Pro-people innovative schemes can help expand Islamic banking in Pakistan
Growth of Shariah-compliant investment funds in Pakistan is helping fuel demand for sukuk, which could encourage other countries trying to deepen their Islamic capital markets.
Pakistan’s Islamic banks lag their conventional peers, holding around 13 percent of total deposits, while Islamic mutual funds and private pensions have a far greater market share. Islamic mutual funds held 242.7 billion rupees ($2.3 billion) in assets as of December, or 37 percent of the total, official statistics show, sources told PAGE.
According to them, almost two-thirds of assets in the country’s voluntary pension system (VPS) are now managed under Islamic principles. All 10 VPS managers offer Islamic pension products, worth a combined 14.5 billion rupees, or 63 percent of total VPS assets with the largest VPS product being Shariah-compliant.
A senior banker told this scribe that attractive yields, tax exemptions and greater flexibility in choosing external managers have made VPS products popular.
According to him, mutual funds, both fixed income as well as equity funds, have become big time investors in existing and new sukuk issues taking place because of the huge assets under management under their disposal.
On the other hand, although Islamic banking has grown fast in the last decade in Pakistan, debate is on as to whether or not this banking model is in accordance with true spirit of Islamic teachings.
The practice of riba leads to unprecedented social and economic inequalities which create an unjust society. Islamic scholars believe that the Islamic bank does not fulfill the qualification of ownership required to enter into a ba’ah with the buyer (in this case end-user of the car). The bank is not a seller in principle, rather a supplier of the car as a middleman and making profit in a multiplier exchange mode from a product, which is produced by another party in the first place. Now this Islamic bank imposes all sorts of conditionalities to secure this so-called modaraba contract with the car buyer — in fact a consumer of the car, not a worker as per Islamic framework. This includes car price, car rent (another term for mark-up), takaful (name change for insurance), processing fee, binding contract and capping on further usage of the car. Is this modaraba transaction fair to the parties, free of multiplier mode of economic exchange, sharing liabilities and benefits? The answer would be an emphatic ‘no’.
An economic transaction would be considered riba-free if it avoids multiplier mode of moneymaking, profit-taking and capital-creation.
According to Islamic economic rationality, labor is mightier than capital because it creates economic value. On the contrary, Anglo-Saxon liberal economics rests on the reverse proposition (adhered to by banks in Pakistan, both ‘Islamic’ and ‘modern’), which holds that capital creates value and therefore the worker must lay in bondage to capitalistic domination. The vicious cycle of capital accumulation is perpetuated by multiplier mode of economic exchange. No sector of the economy is exempt from this multiplier effect and hence infested with all the attributes of riba.
In Pakistan, Islamic banking was introduced in the 1970s but for most people, it remains a new phenomenon: two-thirds of Islamic banking clients have had such a relationship for fewer than three years.
Conventional banks have been able to retain clients and several plan to offer Islamic financial products, but in doing so they will have to ensure a clear segregation of the two businesses. However, most of the financial banks are also dedicated Islamic banking desks/ braches.
On the other hand, the government was pursuing appropriate policies for the promotion of Islamic banking and finance in the country.
Sources said it was encouraging that the share of Islamic banking in overall banking sector was steadily growing, which showed the tendency of the public to use Shariah-based banking system and made it incumbent upon the relevant quarters to further bring improvement in it.
However, banks dealing in Islamic finance need to come up with micro-finance schemes in various sectors including agriculture for poverty alleviation and just distribution of wealth. There is also need for making the banking system more vibrant in the wake of China Pakistan Economic Corridor (CPEC) and a number of energy projects currently being worked in the country.
Nevertheless, there is a vast scope for Islamic banking in Pakistan and the Islamic Index in Pakistan Stock Exchange is showing a positive impact on the stock exchange. There are numerous opportunities of investment in Islamic banking in Pakistan. The need is to introduce pro-people innovative schemes.
As far as growth of Islamic banking in Pakistan, a former senior banker told this scribe that Islamic banking is not growing as per expectations due to various reasons. One major reason is that conventional banks, which although started Islamic banking but their main focus is on conventional banking. Unless, innovative banking products are introduced by the Islamic banks, the goal of real growth of Islamic banking cannot be achieved.
When asked about the major risks associated with the CPEC projects, he said there are several issues with the China Pakistan Economic Corridor (CPEC) project. For one, transparency and accountability have been sacrificed because details of the projects have not been shared; there is no public bidding or even announcement. Clearly, the intention is that the major proportion of these loans will be channeled back to China to benefit only Chinese companies.