Are Banks the Root Cause of Economic Woes and Can They Be Islamic?

Author Credit:This blog is adapted from an article by Muhammad Rizwan-ul Haque, Founding Chairman of Dawood Family Takaful, CEO of an Investment Bank, and Director of a Trust. The original article was published on July 3, 2015.

Introduction

Banking is often viewed as the backbone of the modern economy. Banks collect deposits, provide loans, support businesses, and facilitate financial activity.

However, from an Islamic finance perspective, a deeper question must be asked: do banks truly support economic justice, or do they create imbalance by trading in money?

According to Muhammad Rizwan-ul Haque, both conventional and Islamic banks need to be critically examined because their core operations are often based on the buying and selling of money.

Do Banks Trade in Money?

The central argument of the article is that banks, whether conventional or Islamic, effectively trade in money.

Banks collect deposits from the public, especially from the middle class and ordinary savers. These deposits are taken at a certain cost, commonly called interest in conventional banking or profit in Islamic banking.

The same funds are then provided to entrepreneurs, companies, and governments through loans, advances, or investment structures at a higher return.

The difference between what banks pay depositors and what they earn from borrowers becomes the bank’s spread.

The Issue of Deposits

When people deposit money in a bank, they often believe their money is safely being held for them. However, in practice, once money enters the banking system, the bank gains control over how those funds are used.

The article argues that depositors, who are the real providers of funds, do not always have meaningful control over how their money is deployed.

The bank then uses these funds according to its own policies, lending or investing them where it expects to earn a return.

Lending to the Wealthy and Powerful

Another concern raised in the article is that funds collected from ordinary depositors are often provided to wealthy entrepreneurs, large companies, and governments.

These borrowers may or may not use the funds for real economic activity. In some cases, financing may support productive ventures. In other cases, it may support debt cycles, speculative activity, or government borrowing.

This raises a question of fairness: if the public provides the funds, why is the greatest share of the reward often captured by large borrowers and financial institutions?

Unfair Distribution of Wealth

The article highlights a major concern regarding wealth distribution.

First, large businesses may use borrowed funds to generate profits, dividends, or capital gains. Then, banks retain a significant portion of the return through their spread. Meanwhile, the original depositors receive only a relatively small return.

This creates an imbalance where the actual providers of funds may receive the least benefit, while banks and large borrowers capture a much larger share.

From an Islamic economic perspective, this raises concerns about justice, fairness, and equitable distribution.

Can Such a System Bring Justice?

Islamic finance is not only about avoiding certain terms. It is about establishing fairness, transparency, responsibility, and socioeconomic balance.

If a system allows money to be traded like a commodity, and if wealth continues to flow mainly toward those who already have financial power, then it becomes difficult to call that system just.

The article argues that money should not be treated like a commodity. In Islam, money is meant to facilitate trade and real economic activity. It should not become the object of trade itself.

The Menace of Loans, Interest, and Banking

According to Muhammad Rizwan-ul Haque, a banking system built around loans, interest, and spreads can widen the gap between rich and poor.

The article refers to major financial failures and economic crises as examples of the damage that can result from debt-driven financial systems. These include global banking failures, sovereign debt crises, and economic instability in different countries.

The broader point is that when economies become dependent on debt and interest-based structures, financial pressure increases across society.

Impact on Social Harmony

The article also connects economic injustice with wider social problems.

When wealth becomes concentrated, opportunities become limited, and lower-income groups struggle to participate productively in the economy, social harmony can be disturbed.

Islam places great emphasis on justice, equality, and giving people fair opportunities to contribute. A financial system should support these values rather than deepen inequality.

Why Do People Set Up Banks?

The article asks an important question: what is the motivation behind establishing a bank?

A bank is a business, not a charity. Its primary attraction is the ability to earn a spread between the cost of funds and the return earned from financing activities.

This spread-based model becomes problematic if it is built upon trading money rather than supporting genuine trade, partnership, and productive economic activity.

Can Banking Be Truly Islamic?

This leads to the central question: can banks be truly Islamic if their operations are based on trading money?

For a financial institution to be Islamic in substance, it must go beyond changing names and documents. It must avoid Riba, support real economic activity, promote fair risk-sharing, and ensure justice between fund providers and fund users.

If Islamic banks continue to follow the same money-trading logic as conventional banks, then their Islamic identity becomes questionable.

Conclusion

The article presents a strong critique of the modern banking system. It argues that banks collect money from the masses, deploy it toward wealthy borrowers and institutions, and retain a significant share of the benefit through spreads.

From an Islamic finance perspective, this model raises serious concerns about Riba, fairness, wealth distribution, and socioeconomic justice.

A truly Islamic financial system should not be based on trading money. It should be based on real assets, genuine trade, partnership, risk-sharing, productivity, and fairness.

The challenge for Islamic finance is not merely to create Islamic versions of conventional banking products. The real challenge is to build a financial system that reflects the values of justice, balance, and real economic contribution taught by Islam.

Credit: This blog is adapted from the article by Muhammad Rizwan-ul Haque, Founding Chairman of Dawood Family Takaful, CEO of an Investment Bank, and Director of a Trust.