Mahmood Ahmad
misconception is partly due to incomplete knowledge in the fundamentals of
Islamic finance and due to the over-reliance on short-term trade financing.
The investment portfolio of Islamic banks has generally favored trade-related
activities over production-related activities, short-term profitability over long-
term profitability and private profitability over social profitability. Almost 80
to 90 per cent of investment has been made to short-term trade-related
activities. Heavy reliance on a short-term asset portfolio makes Islamic banks
vulnerable, increases its risk and threatens its stability. On the other hand, the
borrowers prefer short-term trade loans to profit-loss sharing instruments,
which have weakened the bank’s portfolio. The real rates of return of the
Islamic bank’s asset portfolio are lower than those of conventional banks.
Islamic banks have become, to an extent, successful in the field of
deposit mobilization, but socially beneficial and development oriented
utilization of these deposits did not happen. Employment generation and a
flow of resources towards the lower and middle classes, particularly in the
rural areas, have not taken place. Still, Islamic banks are involved in the
heroic role of eliminating riba from financial dealings in Muslim countries
against a backdrop of regulation in the area of taxation, legal framework, and
weak moral fabric of society. In order to remove misconception from the
minds of bankers and customers, there is no alternative to publicity, research
and training of Islamic banking practices. Research should focus on the
development of financial products that conform to Islamic Shari[ah, and
training should be given to bankers, potential researchers and bank
customers.