ISLAMIC banking is commonly defined as a form of banking which operates without the norm of interest. As a concept, it is comparatively of recent origin. It is only during the last fifty years or so that efforts have been made to develop Islamic banking. It is interesting to note that it is not only the Islamic Development Bank at Jeddah but the IMF and the World Bank as well which are promoting the cause of Islamic banking.

The IMF at one stage had opened a Shariah department with the sole responsibility of devising Shariah compliant securities for domestic and external debt and transforming the existing financial system in the Islamic world on lines specified by the Shariah department. What has been the success of these ventures is now of historical interest only. However, IMF staff did contribute their share to the stream of literature on the subject.

A critical review of the literature on Islamic banking and an evaluation of the so-called Islamic banks operating globally lead to a startling but significant revelation Islamic banking both in theory and practice is nothing more than a mythology. This mythology has socio-economic implications which cannot be ignored at any cost.

By its definition, structure and functions, a bank cannot exist without interest. These two concepts are too intertwined to be separated. Because of the inseparability between a bank and the norm of interest, it can be concluded that Islamic banking is a mythical and a contradictory concept. If the objective is to abolish interest, the entire banking system will have to be scrapped altogether. In other words, if the foundation of the banking superstructure, namely the norm of interest has to be eliminated, the entire superstructure would have to be dismantled. However, to justify Islamic banking, the Shariah experts, economists, bankers and intellectuals have continued over the last five decades or so to build a web of myths which are increasing in number day by day.

The first or the primary myth which has gained common currency throughout the Islamic world is based on gross misinterpretation of the Quranic verses on Riba, which have led to the conclusion that Riba prohibited in the Quran and the bank interest are identical and as such interest must be abolished from all tiers of the economy including banking. The Muslim scholars have never seriously and dispassionately discussed the three basic and inter-related questions. What is Riba? What is interest? Are Riba and interest co-equal or synonymous? As a result of the failure of Islamic scholars to critically address these fundamental questions, the myths on Islamic banking continue to flourish.

The second myth around which the concepts of Islamic banking and Islamic economy are developed, points out that interest is the basic cause of the ills from which modern economies suffer such as unemployment, inflation, depression, income inequalities, poverty, etc. Remove the norm of interest and the economic system would be fully purified (Islamised) with no unemployment, no inflation and no income and wealth inequalities.

The third myth is in the form of the popular claim that there are as many as 200 banking units or banking companies which operate around the globe without interest and that these banks represent alternative models to interest-based banking. Even the western secular banking companies are now opening branches of Islamic banks or Islamic windows as these companies are convinced of the superiority of Islamic banking over the interest-based banking. The fourth myth is that the mode of profit-loss-sharing (PLS) is truly an Islamic mechanism and as such it can best serve as the basis of Islamic banking. In other words, PLS can replace the norm of interest in the banking industry and can give optimal results.

The fifth myth is that J.M. Keynes as one of the greatest economists of the twentieth century, in his numerous writings, has propounded and approved the structure of an economy which is free from interest. The Quàanic injunctions and interpretations forbidding interest are thus supported by the worldly economists such as J.M Keynes. The sixth myth stipulates that Islamic banking will become a reality once the Islamic economic system is established in its totality. In other words, the successful launching of true Islamic banking is contingent upon realising the objective of transforming the existing economic systems which are secular in their outlook and spirit on Islamic lines. If a truly Islamic economic system is established in a particular country or globally, operating Islamic banking and financial system will be feasible and practicable.

The mythology of Islamic banking is being propagated as a new gospel throughout the Islamic world. Scholars in Pakistan, Indonesia, Malaysia, Bangladesh, Sudan, Iran, Egypt and Saudi Arabia etc. have invested immense mental energies on themes of Islamic banking, Islamic economics etc. Their innovative research, bizarre interpretations and newly defined models have only led them to camouflage the norm of interest under esoteric nomenclature such as mark-up, rates of return, profit ratio etc.

Interest remains the foundation of all Islamic banking institutions. At the same time the Muslim world continues to suffer from a collective self-conceit that the banking system has been baptised the Islamic way. However, in a real world scenario, if interest is abolished through an ordinance or an administrative fiat, the Muslim world would face an unparalleled predicament of economic disorder and disaster.

The writer is former Joint Chief Economist, Planning Commission and is working as Chief (WTO), Ministry of Industries and Production. The views expressed here are personal to the author.