Lender’s position in the profit and loss sharing Islamic finance: an analytical perspective of Izutsu’s hypotheses on “Islam” and “Hilm”

What is it about?

There is a growing debate as to how Islamic financial institutions can increase the expansion of profit and loss-based finance (musharaka, mudarabah) instead of widely practiced markup (murabaha) finance. No doubt, Islamic banks should be Shariah-based completely. However, a question remains: has Islamic banking system furnished essential and adequate infrastructure for shariah-based banks to be purely Islamic? This paper highlights one of such requirements, lenders right, in arguing why murabaha finance dominates the balance sheet of Islamic banks. In so doing, the paper draws upon the theorical contribution of Toshihiko Izutsu, a philosopher of Oriental studies specialized in Islamic thoughts. Izutsu shows the derivation of the modern term Islam from its pre-Islamic root of hilm. He argues that a halim (Muslim or mu’min) possesses power and becomes altruist for fellow Muslim. Based on this theoretical underpinning, we propose that the practice of PLS should be based on an effective power retained by the lender to discipline the borrower, which is currently lacking in typical PLS contract. Japanese main bank system during its heyday is presented, as a case, of banks’ hilmic behaviour.

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