Islamic Banking and the Architecture of Modern Money: A Structural Critique of Debt-Based Monetary Systems

Abstract

       This article critically examines the prevailing discourse on Islamic banking in Pakistan, focusing on the conceptual foundations, operational practices, and theoretical assumptions underlying the system. The study distinguishes between two broad groups of critics: those who accept the possibility of “Islamizing” conventional banking and those who consider banking intrinsically non-Islamic and impervious to reform. Drawing upon the works of Maulana Taqi Usmani, the article analyzes the neoclassical economic assumptions embedded in the proponents’ view of banking, including the notion that banks function primarily as financial intermediaries facilitating savings and investment, and that fiat money and fractional reserve banking are natural and neutral mechanisms.  The study highlights inherent contradictions in the proponents’ framework, such as the simultaneous claim that banks merely exchange money while also creating it, and critiques the oversimplified understanding of money, banking, and macroeconomic equilibrium. The paper further explores the historical evolution of banking, the possibilities and limitations of “Islamizing” banking practices, and the implications of fractional reserve banking for money creation and economic stability. By situating Islamic banking within the broader economic and jurisprudential context, the study aims to provide a nuanced understanding of its theoretical foundations, operational challenges, and the feasibility of aligning modern banking practices with Islamic principles.