CONVERGENCE BETWEEN THEORY AND PRACTICE OF ISLAMIC BANKING: AN EMPERIAL ANALYSIS

Abstract

Islamic banking was launched with the hopes that it would provide an alternative banking system. Given that bank interest was deemed impermissible by majority of the Muslim jurists, therefore they sought to replace fixed-return model of banking with that of profit-and-loss sharing banking system. However, even after about half-century of experiment, Islamic banking is not completely based on profit-and-loss sharing. This study aims at developing a framework that can be used to evaluate convergence between theory and practice of Islamic banking. Objectives of Islamic banking are identified on the basis of its celebrated theory. A set of hypotheses or indicators are derived to reflect the achievement of these objectives in Islamic banking practice. Empirical methodologies and tools are developed to test these observable hypotheses. Finally, the study applies this methodology for investigating the extent to which Islamic banking practice has converged to its theory in Pakistan and Malaysia over time. The results indicate that the Islamic banking industry is largely struggling to approach its stated objectives in both countries.