Variable Profits Are Not Enough: A Response to Miftah Ismail on Islamic Banking

A Diagnosis Worth Honouring

In a recent essay for Dawn (6 June 2026), Mr Miftah Ismail, a former finance minister, wrote what he says bankers and economists know but do not say: that the difference between Islamic and conventional banking in Pakistan has become "more in nomenclature and less in substance." It is not a small thing for a man who has sat at the centre of the country's financial machinery to say this in public, and to say it plainly. The honesty deserves to be met with honesty.

So let it be said at the outset, without qualification: on the central charge, Mr Ismail is right. And he is, if anything, more right than his measured tone suggests.

He opens, fittingly, with the words of revelation. أَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا (ahalla Allahu al-bay'a wa harrama al-riba), "Allah has permitted trade and forbidden riba" (Surah Al-Baqarah 2:275). It is worth pausing on the verse he chose, because it carries the whole argument inside it. The Quran does not permit "profit" and forbid "interest." It permits بَيْع (bay'), genuine exchange in which a real thing changes hands and real risk is borne, and it forbids الرِّبَا (riba), an increase secured on money by the passage of time, regardless of what is produced. The line between the two was never drawn at the level of vocabulary. It was drawn at the level of substance. Any system that preserves the substance of riba while changing only its vocabulary has not crossed from the second category into the first. It has merely learned to spell it differently.

Where the Diagnosis Is Right, and Sharper Than Stated

Consider the example Mr Ismail gives of a company that needs financing to buy cotton. The bank "buys" cotton for ten million rupees and "sells" it to the company for eleven million payable in a year, or ten and a half million payable in six months, while, as he notes, the bank "doesn't actually buy the cotton or sell it to the company," and "there is, however, paperwork to pretend this has taken place." This is the cost-plus sale, Murabaha in its classical name, and his description of it is exact. When the commodity is not genuinely acquired, not genuinely held at the bank's risk, and not genuinely delivered, the sale exists on paper alone. Strip the paperwork away and what remains is money advanced and a larger sum returned by prior agreement. That residue has a name, and the name is not trade.

Mr Ismail then makes the observation that ought to end the debate by itself: the profit the bank earns on these structures, whether styled as Murabaha or Musharakah, tracks the State Bank's policy rate. If the conventional spread is two per cent above the policy rate, so is the "Islamic" one. If the policy rate rises mid-tenor, the "profit" rises with it. A return that is benchmarked to the central bank's interest rate, that moves when interest moves, and that is owed whether the venture prospers or fails, is interest in everything but its label. He notes the corollary as well: aside from default, "no Islamic bank has ever made a loss because its borrower was losing money." A financier who cannot lose when his partner loses is not a partner. He is a lender with a more elaborate contract.

This is the heart of it, and it is worth naming the mechanism precisely, because the classical jurists named it long ago. What Mr Ismail is describing is حِيَل (hiyal), legal stratagems: arrangements engineered to produce a forbidden outcome while satisfying the formal conditions of a permitted one. Ibn Qayyim al-Jawziyyah devoted long passages of I'lam al-Muwaqqi'in to exposing exactly this, the dressing of riba in the costume of sale. His teacher Ibn Taymiyyah went further, holding in his Majmu' al-Fatawa that the one who consumes riba through a stratagem commits a graver wrong than the one who consumes it openly, because he has added a mockery of the law to the transgression itself. The contemporary industry has not discovered a way around riba. It has rediscovered the hilah, and scaled it.

The scale is itself the indictment. The instruments that give Islamic finance its moral claim, مُشَارَكَة (Musharakah) and مُضَارَبَة (Mudarabah), the partnerships in which capital genuinely shares in profit and genuinely shares in loss, make up a small fraction of what the industry actually does. The overwhelming majority of financing is cost-plus debt. The model that was meant to be the exception has become the rule, and the model that was meant to be the rule has become the brochure.

The Vessel and the Substance

Mr Ismail closes with an analogy that I would not improve so much as press harder. He recalls that Islamic bankers defend their work by pointing to beef: the same beef is unlawful if the animal is slaughtered wrongly and lawful if slaughtered properly, so why should the same financing not become lawful when structured properly? He answers, correctly, that interest is not like beef but like wine: "It doesn't matter whether it is consumed out of a teacup or a wineglass; the prohibition stays."

The analogy is sound, and it can be turned to reveal more than he claims from it. The bankers' own comparison concedes the case against them. For with beef, the act that matters is performed on the substance: the slaughter changes the thing itself, the manner of the killing, the invocation, the draining of blood. The bankers, by contrast, have changed nothing in the substance. They have changed the vessel. They have moved the same guaranteed, time-priced, risk-free return from the cup labelled "interest" into the cup labelled "profit," and asked us to believe that the wine has become permitted because the glass is now etched with Arabic. The slaughter was never performed. Only the plating changed.

What the Borrower and the Depositor Are Owed

There is a second passage in Mr Ismail's essay that should trouble us more than it seems to trouble the industry. He observes that Islamic banks objected to paying their depositors a fixed minimum return, on the principled ground that a guaranteed return to a depositor would violate Islamic principles, and yet those same banks happily charge their borrowers a fixed return benchmarked to the policy rate. The result, he notes, is that the depositor in an Islamic bank often earns less than he would at a conventional bank, even as the Islamic bank earns more, so that the faithful end up "increasing people's cost for being good Muslims."

Read that sentence beside the Quran's warning to those who keep two measures. وَيْلٌ لِّلْمُطَفِّفِينَ (waylun lil-mutaffifeen), "Woe to those who give short measure" (Surah Al-Mutaffifin 83:1), those who "demand full measure when they receive, but give less when they give." An institution that invokes Islam to deny its depositor a fixed return, while invoking the market to impose a fixed return on its borrower, is keeping precisely the two measures the Surah condemns. It receives in full and it gives short, and it does so under the banner of the very faith whose first concern was honest measure.

Recall, too, the part of his opening verse that Mr Ismail was careful to quote and that the industry is careful to forget: وَإِن كَانَ ذُو عُسْرَةٍ فَنَظِرَةٌ إِلَىٰ مَيْسَرَةٍ (wa in kana dhoo 'usratin fa-naziratun ila maysarah), "and if the debtor is in straitened circumstances, then grant him respite until a time of ease" (Surah Al-Baqarah 2:280). The Quran's instinct, at the very moment it legislates on debt, is to protect the one who owes. Contrast this with the penal charge that Mr Ismail describes, levied on the late payer by Islamic and conventional banks alike. That the Islamic bank then donates the penalty to charity does not cure the matter; it discloses it. A charge that must be given away as soon as it is taken is a charge that should not have been taken. The Quran did not ask the creditor to penalise the struggling debtor and launder the proceeds. It asked him to wait.

The Courage That Is Missing

Why has the industry retreated so completely from partnership into disguised debt? The honest answer is not technical. It is dispositional. Genuine Musharakah requires the financier to accept an outcome he cannot guarantee in advance, to study the venture, to share its fate, to lose when it loses. Cost-plus debt requires none of this. It offers Shariah-shaped paperwork with commercial certainty, and the industry, given the choice, chose certainty.

But certainty bought this way is the abandonment of a principle that sits at the centre of the faith. The Quran permitted trade and forbade riba precisely because trade carries risk and riba removes it. To insist on a guaranteed return before deploying capital is, in the deepest sense, a failure of تَوَكُّل (tawakkul), of trust in Allah while taking meaningful action. The entrepreneur is a soldier on the field of commerce. He cannot demand a written guarantee of victory before he advances. The financier who will only fund him on the condition that he, the financier, can never be wounded, has not joined the campaign. He has sold insurance to the troops and called it solidarity.

This is what is lost when the profit rate is pinned to the policy rate and the downside is engineered away. Not merely a technicality of fiqh, but the entire moral content of the enterprise: the willingness to share in the real fortunes of real production, which is the only thing that ever distinguished the permitted from the forbidden.

Why Variable Profits Are Necessary but Not Sufficient

Mr Ismail ends with a prescription: "We must endeavour to bring Islamic banking closer to the tenets of Islam, variable profits and risk sharing." He is right. Every word of it is right, and it is more than most are willing to say. If the industry did only this, deployed its vast pool of zero-cost current-account deposits into genuine partnerships, shared profit as it actually materialised and loss as it actually fell, and let the borrower negotiate as the longest verse in the Quran (2:282) envisions rather than sign a standard form, it would be a transformation worth a generation's work.

And yet I must, with respect, say that this prescription is necessary but not sufficient, because it treats the contracts while leaving untouched the medium in which the contracts are written.

Suppose we achieved everything Mr Ismail asks. Suppose every Murabaha became a true Musharakah, every return became variable, every loss genuinely shared. All of it would still be denominated in a currency that is itself created as interest-bearing debt. Modern fiat money does not enter the world as a measure of value resting on something real. It enters as a loan, conjured at the moment of lending and extinguished at the moment of repayment, with interest owed on the whole of it from the first day. The base layer of the system is the very thing the faithful are straining, at the level of individual contracts, to avoid. We are filtering the water with great care while the well itself is the source of the contamination.

This is the question I have argued elsewhere that the Ummah has been slow to ask. When one examines fiat currency against the characteristics that the classical sources attach to the ribawi commodities, gold, silver, and the named foodstuffs, it does not in fact share them. It has no intrinsic value, it is not scarce, it is not a commodity; its worth exists by decree and erodes by design. That observation cuts in a direction many do not expect. It does not make fiat innocent. It makes it something the classical categories did not have to name, because it did not yet exist: a medium whose structural injustice, the silent transfer of wealth from the wage earner and the saver to the holder of assets and the issuer of credit, can exceed the injustice of the riba the jurists knew. The Quran's concern in forbidding riba was never the Arabic word. It was the reality of wealth growing without production and concentrating without limit, كَيْ لَا يَكُونَ دُولَةً بَيْنَ الْأَغْنِيَاءِ مِنكُمْ (kay la yakoona doolatan bayna al-aghniya'i minkum), "so that it does not become a thing circulating only among the rich among you" (Surah Al-Hashr 59:7). By that measure, the monetary base itself, and not only the banking products built upon it, stands accused.

So the work Mr Ismail calls for is real, and it should begin tomorrow. But we should undertake it knowing that perfecting the vessel of Islamic banking, while leaving the substance of the money it holds unexamined, is to win the argument we have been having and lose the one we have been avoiding.

First Principles, Not Compliance

What, then, is the alternative? It is to stop asking whether a product can be made to fit an inherited legal template, and to start asking whether its deep structure conforms to what the Quran and the Sunnah actually teach about wealth, risk, and justice. The first question produces the industry we have. The second produces something else.

In practice this means at least three things. It means that the test of an instrument must be its substance and not its certificate: remove the asset, the commodity, the trade steps, and ask what remains; if what remains is money in and more money out by prior agreement, the structure is riba whatever the paperwork says. This is the purpose of the primary-source diagnostic I have made freely available, Mizan, which traces every finding back to the verse, the hadith, or the classical text it rests on, so that a verdict can be checked rather than merely trusted. It means that the industry must find the courage to deploy genuine partnership capital and to accept genuine loss, measuring its success not by the size of its balance sheet but by whether it funds the hospital, the farm, and the school rather than only the creditworthy and the already secured. And it means, finally, attending to the money itself: a medium honest in its measure, stable across a working life, and not summoned into being as a debt that the unborn already owe.

None of this is a claim of completed knowledge, and none of it displaces the scholars whose interpretive authority remains where it has always been. It is an argument that the gap Mr Ismail has named so candidly will not be closed by better contracts alone, because the gap runs deeper than the contracts.

A Closing Question

I am grateful that a man of Mr Ismail's standing has said in public what so many concede only in private. The silver jubilee he anticipates next year is a fitting moment to ask the question his essay circles but does not quite land on. For twenty-five years we have laboured to ensure that our profit is not called interest. We have been less willing to ask whether, in the sight of the One who forbade riba not as a word but as an injustice, our profit has become anything other than interest, and whether the money we count it in was ever honest to begin with.

In whom, then, have our Islamic banks placed their trust: in the contract, or in the Creator?

Any errors in this are my own. Any clarity is from Allah alone.