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Islamic Finance towards partnership – hindrances & possible solutions

Islamic Banking and Finance practices are running and growing at the rapid pace and has been proved itself as a viable financial system before the conventional economic and banking system. Here, we must consider whether the prevalent practices are fulfilling the Islamic socio-economic goals and objectives. If not, there is a need to determine the shortfalls and challenges in this direction and suggest the possible solutions in this respect.

It is a fact that every system has principles, mechanism, objectives and goals. The same is the case of Conventional & Islamic economic systems.

Conventional economic system is based upon man-made system and rejects any involvement of revelation in worldly manners. On the contrary, Islamic economic system is based upon the commandments of Almighty Allah.

When the man rejects the involvement of revelation, the factor of self-interest arises and the policies are made by the powerful persons that formulate policies in their vested interests without any consideration and welfare of other segments of the society.

On the contrary, Allah, the creator of the Universe, gives eternal guidance and law that leads to social welfare and prosperity without any unjust approach to any segment of the society.


The present day Islamic banking practices are Shariah-complaint as clearly recognized by the Shariah scholars but the socio-economic objectives could not be achieved with these practices. What was the objective to start Islamic finance? The objective was to start a financial system that could lead to Islamic socio-economic welfare system. The reason for transforming banking and finance system was that this sector is the engine of the present day economic vehicle of the society. There was not the objective to merely establish the Islamic banking system but to effect upon the overall socio-economic structure.

The prevalent practices of Islamic banking and finance are based upon the modes of Murabaha, Ijara, Diminishing Musharaka, Salam and Istisna’ etc. on the financing side and Mudaraba on the deposit side. The real modes that may bring revolution in the socio-economic scenario are partnership modes i.e. Mudaraba and Musharaka on the financing side but these modes are, unfortunately, not being functioned due to many problems and hindrances.

It is a fact that Islamic finance system has proved itself as a practical and viable system therefore; this is the moment that we should move to the next phase that can lead to the implementation of real Islamic economic system into the society and the next phase would be the practices of Mudaraba and Musharaka.

In the prevalent practices of conventional banks, the loans are disbursed and the fixed interest is charged thereon. The debtors pay the interest to the bank i.e. cost of fund that is added to the prices of products and services and the final consumer will bear this cost of fund. This transaction is prohibited transaction and causes unjust burden upon the final consumer. On the contrary, in case of Islamic banks, the bank sells and leases assets and commodities etc. after purchasing, taking possession and obtains fixed profit and rent thereon. This transaction is valid transaction according to Islamic posture but brings unjust burden upon the final consumer as same as conventional banking because the firm adds the cost of financing to products and services. It means that the final effect upon the society in both cases is same.

If the Islamic bank goes into partnership with the customer. In case of partnership i.e. Mudaraba and Musharaka, both parties share the profit with certain ratio. In this respect, no cost of funds or cost of financing is involved. In this case, both the parties will bear their own risk and earn their own reward according to certain pre-agreed ratio. Consequently, the cost of fund or cost of financing that is paid to conventional or Islamic banks would be eliminated and the burden of this additional cost upon the final consumer would be abolished.


At present, it is a fact that the practices of Mudaraba and Musharaka on the financing side are not very easy. The hindrances and issues on both bank’s end and customer’s end are following:

On Bank’s End
  • The problem is that the Islamic Banking is being operated in interest based environment which does not support the Islamic banking in an appropriate manner. The whole economy has been spoiled with the factor of interest and interest-based benchmark.
  • There is a less risk factor in the prevalent modes of Murabaha, Ijarah, Diminishing Musharaka, Salam and Istisna’ etc. Therefore, Islamic banks do not consider about partnership modes. On the side of partnership, the banks may face risks like misrepresentation risk, risk of loss and risk of profit less than speculated profit based upon benchmark etc. These risks may disturb the regular profit distribution to the depositors.
  • The scrutiny of the customer is more required in partnership as compared to scrutiny in prevalent modes.
  • There is a lack of prudential regulations, legal framework and applied framework from the regulator with respect to partnership modes.
On Customer’s End
  • Due to conventional banking habit, the customer hesitates to execute partnership with the bank as it is easy for the customer to obtain loan from the bank and pays interest over it and get the interest expense back after adding to the consumer price.
  • The customer does not want to get extra ordinary benefit to the bank in case of partnership and does not want to open doors to the bank for the participation in management.
The Things To Do

There is a need to take steps towards the successful practices of partnership modes including, but not limited to, the following:

The Mindset Change

Due to well-established interest-based socio-economic environment, the financial institutions, individuals and firms are used to this system and try to obtain the result in the same manner as conventional interest based system.

In the conventional system, there is a concept of time value of money which is evaluated through interest based benchmark like KIBOR, LIBOR etc. This interest based benchmark is considered for pricing in conventional as well as Islamic products and services. The financial institutions price their products and services above KIBOR, LIBOR etc. and the customers also agree on this benchmark. The bank earns above the interest based benchmark and gives profit to the depositors less than the benchmark. The difference between the two would be the profit for the bank. This mechanism is followed in both conventional and Islamic financial institutions.

This mindset is the biggest hurdle in the way of real implementation of Mudaraba and Musharaka. If this mindset would be changed, the other things can be made easy and practical.


Monetary Management Purposes

The monetary management, in a present era, is controlled mainly through discount rate policy that increase or decrease in interest rate for the purpose to adopt expansionary or contractionary monetary policy.The banking and finance system is the main instrument for monetary management. To abolish this system, there is a need to promote Islamic banking and finance system with special focus on practice of participatory modes due to which monetary management through interest based benchmark may be abolished. When conventional banking would be less than Islamic banking having participatory modes, the tools of monetary management will be ultimately transformed into Islamic monetary management principles based upon the needs of the era.

Bank – Customer Partnership Laws

When the bank will be entered into partnership with the customer, the status of the partnership must be defined and it must be a real partnership like other general partnerships. These partnerships may be considered under present laws or particular laws may be formulated for bank-customer partnership contracts.

Incentives for Banks & Customers

For the promotion of partnership within the society, there is a need to provide economic, taxation and business incentives to corporate & SME firms etc. who will obtain financing from Islamic banks. On the contrary, Islamic Banks may also be provided special incentives. These incentives may pave the way for development of partnership transactions.

Training & Development

It is observed as there is less focus on Mudaraba and Musharaka in Islamic banks, the adequate training and development of these modes are also being ignored. There is a need to equip employees of Islamic banks with the sufficient knowledge of modes of Mudaraba and Musharaka in order to develop products and services and to operate the transactions in the best possible manner.


It is very important to develop awareness among individuals, corporate & SME firms regarding partnership and benefits of partnership to both the parties and the society. Without this awareness campaign, there is a risk of losing business as the customers may move to conventional banking.


It is very important to scrutinize the customers who would like to avail partnership facility from Islamic banks. The capacity of the customer to tackle the business must be assessed and then take decision to go into partnership.


It is necessary for banks to conduct proper monitoring after the execution of partnership. The monitoring may include, but not limited to, review of financial statements, review of daily transactions, review of business and economic conditions regarding certain business etc. The monitoring helps banks to assess the working conditions of the certain business either good or bad. It helps to make decision to continue or discontinue partnership.

Need of Continuous R&D on the level of SBP and Islamic banks

SBP and Islamic banks must conduct research and development to innovate products and schemes that may be viable according to the socio-economic environment. It is better that the regulator and Islamic banks join hands in this respect.

Need of Revamping other Economic Sectors of the Society

There is a requirement to revamp other economic sectors of the society according to Islamic posture. These steps will boost and encourage Islamic banking in a real sense and the modes of Mudaraba and Musharaka may be flourished.

Prudential Regulations for Partnership Modes

SBP must develop prudential regulations for partnership based transactions with the consultation of Islamic financial institutions. In the light of the prudential regulations, the banks may make partnership based transactions in a prudent manner under the supervision of the regulator.

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