks in the light of Islamic ethical values and philosophy of accountabilityto Allah and society. The paper’s structure comprises history and growth ofIslamic banking, evaluation of non-compliance of Islamic banking with PLSmodes of financing, emergence of earning management issues in Islamicbanking, non-compliance with Accounting and Auditing Organization forIslamic Financial Institutions (AAOIFI) standards, issue of diverse versionsof Islamic rulings (fatwā), evaluation of practices against fundamentalIslamic philosophy of “accountability to Allah and society” and discussionsand concluding remarks for future development of Islamic banking. Thefindings show that Islamic banks defend their practices by taking Islamicrulings from Sharī‘ah advisors in order to make them sharī‘ah compliant notsharī‘ah based. Profit maximization, availability of a vast range of Islamicrulings, market competition, lack of adequate risk management tools and truston Islamic banking and meeting the general public expectations causedIslamic banks to comply with debt base modes of financing. Islamic FinancialInstitutions (IFIs) comply with International Financial Reporting Standard(IFRS), US Generally Accepted Accounting Principles (GAAP), domesticaccounting standard or mix of these but do not adopt the AAOIFI standard intheir financial reporting. This paper is a value addition in the literature ofIslamic finance which suggests what it ought to be. It also discusses the role of the Organization of Islamic Countries (OIC) and the governments of Islamic countries. JEL Classification: D63, G30, A11