Ethics, Practice, and Future of Islamic Banking and Finance

This paper explores the ethical mandates of Islamic banking and finance (IBF) and then studies the recent performance of IBF on the positive level. The ethical section is divided into four parts: (1) promotion of trade and cooperation, (2) prohibition of ribā and of profiting without risk, (3) prohibition of gharar and maysir, and (4) requirement of charity and altruistic acts. Each of these topics is discussed on the normative level. Subsequently, the performance of IBF is assessed through a comparative study of IBF institutions and conventional banks operating in select Muslim majority countries from 2005 to 2008. The analysis shows that IBF institutions are able to provide competitive returns for their customers while adhering to its ethical injunctions. At the end of the paper, recommendations are offered to make IBF more efficient and transparent.