What is the importance of Islamic Banking? Part 1

Note: This is part of my answer to Ara Belleng's  (UP student mastering in Islamic Finance) questions on Islamic Banking. I am not an expert in the field. This is just a 'writing out loud' answer.

The importance of Islamic banking can be answered from multiple perspective but is rooted on one basic principle: Maqaasid ash Shariah or the Goals of Shariah. Accordingly, the goals of Shariah are the preservation of faith, life, lineage, intellect and wealth. All of the injunctions of Islam can be traced to these five goals. Broadly speaking, the importance of Islamic banking, just like any other Islamic systems, must promote and not contradict these goals.

From an economic perspective, the importance of Islamic banking is not different from conventional banking. Banks serve as repository and transfer of wealth, of nations and individuals, engage in economic activities. Had there been no banks, we can be still carrying loads of gold coins when we purchase that house we always dream about. However, humans are ever prone to deceit, dishonesty and greed that beset both the ancient and modern economic transactions. Whether it is selling rotten potatoes hidden on the bottom of the sacks or some clauses hidden in modern buying and selling contracts, Islam prohibits Gharar or deception and uncertainty in economic transactions. Further, Islam also prohibits Riba fueled by greed. Lastly, any transaction that leads to haram is also forbidden. Consequently, Islamic banking aims to prevent harm and promote benefit to the society, both Muslims and non-Muslims. In a nutshell, Islamic banking allows Muslims to enjoy all the benefits of banking systems and engage in modern economic transactions without going against the injunctions of the Shariah – hence the term Shariah-compliant products. This includes personal and business financing, and opportunity for halal investments. This allows capital to flow, finance businesses, promote growth of small and medium enterprises, creates jobs and contribute to overall health of the economy.

All these benefits may affect the social and political domains. A nation with a healthy economy and strong middle class are probably amongst the happiest nation with stable peace and order situation. A common man, normally just want to put food on the table and provide a secure shelter to his family. Deny him this basic right, many resorts to crime and other unlawful means.

Lastly, Islamic banking may have a role in geopolitics. After World War 2, imperialism took a new form. Instead of the ugly and bloody military domination, control of a country and consequently its resources is done through economic control. The New York Times best seller, The Confessions of an Economic Hitman, revealed that First World corporations take control of Third World countries through Riba-based loans designed so that it can never really be paid, rendering these countries forever indebted. Thus, any action these debtor countries impose (such as invasion of a country) is surely not opposed, locally or internationally (e.g. UN votes) by the indebted countries. Theoretically, Islamic financing systems may rid these first world countries their economic weapons that led to wars and untold sufferings in modern times. After all, it is mentioned in the Qur’an that God called Riba as war.