Islamic Banking is in actual fact Interest Free Banking with the products and services designed in the light of Islamic moral standards and traditions.

Quiad-I-Azam Mohammad Ali Jinnah inaugurated the State Bank of Pakistan on July 1, 1948. In his inaugural address the father of the nation emphasized upon the need for evolving banking practices compatible with the Islamic ideals of social and economic life. Talking about economic system of the West he went on to say:"It has failed to do justice between man and man and to eradicate friction from the International Field."

But State Bank had its teething problems. They continued to follow the practices of Reserve Bank of India and the advice of the Father of the Nation was forgotten. 

Couple of decades later politicians started talking about Islamization of every thing and the phrase Islamic Banking was came to be recognized. And various commissions or committees were formed to evolve the mechanics of Islamic Banking and to clarify its concepts. Their tasks was indeed more than challenging as the Ummah is divided in many
different sects and their views and interpretations to the sayings of the Holy Prophet and Quranic Injunctions and the need for Ijtehad vary not only from sect to sect but also Maulana to Allama . 

In the days of Late General Zia ul Haque, we got various schemes in the name of Islamic Banking. For instance, in place of Savings Account we got the Profit and Loss Account, which usually pays, more or less the same amount as one used to get as Interest and the worth of your principal amount continues to diminish due to inflation and fall in the value of Rupee.

In 1980s they also introduced Interest Free House Building Loans and made acquisition of loans for house building more difficult as well as expensive. Now one does not pay interest but what one pays as something like rent comes to much greater amount than the interest that used to be charged in early days of House Building Finance Corporation or by the banks in private sector prior to their nationalization in the seventies. 

 
Banking whether Islamic or conventional - means, transactions carried on by any individual or firm engaged in providing financial services to consumers, businesses, or government enterprises. Thus a bank is a financial intermediary that performs one or more of the following functions: safeguards and transfers funds, lends or facilitates lending, guarantees creditworthiness, and exchanges money. A narrower and more common definition of a bank is a financial intermediary that accepts, transfers, lends and creates deposits.

Qarze Hasna schemes (total interest free and paying back at earliest possible opportunity) have yet to be developed by the State for such dire needs as higher education, to help start business, hospitalization, daughter's marriage etc. 

Paper Currency - A Device for Exploitation
Although I would not go to the extreme of calling it "Haram" I call the existing monetary system of paper currency (without base of gold) as Un-Islamic. Muhatir Mohammad of Malaysia feels more or less the same as Dr. Lawrence Parks writes.

"Today, fiat money, money that is created out of nothing and without work, is used worldwide. The reason monetary authorities have gotten away with this prima-facie fraudulent money is a combination of coercion (specifically legal tender laws in every nation and restrictions the IMF has put in place internationally that prohibit member countries from linking their currencies to gold, and only to gold), misrepresentations, and nondisclosure of material information. Since the 8th century in China, every experiment with fiat money has ended in disaster, many times destroying the middle class, that group that protects society from the barbarians. To counter this risk and to protect and preserve our civilization, it is essential that we once again return to "the standard of every great civilization": gold-as-money."

Therefore, the socalled Islamic financial products based under Non-Islamic monetary system cannot produce something based on real Islamic values. For this reason in many Islamic schemes like house building loans you end up paying more than the bank interest deluding yourself that your are paying rent - not the Interest. 

If the Interest rates are regulated by the Government, then it can be regarded only as a provision for covering operating costs and a  reasonable margin for inflation and profit and not as Riba or usury. 

Usury must be defined in our laws such as a rate of interest 5% or so  higher than the bank rate fixed by the State Bank and like developed countries we should fix maximum limits beyond which the banks cannot charge Interest/rent. In many countries the maximum limits are prescribed by law beyond which the banks cannot charge interest. In Pakistan a foreign bank charges such exorbitant interest as 3.5 % per month  (over 52% per annum) and calls it service fee over and above the annual fee whereas in US various state laws restrict interest to barely 9 %  to 12% pa. 

It is about time our legislators and the pundits in the State Bank of Pakistan and the Finance Ministry wake up and do something to stop consumer exploitation by our banks. Recently a bank which opened millions of PLS accounts with such low amounts as RS. 100 to RS. 1000 
has started charging service fee of RS. 50 per month in case the balance is less than RS. 5000/- without any proper written notice to the accounts holder. There are many other examples of exploitation of consumers by the banks.
 

The concept of Islamic economic system as some zealots of Islamization of economics talk about,  appears to be more like Utopian philosophy inasmuch as they regard alleviation of poverty by fair and equitable distribution of wealth as an objective of Islamic system! Although there is great emphasis on charity and helping the needy and payment of Zakat and distribution of war booty,  there is no provision in Holy scriptures for distributing of wealth and ownership on socialist pattern, 

The research and experiments in Islamic Banking have been going on since the last century for years. Only thing that separates it from conventional banking is that Interest cannot be employed but the lender can share in the profit and loss of the venture undertaken by the borrower in proportion to the money lent. But neither the role of Central Reserves Bank nor the principles of dealings with other  commercial banks and International Banking have properly been defined or agreed upon nor any concrete practical steps taken to evolve the standards, procedures, and laws. Only Arabic names or  terminology is used to describe the old trading practices. Talk about formation of Islamic Monetary Fund confines to academic discussion.

The fact remains that banking is banking - and economics is economics - whatever name you may give it according to the policies and practices adopted. The concepts of Western Interest Free Banking are not much different than what have been introduced here as Islamic Banking. Most of them have been adopted giving Arabic sounding names to standard terms. 
 

Provision to offset the fall in purchasing power of lent amount can't be termed as Interest or Riba.
see Holy verse
002.279 
If ye do it not, Take notice of war from Allah and His Messenger: But if ye turn back, ye shall have your capital
sums: Deal not unjustly, and ye shall not be dealt with unjustly. 

Now every country has to have a Reserves Bank or Central Bank. In Pakistan we have State Bank.  The central bank as the foremost monetary institution in a market economy is  usually owned by the Government. Most central banks perform the following functions: They serve as the government's banker, act as the banker of the banking system, regulate the monetary system for both domestic and international policy goals, and issue the nation's currency. As banker to the government, the central bank collects and disburses government income and receipts, manages the issue and redemption of government debt, advises the government on all matters pertaining to financial activities, and makes loans to the government. As banker to the nation's banks, the central bank holds and transfers banks' deposits, supervises their operations, acts as a lender of last resort, and provides technical and advisory services. Monetary policy for both domestic and foreign purposes is implemented and, in many countries, decided by the Ministry of Finance employing a variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the national currency are the liability of the State Bank..

Role of Central Bank or State Bank or Federal Reserve Bank is not properly defined by the proponents of Islamic Banking. Earliest Form was a sort of Treasury called Baitul mal where the valuables were kept for safe-custody and distribution by the rulers.

Now every country has to have a Reserves Bank or Central Bank. In Pakistan we have State Bank.  The central bank as the foremost monetary institution in a market economy is  usually owned by the Government. Most central banks perform functions such as serving as the government's banker, holding reserves, acting as the banker of the banking system, regulating the monetary system for both domestic and international policy goals, and issuing the national currency. As banker to the government, the central bank collects and disburses government income and receipts, manages the issue and redemption of government debt, advises the government on all matters pertaining to financial activities, and makes loans to the government. As banker to the nation's banks, the central bank holds and transfers banks' deposits, supervises their operations, acts as a lender of last resort, and provides technical and advisory services. Monetary policy for both domestic and foreign purposes is implemented and, in many countries, decided by the Ministry of Finance employing a variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the national currency are the liability of the State Bank..
 

In the 7th century AD at the time of dawn of Islam, money consisted of metallic coins and gold and silver bars. That was the kind of money whose purchasing power was not only stable but also tended to appreciate, like the worth of land or gold. 

It was and still is the simplest and straightforward method of fulfilling the promise of the Rulers who issue coins and currency to give you the real worth of the money - not less than what you acquired when you took that money in your custody. In this respect our Governments have been guilty of breach of the trust as it is incumbent upon the rulers, according to Islamic precepts to protect the interests of his people. 

These days we have paper and credit money besides coins. The face value of commodity money (coins) may be about equal to the value of the material contained in it, usually silver, and copper. Gold is now rarely used for coins.

All other kinds of money including Credit money or Flat money are paper backed by promises by the issuer, and the manner that become redeemable and the value that is assigned to them merely by government edict or the laws. Thus the currency notes and credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of transactions; the money thus becomes a legal tender. 
 

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