Abstract:
The Islamic financial system has witnessed a rapid growth in its recognition, as an alternative to
the conventional financial system, in the recent past. The number of Islamic financial institutions
establishments, is also on a rise and depicts a very promising future for Islamic financial system.
The magnitude of operations of Islamic financial institutions has reached global level and they
are directly competing with and giving a very hard time to conventional institutions.
Islamic financial system is still in its evolutionary stage and is facing a lot of criticism regarding
its practices. The use of market interest rate, by the Islamic financial institutions, for pricing their
products and services, is the biggest criticism on them as interest is forbidden in Islam. The
challenge, currently faced by Islamic financial institutions is, how to counter this criticism.
The issue of benchmarking encompasses the factors of price and profit. There is not an adequate
volume of available literature that can provide an explanation of Islam’s stance on these issues,
in reference to the current era of financial practices.
This study is an attempt to enhance the body of knowledge regarding these issues and provides
an answer to the biggest criticism on Islamic financial institutions. In persuasion of this
objective, the study conducted, is a combination of qualitative and quantitative analysis.
At the qualitative front, available literature is analyzed by conducting interviews with Islamic
scholars and Islamic bankers in order to develop an understanding of Islam’s point of view on
the issues of price and profit and whether the application of benchmarking is validated from the
Shariah’s perspective or not.
In the light of available literature and results from qualitative analysis, a solution is being
extended, in the form of a quantitative model that can be used to establish, an interest free
benchmark for Islamic financial institutions as an alternative to market interest rate.
