ABSTRACT
Islamic finance is ethical in nature, popular on profit sharing and prohibitions of interest among other vices and develops as a distinct financial intermediation alternative based on Sharī ͑ah. However, the fact that it replicates conventional finance parameters in certain operations leaves something to be desired. Benchmarking Islamic financing against conventional interest rates is one such operation. The interest rate benchmark refers to the rate at which interest is charged against different types of credit facilities. Given the nature of Islamic finance, the use of the conventional benchmark to determine the Islamic financing rate has generated argument and counter-argument among Islamic scholars towards a distinct Sharī ͑ah version. In this study, being library-based, a qualitative method was used whereby provisions of primary Sharī ͑ah sources – the Qur ͗ān and ḥadīths – in addition to regulatory instruments, were examined in expounding the nature of Islamic finance with regard to benchmarking. Also, content analysis was made of relevant published secondary sources including journal articles, books, and web resources that embody scholarly viewpoints on the issue while presenting discussions thereon. It is discovered that developing a Sharī ͑ah-compliant interbank market would be difficult as the size and condition of the Islamic banking industry in many jurisdictions could not justify the creation of an Islamic financing benchmark. This is a constraint occasioned by absence of an Islamic monetary system, which renders the Sharī ͑ah-compliant benchmark so far produced largely unworkable. It is also realized that, in addition to an Islamic financial system, an Islamic monetary system is imperative for the establishment and workability of Islamic benchmark in Islamic finance jurisdictions. From legal and compliance perspective, benchmarking is an economic system-wide function that needs to be based on backing and sanction of regulators under whose supervision Islamic financial institutions operates. Thus, reforms towards a profit rate-based Islamic financial benchmarking were accordingly recommended.
