TAKING ISLAMIC BANKING BEYOND CORPORATES
COST OF FUNDS IS STILL UNAFFORDABLE FOR THE SMALLER BORROWERS
SHABBIR H. KAZMI
Sep 10 - 16, 2012
A closer look at ten years history of Islamic finance in Pakistan clearly suggests that Islamic banking has achieved remarkable growth. However, it is also felt that its main beneficiaries have been larger business entities and their employees. Little has been achieved in lending to farmers, small and medium enterprises and especially women entrepreneurs. Following the footprints of conventional banking, Islamic banks are also keen on 'collateral based' lending rather than on the basis of 'business plan'. Over the years Islamic banks have attained reasonable strength and time has come to serve those which have been ignored by the conventional banks in the past.
Ateeq-ur-Rehman, Advisor, Banking/ Insurance, Karachi Chamber of Commerce and Industry (KCCI) lately said, "Islamic Banking in Pakistan is as such doing nothing for a common man, except borrowing heavy deposits and investing in government bonds (Ijara Sukuk)î. He demanded, "Islamic Banking has attained maturity and now it should focus on lending to micro enterprises, small and medium enterprises and extending loans to the farmers." He opined, "Our system is supporting elites by squeezing poor , making life difficult for a common man, therefore Islamic banks should concentrate on self financing projects for the unemployed, down trodden, underprivileged , discouraged and demoralized masses though "Qard-e-Hasna, which should be without collateral and interest."
This is an interesting debate and it is necessary to listen to various points of view. However, one point must be kept in mind that all the institutions offering Shariah compliant products/services are commercial enterprise and not the charities. When they solicit deposit from general public they also have to offer rate of return which is close to the rate offered by conventional enterprises. Those demanding 'Qard-e-Hasna' are suggesting cost free fund that is not a commercially viable proposal. This job can be done best by NGOs, which operate primarily for the welfare of people and earning profit is not the driving motive.
Some of the critics say bluntly, "Present Islamic banking is not Shariah compliant". While one must respect Shariah experts it must be kept in mind that issuing such statements adds to the confusion of general public rather than providing any solution. Now State Bank of Pakistan (SBP) has a full-fledged Islamic Banking Department and even the commercial banks have Shariah Boards. It must also be remembered that when Islamic banking was introduced in Pakistan the objective was to give people an alternative solution and allow them to make their own choice. Now SBP is also in touch with all the leading entities working for the promotion of Islamic banking around the globe.
Kazi Muktadir, Deputy Governor, SBP speaking at a recently held Road Show by Islamic Finance News (IFN) of Malaysia said "The central bank is developing a comprehensive framework to further strengthen the Shariah governance in Islamic banking institutions (IBIs)". He added that the framework will explicitly define the roles and responsibilities of different organs of IBIs including the board of directors, Shariah advisors, committees and executive management for ensuring Shariah compliance.
He also said a comprehensive profit distribution and pool management framework, in consultation with the industry, had already been developed and was likely to be issued shortly. Growing from scratch in 2002 the Islamic banking now constituted over 8% of the banking system with a network of 964 branches and over 500 windows across the country. It is likely to increase its share to 15 per cent over the next five years. "Encouragingly, the sustained growth of Islamic banking has also started catalyzing growth and development of Islamic capital markets, Mutual funds and Takaful companies etc. Presently, we have five Takaful operators, about 30 Islamic mutual funds", said Muktadir.
Those still apprehensive of the outlook of Islamic finance in Pakistan must take into account the milestones achieved. The country's Islamic banking industry includes five full-fledged Islamic banks and five Takaful (Islamic insurance) operators. Besides that 12 conventional banks are offering services through Islamic windows. Securities and Exchange Commission of Pakistan (SECP) has recently issued new Takaful rules allowing conventional insurance companies to open up 'Takaful Windows. However, this prompted a legal challenge from Takaful operators and it is unclear when the new rules will actually be implemented.
Experts are of the opinion that if conventional banks are allowed to open up designated Islamic banking branches, why should there be any restriction on conventional insurance companies to establish Takaful windows. Takaful operators were given ample time to overcome teething problems and if they have not been able to create a niche market, conventional companies should not be denies the same. Even the logic that allowing conventional companies to open up Takaful windows could offend foreign investors does not carry much weight.
It is also necessary to mention that the policies followed by the Government of Pakistan (GoP) support IBIs. Over the years Modarabas have enjoyed tax exemption, if they distribute 90% of the profit earned in a year. Takaful operators can also solicit some incentives with the GoP but denying the conventional insurance companies the right to open Takaful windows seems extremely bias.
It is encouraging that the SBP is working on a five-year (2013-17) strategic plan for the Islamic banking industry that will move the industry to the next level of growth. However, this plan will remain meaningless without the active participation of the players. It is a blessing that Pakistan is in close contact with global players as well as the regulators. Progress on industry can be ensured by removing the irritants and improving the regulatory regime.
Awareness has to be created among both the general public and the employees of IBIs by remove the ambiguities. While general public has many questions to be answered Shariah scholars have even the greater responsibility. Some analysts fear that certain elements within Pakistan are not happy with the entire process of Islamization of economic system. They have a mindset that following Shariah is not possible when it comes to financial transactions, especially with the multilateral institutions.