Assessments, controversies, challenges

Assessments, controversies, challenges

Islamic banking and finance has been praised and criticized.

Praise/defense

It has been praised — or at least described positively — for

• turning a "theory" into a trillion dollar^{[426][208][427][426]} "reality", asserted Islam into international financial markets (according to Taqi Usmani);^[426]
• enriched the Islamic legal system by providing it with real world business questions to find shariah-compliant solutions for (Usmani);^[426]
• creating an "ethical, sustainable, environmentally- and socially-responsible" system (according to Abayomi A. Alawode);^[428]
• drawing conventional banks into the industry in search of Muslim customers (Munawar Iqbal and Philip Molyneux);^{[Note 26]}
• drawing new customers and money into banking, rather than taking existing customers and their money away from conventional banking, (Laurent Gheeraert).^[431]
• Creating a less risky form of finance (according to Zeti Akhtar Aziz and others),
  • by forbidding speculation,^[432] so that, for example, the excesses that led to the global financial crisis of 2007–2008 are avoided (according to Ibrahim Warde);^[433]
  • and by use of two kinds of accounts:^[240]
    • "current accounts" — where funds earn no return and (in theory) are held, not invested by the bank, so not subject to risk;^[240]
    • and mudarabah accounts — where the depositors share in any losses with the bank, so diminishing the bank's risk.^[252]
• While the industry has problems and challenges, these can be explained by
  • its relative youth and low position on the "learning curve" that will solved these difficulties over time;^[434][435] and by
  • non-Islamic influences which can only be eliminated when the industry operates in a truly Islamic society and environment.^[436]

Challenges, criticism — Industry view

On the other hand, the industry also has challenges —"key" among them, as of 2016 (according to the State of the Global Islamic Economy Report, 2015/16 and the IMF), include:

• "low levels" of public awareness;^[437][438]
• a need for better regulation, better cooperation between Islamic and conventional financial standard-setters to deal with complexity and to "address the unique risks of the industry";^[439]
• a "scarcity of Shariah-compliant monetary policy instruments";^[439]
• "underdeveloped" safety nets and resolution frameworks such as sharia compliant deposit insurance systems and "lenders-of-last-resort";^[439][438]
• better Shariah compliance by regulators.^[438][438]

Challenges, criticism — scholars and critics

Critics have complained of Islamic banking and finance closely resembling the conventional sort but having "higher costs, bigger risks",^[20] — a situation that has not been remedied by "learning" over the decades.^[436] Other issues/complaints include a lack of policies to uplift small traders and the poor;^[117] the challenge of inflation,^[440] late payments,^[441] the lack of hedging of currencies and rates,^[442] or of sharia-compliant places to park short term funds for liquidity; the non-Muslim ownership of much of Islamic banking,^[443] and the concentration of what ownership is in Muslim hands.^[444]

Imitation of conventional finance

A number of scholarly supporters (such as Taqi Usmani, D.M. Qureshi, Saleh Abdullah Kamel, Harris Irfan) and skeptics of Islamic banking (Muhammad Akram Khan, Muhammad O. Farooq, Feisal Khan, Mahmoud El-Gama, Timur Kuran) have complained of its similarity to conventional banking. Taqi Usmani argues that the industry has "totally" neglected the "basic philosophy", undermining its own raison d'être;^[445] so that non-Muslims and the Muslim "masses" have now gotten the impression that Islamic banking is "nothing but a matter of twisting documents ...."^[445] This has happened first by the sidelining risk-sharing finance in favor of murabaha and other fixed-markup financing of purchases,^[16] and further by distorting the rules of that fixed-markup murabaha (see also Ignoring required commodities below)^[19] to effectively provide conventional cash interest loans with "profit rates" that follow conventional interest rates,^{[446][17][18][19][20]} the "net result" being "not materially different from interest based transactions".^[447] (Another violation is the use of ijarah (leasing) without the "lessor either assuming "the liability for his ownership" or offering "any usufruct to the lessee".)^[322] In March 2009, Usmani,^[208] (as chairman of the board of scholars of the Accounting and Auditing Organization for Islamic Financial Institutions, or AAOIFI), declared that 85% of Sukuk, or Islamic bonds, were "un-Islamic".^[448] Others (Hassan Heikal) have also criticized the authenticity of sukuk.^[449]

• Other pioneers of Islamic banking, have called it "a labeling industry" (D.M. Qureshi),^{[Note 27][450]}
• or complained that the industry was "busy searching for ways to make it similar" to conventional banking, when it should be demonstrating its differences (Mohammad Najatuallah Siddiqui).^[451] (a Sharia committee at one bank — Lariba — even issued a fatwa in 1990 stating "no objection to using the term “interest” as an alternative to the term “profit” or “rate of return”.)^[452][453]
• that the industry uses "a whole host ruses and subterfuges to conceal" rather than eliminating interest (Muhammad Akram Khan).^[19]
• complain of the industry charges higher fees for financial products that have "all the economic features of that conventional product"Mahmoud Amin El-Gamal,^{[Note 28]} and Mohammad Fadel^{[18][18][454]}
• has the same "formulas for SLR (statutory liquidity requirements), capital adequacy ratio, and risk management standards" as those of "interest-based banks" (Sayyid Tahir).^[455]
• is the same as conventional banking other than in "the technicalities and legal forms", keeping interest but calling it "by another name, such as commissions or profits ...`" (A. W. Duskuki and Abdelazeem Abozaid).^[456]

Explanations

Explanations for the similarity between Islamic and conventional banking include:

• The pressure on Shari'ah boards (which serve as a sort of modern day equivalent of the medieval "court ulama") to approve the products of institutions that pay their salaries (M.O. Farooq).^{[457][Note 29]}
• The clash between the large demand by pious Muslims for Islamic financial products and practices, and the impracticality/inefficiency of the Islamic products and practices proposed by Islamic finance evangelists, resolved by use of highly paid (but scarce) scholars "willing to certify conventional instruments as being Shariah-compliant", and the adding of an additional layer of transaction costs on those products (Feisal Khan).^[115]
• The lack of training of sharia experts in the deeper meaning of the sharia, and in the long term economic consequences of the widespread use of complex financial transactions (Farooq quoting Mohammad Nejatullah Siddiqi).^[460]
• The motivation of the evangelists of Islamic banking, which is to reassert "the primacy of Islam" rather than advance fundamental "economic change".^[461][462]

Social responsibility and emphasis

Following Islamic principles, "Islamic banks were supposed to adopt new financing policies and to explore new channels of investments" to encourage development and raise the standard of living of "small scale traders", but Taqi Usmani complains "very few Islamic banks and financial institutions have paid attention to this aspect".^[117] Islamic scholar Mohammad Hashim Kamali, laments the focus on short-term financing by Islamic banks. This financing being "largely concerned with the financing of goods already produced, and not with the creation or increase of production capital or with facilities like factories and plants, infrastructure etc."^[463][464] Others

• Protest the lack of "a different type of banking which was aligned to fairness, equitable income distribution, and ethical modes of investment" (Muhammad Akram Khan).^[16]
• Propose emphasizing "community banking, microfinance, socially responsible investment and the like." (Mahmoud El-Gamal).^[465]
• Challenge the basic premise of Islamic banking, arguing that "greed and profit" are more serious and widespread causes of exploitation than interest on loans, which may not truly constitute forbidden riba in a competitive, regulated market (Muhammad O. Farooq).^[466]

  The world in reality is full of exploitation: child exploitation, sexual exploitation, labor exploitation, etc. Interest is probably, if any, a small component in accounting for global exploitation. Yet, the proponents of Islamic economics and finance are fixated with interest.^[467]

  Farooq cites as an example the profit (not interest) motive of the East India Company that colonized and ruled India at the expense of the Muslim Mughal Empire until 1858.^[466] He notes that lack of empirical or focused studies (as opposed to polemical fulminating) in Islamic economics on the subject of exploitation or injustice.^{[466] [Note 30]}
• Complain that while use of profit and loss sharing by Islamic banks is in decline, in the non-Muslim West venture capital — which operates under the same principals as darabah, (minus the prohib8ition on haram products) — has "financed the global high-tech industry" and could potentially "bring major benefits" to poor Muslims countries seeking economic development (Timur Kuran).^[469]

Profit and Loss Sharing and its problems

While profit-loss-sharing modes (or at least mudarabah), were originally envisioned as "the basis of a riba-free banking"^[151] — with fixed-return financial models only filling in as supplements — a number of studies, (of banks in Saudi Arabia and Egypt,^{[Note 31]} Malaysia,^{[Note 32]} and of large Islamic banks in general)^{[Note 33]} have shown fixed-return products now far exceed profit-loss-sharing modes in assets under management.^[94] Explanations (offered by two authors, Humayon A. Dar and J.R. Presley), for why PLS instruments — namely mudaraba and musharaka financing — have declined to almost negligible proportions include:

1. There is an inherent disincentive for the bank's client to report profit, because the more it declares, the more of the client's money will go to the financing bank, and the less it will get to keep.^[474]
2. Property rights in most Muslim countries are not properly defined, creating more difficulties for profit-loss sharing financing than for the fixed payment kind.^[474]
3. The competitors of Islamic banks — conventional banks — are firmly established and have centuries of experience. Islamic banks are not yet sure of their policies and practices and feel restrained in taking unforeseen risks.^[474]
4. PLS is not suitable or feasible in many cases such as short-term resource requirement, working capital needs, non-profit-generating projects such as in the education and health sectors.^[474]
5. Conventional finance has tax advantages over the sharia compliant sort in some countries were interest is considered a business expenditure and given tax exemption, while profit (the return of PLS investment) is taxed as income.^[474]
6. There were no secondary markets for Islamic financial products based on PLS (at least as of 2001).^[474]
7. Mudaraba, one of the forms of PLS, provides limited control rights to shareholders of the bank and "creates an imbalance in the governance structure" of PLS. "Shareholders like to have consistent and complementary control system, which is missing in the case of mudaraba financing." ^[474][475]
8. Depositors/investors of banks have proven highly resistant to accepting periodic losses (the L in PLS) that inevitably arise in investment.^[439] (The sharing of banking losses with bank customer/investors had been advanced as a reason why Islamic financial institutions would be more stable than conventional banks.)^[252][432] As of at least 2004, no bad debt has translated into losses for depositors in an Islamic bank, and "no Islamic bank has ever written-down the value of its depositor's accounts when it has written-down the value of its non-performing assets"^[476] for fear of losing depositors.

Aside from disadvantages to lenders, one critic of Islamic banking, Feisal Khan, argues that widespread use of PLS could have severe harm to economies by preventing central banks from expanding credit — buying bonds, commercial paper, etc. — to prevent liquidity crisises that arise from time to time in modern economies.^[477]

Murabaha and ignoring required commodities

In addition to ignoring profit and loss sharing in favor of murâbaḥah, the industry has been accused of not properly following shariah regulations of murabahah (mentioned above), by not buying and selling the commodities/inventory that are "a key condition"^[149] of shariah-compliance (done when the bank wants to borrow cash rather than to finance a purchase, and though they are an added cost and serve no other function). In 2008 Arabianbusiness.com complained that there are^[140] sometimes "no commodities at all, merely cash-flows between banks, brokers and borrowers". Often the commodity is completely irrelevant to the borrower's business and not even enough of the relevant commodities "in existence" in the world "to account for all the transactions taking place".^[281] Two other researchers report that for many years multibillion-dollar 'synthetic' murabaha transactions in London took place, where "many doubt the banks truly assume possession, even constructively, of inventory".^[149][478]

Fund mingling

The original Islamic banking proponents called for "keeping distinct accounts for various types of deposits so that return can be assigned to each type". "In practice", according to critic Muhammad Akram Khan, "Islamic financial institutions pool all types of deposits".^[479]

Falsification

Critics complain that the compliance with sharia regulations by banks often is nothing more than the taking of the word of the bank or borrower that they have followed compliance rules, with no effective auditing to see if this is true.^[480] One observer (L. Al Nasser) complains that "Shariah authorities demonstrate excessive confidence in their subjects when it comes to dealing with parities in the industry", and Shariah audits are needed "to bring about transparency and ensure" that the institutions "deliver what they have committed to their customers". Furthermore, when external Shariah audits are carried out, "many of these auditors frequently complain about the amount of violations that they witness and cannot discuss" because the records they have examined "have been tampered with".^[481][482]

Following conventional (haram) returns

Although Islamic banking forbids interest, its "profit rates" often are benchmarked to interest rates. Islamic banker Harris Irfan states "there is no question" that benchmarks such as LIBOR "continue to be a necessary metric" for Islamic banks, and that the "overwhelming majority of scholars have come to accept this, however imperfect a solution this may seem",^[483] but Muhammad Akram Khan writes that following the conventional banking benchmark LIBOR "defeats the very purpose for which the Islamic financial products were designed and offered" in the first place,^[484] In addition skeptics have complained that the rates of return on accounts in Islamic banks are suspiciously close to those of conventional banks, when (in theory) their different mechanisms should lead to different numbers. A 2014 study in Turkey found the long-term relationship between term-deposit rates at three of four “participation banks" (i.e. Islamic Banks) "significantly cointegrated" with those of the conventional banks.^[485] According to skeptics this nearness suggests a manipulation of returns by Islamic banks, to reassure customers of their financial competitiveness and stability.

Liquidity

Islamic banking and finance has lacked a way to earn a return on funds "parked" for the short term, waiting to be invested, which puts those banks a disadvantage to conventional banks.^[486] Banks/financial institutions must balance liquidity — the ability to convert assets into cash or a cash equivalent quickly in an emergency when their depositors need them without incurring large losses^[487] — with a competitive rate of return on funds. Conventional banks are able to borrow and lend by using the interbank lending market — borrowing to meet liquidity requirements and investing for any duration including very short periods, and thereby optimize their earnings.^[486] Calculating the return for any period of time is straightforward^[486] — multiplying the loans length by the interest rate. While Muslim countries such as Bahrain, Iran, Malaysia^[488][489] and Sudan have started to develop an Islamic money market, and have been "issuing securitized papers on the basis of musharaka, mudaraba and ijara", at least as of 2013, the "lack of an appropriate and efficient secondary market" has meant the relative volume of these securities is "much smaller" than on the conventional capital market.^[486] Regarding non-PLS, "debt-based contracts", one study found that "the business model of Islamic banking is changing over the time and moving in a direction where it is acquiring more liquidity risk."^[487] To deal with the problem of earning no return on funds held for the sake of liquidity or because of a lack of investment opportunity, many Islamic financial institutions (such as Islamic Development Bank and the Faisal Islamic Bank of Egypt)^[490] have "been explicitly and openly earning interest on their excess funds, often invested in safer, debt-like or debt instruments overseas".^[491] Rather than forbidding this, "Shariah-experts have provided the necessary fatwa of Shari'ah-compliance based on the rules of necessities (darurah)".^[491]

Scholars in Islamic finance and banking have invoked necessity to permit exceptional relaxations of rules. They have issued fatwas (opinions) allowing Islamic banks to deposit funds in interest-bearing accounts.^[492][491]

though they require the interest be used for "religiously meritorious purposes".

Other challenges and issues

Most Islamic banks have their own Shariah boards ruling on their bank's policies.

Lack of shariah uniformity

The four schools (Madhhab) of Sunni fiqh (Islamic jurisprudence) apply "Islamic teachings to business and finance in different ways", and have not come closer to agreement. Furthermore, shari'a boards sometimes change their minds, reversing earlier decisions."^[493][457] Differences between boards as to what constitutes shariah compliance may raise "doubts in the minds of clients" over whether a given bank is truly shariah compliant, and should be given their business.^[494]

Late payments/Defaults

While in conventional finance late payments/delinquent loans are discouraged by interest continuing to accumulate,^[441] according to Ibrahim Warde,

Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory legal and religious device ... In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable. Late fees in particular have been assimilated to riba. As a result, `debtors know that they can pay Islamic banks last since doing so involves no cost`^[495][441]

A number of suggestions have been made to deal with the problem.^{[Note 34]}

Inflation

Inflation is also a problem for financing where Islamic banks have not imitated conventional baking and are truly lending without interest or any other charges. Whether and how to compensate lenders for the erosion of the value of the funds from inflation, has also been called a problem "vexing" Islamic scholars,^[440] since finance for businesses will not be forthcoming if a lender loses money by lending. Suggestions include indexing loans (opposed by many scholars as a type of riba and encouraging inflation),^[498] denominating loans "in terms of a commodity" such as gold, and further research to find an answer.^[499][500]

Non-Muslim influence

Islamic banking and finance customers, are almost all, if not entirely, Muslims. But the majority of financial institutions that offer Islamic banking services are Western financial institutions, not owned by Muslims. Supporters of Islamic banking have cited this interest of western banks in Islamic banking as evidence of the strong demand for Islamic banking and thus an "achievement of the movement".^{[Note 35]} However, critics complain these banks lack a deep faith-based commitment to Islamic banking which means

1. That Muslims employed within these organizations have little input into the actual management, resulting in sometimes well-founded suspicion among the Muslim populace as to the diligence of sharia compliance at these institutions.^[41]
2. That rather than a reflection of the growing strength of Islamic banking, the interest of conventional banks reflects how similar Islamic banking has become to the conventional sort,^[502] so that the later can enter Islamic banking without making substantive changes to its practices.^[502]
3. And that these banks will be more likely to withdrawing from the industry when the market takes a downturn.^[443] Harris Irfan argues that the lack of ideological commitment to Islamic banking by non-Muslim banks such as Deutsche Bank, will lead to their withdrawing from the industry when the market takes a downturn. In early 2011 during the housing bubble collapse, "not a single dedicated Islamic structurer or salesperson remained at Deutsche. Islamic finance had become `a luxury the bank can't afford'"^[443]

Stability/Risk

Sources differ over whether Islamic banking is more stable and less risky than conventional banking. Proponents (such as Zeti Akhtar Aziz, the head of the central bank of Malaysia) have argued that Islamic financial institutions are more stable than conventional banks because they forbid speculation^[432] and the two main types (in theory) of Islamic banking accounts — "current account" and mudarabah accounts — carry less risk to the bank.^[252]

1. In a current account the customer earns no return and (in theory) there is no risk of loss because the bank does not invest the account funds.
2. In a mudarabah account the Islamic bank carries less risk of loan defaults because it shares that risk with the depositor since if the borrower cannot pay back part or all of the money lent to them by the bank, the amount going to the depositor is cut by an equivalent amount, whereas in a conventional bank the depositor is given fixed interest payments whether or not the bank's earnings decline from loan defaults.^[252]

This of course means that while the bank may be more stable, the depositors/"partners" of Islamic profit and loss sharing accounts (Islamic banks often use the term "partner" instead of "customer" or "depositor") are exposed to risks they would not be subject to in conventional banks. Furthermore,

In these institutions, investment-account holders neither have the protection of being creditors of the Islamic financial institution, nor do they have the protection of being equity holders with representation on those institutions’ boards of directors. This introduces a host of other well-documented risk factors for the institution ...^[503]

On the other hand, Habib Ahmed —writing in 2009 shortly after the financial crisis — argues that the practices of Islamic finance have gradually moved closer to conventional finance exposing them to the same dangers of instability.^[504]

When the practice of Islamic finance and the environment under which it operates are examined, one can identify trends that are similar to the ones that caused the current crisis.... In the recent past, the Gulf region has witnesses its own episodes of speculation in their stock and real estate markets. Finally, the Islamic financial industry has witnessed rapid growth with innovations of complex Shari'ah compliant financial products. Risks in these new Islamic financial products are complex, as the instruments have multiple types of risks ...^[505]

In any event, a few Islamic banks have failed over the decades. In 1988 the Islamic investment house, Ar-Ryan collapsed causing thousands of small investors to lose their savings (they were later reimbursed for their losses by an anonymous Gulf state donor)^[506] and dealing a blow to Islamic finance at the time. In 1998 the management of Bank al Taqwa's failed. with its annual report reporting a "loss of over 23 per cent of principal to both mudaraba depositors and shareholders". (It was later revealed that management had violated banking rules "invested in one single project more than 60 per cent bank's assets.")^[458][459] The Ihlas Finance House in Turkey closed in 2001 due to "liquidity problems and financial distress".^[507] Faisal Islamic Bank had difficulties and closed its operations in the UK for regulatory reasons. ^{[508][509][68]} According to the Economist magazine, "Dubai's debt crisis in 2009 showed that sukuk [Islamic bonds] can help to inflate debt to unsustainable levels."^[432]

Recessions

During the global financial crisis Islamic banks "on average, showed stronger resilience" than conventional banks, but "faced larger losses" when the crisis hit "the real economy," according to a 2010 IMF survey.^[510] At the beginning of the "Great Recession" of 2007-9, Islamic banks were "unscathed", leading to one Islamic banking supporter to write that the collapse of leading Wall Street institutions, particularly Lehman Brothers, "should encourage economists world-wide to focus on Islamic banking and finance as an alternative model."^[511] However gradually the effect of the financial downturn moved to the real sector, affecting Islamic banking. According to Ibrahim Warde, `this showed that Islamic finance was not all a panaceas, and that a faith-based system is not automatically immune to the vagaries of the Financial system.`^[512][252]

Concentration of ownership

Concentrated ownership is another danger to the stability of Islamic banking and finance. Munawar Iqbal and Philip Molyneux write that only

"three or four families own a large percentage of the industry. ... This concentration of ownership could result in substantial financial instability and possible collapse of the industry if anything happens to those families, or the next generation of these families change their priorities. Similarly, the experience of country-wide experiments has also been mostly on the initiatives of rulers not elected through popular votes."^[444]

Macroeconomic exposures

Harris Irafan warns that the "macroeconomic exposures" of Islamic banks constitute a "ticking time bomb" of a "billions of dollars" in "unhedged currencies and rates". The difficulty, complexity and expense of hedging these in the correct Islamic manner is such that as of 2015, the Islamic Development Bank "was hemorrhaging cash as if it were funding a war. It simply couldn't swap dollars for euros or vice versa on an ongoing basis without resorting to the conventional markets." Regional Islamic banks in the Middle East and Malaysia did not have "specialized personnel trained to understand and negotiate Sharia-compliant treasury swaps" and were not willing to hire the consultants who did.^[442]

Customers and the industry

The majority of Islamic banking clients are found in the Gulf states and in developed countries.^[501] Studies of Islamic banking customer in Malaysia^[513] and Pakistan^[514] found customer satisfaction was connected to service quality. A study of Islamic banking customers in Bangladesh found "most customers" between 25–35 years, "highly educated" and having a "durable relationship" with the bank, more knowledgeable about account than financing products.^[515] In series of interviews conducted in 2008 and 2010 with Pakistani banking professionals (conventional and Islamic bankers, Shariah banking advisors, finance-using businessmen, and management consultants), economist Feisal Khan noted many Islamic bankers expressed "cynicism" over the difference or lack thereof between conventional and Islamic bank products,^[516] the lack of requirements for external Shariah-compliance audits of Islamic banks in Pakistan,^[517] shariah boards lack of awareness of their banks' failure to follow shariah compliant practices in or their power to stop these practices.^[518] However this did not deter patronage of the banks by the pious (one of whom explained that if his Islamic bank was not truly shariah compliant, 'The sin is on their head now, not on mine! What I could do, I've done.') ^[519] One estimate of customer preference (given by a Pakistani banker) in the Pakistani banking industry, was that about 10% of customers were "strictly conventional banking clients", 20% were strictly Shariah-compliant banking clients, and 70% would prefer Shariah-compliant banking but would use conventional banking if "there was a significant pricing difference".^[520] A survey of Islamic and conventional banking customers found (unsurprisingly) Islamic banking customers were more observant (having attended hajj, observing salat, growing a beard, etc.), but also had higher savings account balances than conventional bank customers, were older, better educated, had traveled more overseas, and tended to have a second account at a conventional bank.^{[Note 36]} Another study, using "official data" reported to State Bank of Pakistan, found that for lenders who had taken out both Islamic (Murabaha) financing and conventional loans, the default rate was more than twice as high on the conventional loans. Borrowers were "less likely to default during Ramadan and in big cities if the share of votes to religious-political parties increases, suggesting that religion – either through individual piousness or network effects – may play a role in determining loan default."^{[522] [Note 37]}

Costs

Muhammad El-Gamal argues that because Islamic financial products imitate conventional financial products but operate in accordance with the rules of shariah, different products will require additional jurist and lawyer fees, "multiple sales, special-purpose vehicles, and documentations of title". In addition there will be costs associated with "the peculiar structure that Islamic banks use for late payment penalties". Consequently, their financing tends to cost more than, and/or accounts pay less return than conventional products.^[524] El-Gama also argues that another source of inefficiency/greater expense in Islamic banking and a reason its replications of conventional finance are "always one step behind" new financial products in the conventional industry, is the industry's dependence on "classical "nominate contracts" (murabahah credit sales, ijara leases, etc.). These contracts follow classical texts and were created in a time when financial markets were very limited. They are not equipped to "disentangle various risks" that "modern" financial markets and institutions (such as "money markets, capital markets, options markets, etc.") are designed to. On the other hand, making their contracts/products more efficient, will alienate the pious customer base that wants contracts/products to follow classical forms.^[525] Most studies have found Islamic banks less efficient on average, than conventional ones.

• According to a 2006 report by M. Kabir Hassan of 43 bank in 21 Muslim countries from 1996-2001, "on average, the Islamic banking industry is relatively less efficient compared to their conventional counterparts in other parts of the world";^[526][527]
• a study of banks in Malaysia from 1997-2003 found Islamic banks somewhat less efficient, on average, than their conventional counterparts,^[528] as did a study of
• Islamic banks in Turkey from 1999-2001.^[509]
• In contrast one multi-country study (43 Islamic and 37 conventional banks in 21 countries), covering a similar time period (1999-2005) as the studies above, found no "significant differences" in overall efficiency.^[529]

In one important part of the finance market — home buying — Islamic finance has not been able to compete with conventional finance in at least some countries (the UK as of 2002, and the USA and Canada as of 2009). According to Humayon Dar, the monthly payments, for a shariah compliant "Lease Contract" used by Islamic Investment Banking Unit of Ahli United Bank Kuwait in Britain "are much higher" than equivalent conventional mortgages.^[530] In Canada the cost of Islamic home finance was 100 to 300 basis points higher than conventional home finance, and in the USA 40 to 100 basis points higher, according to Hans Visser. (Visser credits the higher cost of Islamic ijara financing to its higher risk weighting compared to conventional mortgages under Basel I and Basel II international standard of minimum capital requirements for banks.)^[531]

Maturity

According to M.O.Farooq, "common explanations offered by" the Islamic finance movement for the Islamic banking industry shortcomings are that

1. industry problems and challenges are part of a "learning curve" and will be solved over time;
2. unless and until the industry operates in an Islamic society and environment it will be hindered by non-Islamic influences and won't "operate in its essence".^[436]

While the veracity of the second explanation can not be verified before a complete Islamic society is established, Feisal Khan points in regard to the first defense that it has been over twenty years (1993) since one critic (Timur Kuran)^[532] first highlighted the industry problems (the basic similarity of Islamic banking in practice to the conventional, the marginalizing of the equity-based, risk-sharing modes and embrace of short-term products and debt-like instruments), and since a supporter (Ausaf Ahmad) defended the industry as early in its transition from conventional banking.^[533] Seventeen years later, Ibrahim Warde, an Islamic finance proponent, lamented that "rather than disappearing, murabaha and comparable sale-based products grew significantly and today they constitute the bulk of the activity of most Islamic Banks..."^[534][480] Most critics of the Islamic banking industry call for further orthodoxy and a redoubling of effort and stricter enforcement of sharia.^{[Note 38]} Some (M.O.Farooq and M.A.Khan), have blamed the industry problems on its condemnation of any and all interest on loans as forbidden riba, and the impracticality of attempting to enforce this prohibition.^[537]