Theoretical trends of Islamic banking: a critical reading

Theoretical trends of Islamic banking: a critical reading Abduljabbar Hamad Obaid Al-Sabhany Faculty of Al-Sharee’a and Islamic Studies Yarmouk University/ Jordan Abstract: The defining mission of emerging Islamic banking was to move away from usurious lending—where the borrower bears the risk of the loan—toward profit-and-loss sharing contracts like almudaraba and musharaka, where contracting parties share both gains and losses. The project and contractual framework for this system were initially developed through individual initiatives. However, once Islamic banks were established, professional considerations began to dominate banking practices, particularly in risk management. This led to a decisive transformation that returned Islamic banks to a debt-based model, albeit through financing sales (like murabaha). While this shift had its advocates, it also faced opposition from those who viewed it as a departure from the prescribed theoretical path. Fatwa institutions ultimately settled the matter in favor of the new model, noting that the murabaha sale to the purchase orderer provided the necessary security for Islamic banks' operations. The evolution did not stop there; some banks swiftly developed a contractual framework to provide customer liquidity through tawarruq. This paper aims to monitor the main intellectual trends parallel to Islamic banking practice. It evaluates the contractual frameworks and mechanisms through which funds are sourced from financiers and the frameworks and mechanisms through which these funds are invested with clients. The methodology involves a critical induction of the evolution of juristic thought and banking theory in response to banking practices over half a century. The research proposes a theoretical review that could establish new corrective pathways.Keywords: Islamic banking, almudaraba, financial intermediation, financing sales

JEL Classification: G21, G29, K12

KAUJIE Classification: C2, H13, I11