There could not be two views that Islam prohibits
Riba. However, the real issue is transformation of centuries old
interest-based into a system which is fully compliant with Shariah.
The initial resistance against implementation of Riba-free system was
based on the fears that it did not capable of offering an efficient
and workable infrastructure. However, the global experience as well as
Pakistan's initiative has proved that Islamic financial system is
fully capable of replacing the conventional banking system. The only
issue is that the strength of Shariah-based system has to be conveyed
and understood in its true perspective.
The success made by Meezan Bank, Pakistan's first
bank offering full-fledged commercial banking services, proves at
least one point — the concept is workable and acceptable to the
clients. Though, the number of customers using this system may be
small at this time but it is growing at a very fast pace. As people
understand the nitty-gritty and develop faith in the system, the
quantum of assets under Islamic Banking could achieve new heights.
At the time of grant of second full-fledged Islamic
Banking license in Pakistan — Bank Islami Pakistan — Dr. Ishrat
Husain, Governor, State Bank of Pakistan said that during last year
the total assets of Islamic Banking institutions grew by 224% to Rs44
billion, and the deposits grew by 263% to Rs30.5 billion. This growth
can be attributed to the policy of the central bank, which encourages
the participation of reputed local and foreign investors in the field
of Islamic Banking.
With the issue of this license, the number of
Islamic banks has increased to three. These are Meezan Bank, Al-Baraka
Islamic Bank and Bank Islami Pakistan. In addition to these banks, 29
branches of 9 conventional banks are providing exclusive Islamic
Banking services to their customers in the country. The number of
designated branches is also on the rise. A point worth noting is that
Pakistan's central bank has virtually stopped issuing licenses for new
conventional banks and encouraging licenses for setting up of Islamic
banks, Islamic banking subsidiaries and Islamic banking branches.
Another factor indicating the diversification of
products and services is the flotation of Islamic mutual funds.
Technically there is no difference between an ordinary and an Islamic
mutual fund. The only difference is that Islamic mutual funds do not
invest in shares of those companies which drive bulk of their income
from Riba-based operations and share of those companies which are
involved in any business prohibited by Shariah. These funds do
buy/sell shares and draw income from dividend. The most heartening
point is that the number of such funds and value of asset under their
management is growing at very fast pace.
It goes without saying that Modarabas have a
history spread more than quarter of a century in Pakistan. It may not
be incorrect that Modarabas were the pioneer of Riba-free financial
system in Pakistan and these were established in the country when most
of the other Muslim countries did not follow such entities. It was a
very bold step on the part of the government to allow establishment of
Modarabas in the country, evolve regulatory framework and ensure their
smooth operations. Over the years these entities did face some
problems but proactive approach of the regulators has always helped in
overcoming the problems. The consultative approach is also helping in
the creation of more conducive working environment.
Initially an overwhelming number of Modarabas were
involved in core business of leasing and most of their clients
belonged to corporate sector. The situation has changed to a large
extent lately. Modarabas are once again trying to cater to the needs
of medium and small enterprises. The other positive development is
that some specific purpose Modarabas have been floated. The other
developments include investment in equities and Murabaha and Musharika
Another milestone achieved has been flotation of
Shariah-based term finance certificates by Al-Zamin Leasing Modaraba.
The positive point was that public offer was oversubscribed. However,
it a little disappointing that since then no other Modarabas has made
such an effort. It is often said that Modarabas face resource
mobilization constraint. Successful flotation of Shariah-based TFCS
opened a window, but it has not been utilized properly. One may say
that in the declining interest environment businesses were reluctant
to lock the funds at a higher rate. According to the new Monetary
Policy Statement, the central bank is making efforts to contain rate
of inflation in the country by raising interest rates. Therefore, the
situation offers an opportunity once again to lock funds in rising
interest rates scenario.
Recapitulation of these facts/developments is to
show that products/services confirming to Shariah enjoy a latent
demand. The level of acceptance is also moderate but the lacking
factor is appropriate and timely approach for marketing of these
products and services. A vast majority of investors is looking for
investment opportunity, which can yield Riba-free income. However,
they do not wish to assume any unknown risk and also seek security of
One of the common fears is that if the return is
based on profit and loss sharing basis, it is not possible to quantify
and compare with conventional products. However, many analysts are of
the view that no financial institutions would be interested in
entering into any agreement which could possibly lead to losses. On
top of this, best efforts are made to also hedge the risk. Therefore,
in most of the cases the probability to incurring loss is negligible.
On of the positive points is that there is no
pressure on the central bank or the financial institutions to bid
farewell to the conventional interest-based banking system. Now all
the efforts are aimed at creating an alternate system, which runs in
parallel with conventional banking system. The objective is to offer a
credible alternate system and let the masses make their own choice.
The strategy is paying off, which is evident from the growing deposits
and advances by banks operating according to Shariah.
There could not be two opinions about Riba. Once it
has been prohibited by Islam, its use in any form is against the
Shariah. However, the two opposite points of view needs to be explored
at length. One school of thought believes that the present system does
not fall under the connotation of Riba and other group had an opposite
point of view. Therefore, the issue has to be discussed at length
because each group has its own rationalization.
Yet anther positive factor is that Pakistan is not
alone in this endeavor. The efforts are going on in almost all the
Muslim countries to eliminate the element of Riba from economic
system. While some of the countries may not have made any significant
achievement, others are way ahead. Therefore, efforts should be to
pool the resources and learn from each others experience. The effort
should be to move ahead from the point which has been achieved
Initially, Islamic finance as a movement made
strides on two fronts. First, individual financial institutions
started operating in many countries in parallel with the conventional
banks. Second, efforts were made to pool the resources/experiences
under the lead of Islamic Development Bank. As the Islamic financial
and business activities have become more developed as well as global
feature, there is a need for effective liquidity management and
enhance coordination among the Islamic financial institutions. The
establishment of Liquidity Management Centre in Bahrain in 2002 was a
Initially, Islamic finance movement was facing some
serious problems. These were the outcome of difference between theory
and practice. Since the Islamic financial system was considered a
threat to conventional banking system, deliberate effort by some
quarters was also made to highlight the weaknesses of the emerging
system. However, very few critic of Islamic system acknowledge the
fact that the history of conventional system was spread over
centuries. The system has improved only after encountering serious
problems. But at no stage no one termed the conventional system
'unworkable'. All the efforts made were aimed at improving the system.
Therefore, the proponents of Islamic system should also try to remove
all those weaknesses which are being pointed out by the critics.
In this regard, efforts of Pakistan's central bank
must be appreciated. With the help of Shariah scholars, the SBP has
prepared various proto type agreements and placed them on its website.
To further facilitate the banks, the SBP has also established Islamic
Banking Department and also hired the services of Shariah scholars.
Commercial banks offering Islamic Banking have also constituted their
Shariah Boards. All these efforts have been made to facilitate
development of Islamic Banking in the country.
Yet another effort of the regulators needs specific
mention, establishment of Religious Board for the Modaraba sector.
This Board was conspicuous for its absence for around three years. It
was often said that in the absence of this Board flotation of new
Modarabas had virtually come to stand and still. At one stage, the
regulators were of the view that there was no need for this Board.
However, the sector was of the view that the Board was need of the
time because it is not possible for each Modaraba to have its own
Board. With the constitution of this Board there are reports that at
least four new Modarabas will be floated shortly.
One of the most recent developments is that rules
for flotation and management of Takaful (Insurance companies based on
Shariah) have been prepared. This will pave the way for the
establishment of Takaful entities. This will open another chapter in
the history of Islamization of financial systems in the country. Some
sponsors have already expressed their interest in the flotation of
such entities and now the time has come to make this dream come true.
The story will not be complete without mentioning
the flotation of Sukuk Bonds by the Government of Pakistan. This
flotation hit the headlines as the government successfully floated
Bonds worth US$ 600 million. Initially, the plan was to float Bonds
worth half a billion dollars only but the response encouraged the
government to accept higher bids. The positive point was that these
Bonds have been floated at very competitive coupon rate.
Following the foot steps of the government, WAPDA
is also planning to float Rs8 billion Sukuk Bonds in the domestic
market. If WAPDA succeed in achieving the target it would be its
largest Bond issue. It is expected that it would also pave the way for
the flotation of such bonds by the corporate sector. Till recently,
the corporate sector has relied mostly on the interest-based term
However, it is yet to be seen how the government
and corporate entities are going to lock their future fund
requirements in the rising interest rates scenario. Most of the
analysts are of the view that in the rising interest rates scenario it
has become all the more important for the government and the corporate
sector to mobilize extra funds expeditiously to contain their
The response to Islamization of financial system in
Pakistan has been overwhelming. Saying this, it is also important to
say that a lot more needs to done. Whatever success has been achieved
so far is a drop in the ocean. The market size is enormous but also
enjoys huge growth potential. It is only up to the players and the
regulators to create the enabling environment and enjoy the fruits.
It is also necessary to reiterate that there is no
need to reinvest the wheel. A lot of work has been done globally and
Pakistan must take its advantage. Not only the work is going one in
the Muslim countries but institutions like Euromoney are busy in
creating market awareness. In this regard, the work of Islamic Finance
and Communication Services must also be looked at. They compile and
disseminate the latest information. It will not be wrong to say that
they are a preferred source of information to know the latest
development around the globe.
Saying this it is also necessary to point out that
local players should come up with both the asset and liability
products to suit the market needs. One such move has been flotation of
Islamic Mutual Funds. The point to be known to all is that most of
these funds have been floated by those who are in the business of
conventional banking business. This clearly shows that the
conventional banks have realized the potential and there to grab the
It is also important to point out that nearly two
dozen domestic and foreign banks are operating in Pakistan. As against
this only one Islamic bank offers full-fledged commercial banking
services. Another institution has been granted Islamic banking
license. And only six banks have established designated Islamic
banking branches. The number of such branches is too small keeping in
view the total number of bank branches in the country.
It was said in the past that banks do not offer
Islamic Banking facilities in the country. Now it is the time for the
critics to review their performance and also suggest the measures to
further improve the working environment. Raising the slogan that Riba
is prohibited by Islam does not serve the purpose. The effort should
be to ensure transformation from conventional interest-based
operations to Riba-free environment.
The beginning has been made and now it is
responsibility of all the stakeholders to make Islamic Banking
institutions stronger and prove the critics wrong. The critics have
been saying that Islamic banking is not a workable proposal.
Having ushered in Islamic banking in the country,
now greater responsibility is on the shoulders of players as well as
the regulators to get ready to eliminate the element of Riba from the
economy. Over the years, Modaraba, Musharika and Murabaha arrangements
have begin to become a norm and the effort must continue.
It is the responsibility of all the Muslims to
ensure smooth transformation of the economic system. Regulators have
created the enabling environment and now it is the responsibility of
all to strengthen it further.