"PHILOSOPHY OF ISLAMIC BANKING"
A session with Mr. Pervaiz Saeed, Business Development Head, Al Meezan Bank
By Ahmed Ali Siddiqui, IBA Karachi
Oct 02 - 08, 2000
A Session on Philosophy of Islamic Banking was held on Thursday September 15, 2000 at IBA City Campus. The session was part of the course "Business Labor Laws" conducted by Mr. Kamil Shahbazker, ex-country manager of Philips Pakistan. The speaker on this occasion was Mr. Pervaiz Saeed, Business Development Head, Al Meezan Investment Bank. Mr. Pervaiz Saeed did his BBA from the Institute of Business Administration in 1977, after which he went to Ohio for his MBA. He is an experienced banker and had worked with Citibank, he was also the Chief Executive of Johnson & Johnson Pakistan. Moreover, Mr. Saeed is working in the area of Islamic Banking from past 2-3 years.
Introduction: During his presentation Mr. Pervaiz Saeed explained the basic concept behind Islamic Banking, importance of Islamic Financial & Banking system, Global view of Islamic Banking and highlighted its benefits for any economy. He also discussed the steps taken by the State Bank of Pakistan for elimination of Interest from the economy and real hindrances in implementation of Islamic Banking in Pakistan.
Islamic Banking: Explaining the basis of Interest based banking he said that traditional banking is based on money and price of money is interest. Therefore, interest is the profit of the bank. While in Islamic Banking the subject matter is economy and profits are earned through participation in real economic activities. In Islamic Banking, the bank earns profit/makes loss by selling goods and services. Whether it makes a profit or loss, the depositors of money equally share it. On the other hand in Interest-based banking, whether the bank makes a profit or incurs a loss, it is not a concern of the depositor. Each month they simply get a percentage of the capital they invested in the bank.
It is also interested to note that Interest is considered illegal not only in Islam but also in all the major religions of the past like Christianity and Jews. The reason behind this is Interest based system is inherently unjust and exploitative. Hence no social and Economic justice is possible in interest based economy. It concentrates the wealth of the nation in the hands of a few strong people, which hinders the development of a just economic model.
Mr. Pervaiz also pointed out that in Islam Riba is the worst sin after "shirk". And Quran has declared an open war against those who are involved in dealings based on Interest. Answering to some confusions about the interest-free system he said that if such a system is not feasible than Allah and the Holy Prophet (S.A.W) should not have declared interest haram and such strong punishments were not proposed for those involved in interest based transactions.
Drawbacks of Interest based system: Describing the drawbacks of interest based system he said that interest results in:
1. An inequitable distribution of wealth. Even in the G8 summit it was mentioned that currently the wealth of the world is unequally distributed. Now for an economy to flourish there should be an equal distribution of this stealth.
2. Another point to be noted is that demand and supply of money are strongly linked. Interest breaks this link. It allows you to manage the demand and supply of money outside the economy. The person who has invested gets profits without having to indulge in any economic activity.
3. Interest-based banking allows the diversion of resources from productivity.
4. Makes an economy inherently unstable.
5. Legitimize deception as people engage in the process of free riding, that is. Sitting back home and doing nothing.
6. It creates a virtual economy. This means that there is no actual cash flow. Money just stays in one place, but the cash flow is only mentioned for recording purposes.
7. At Micro-Level, an interest-based transaction has to be a win-lose situation. If one party gains the other has to lose. Either the bank loses or the depositor loses. Say if bank earns a profit, he has to share it equally with the depositor, irrespective of the depositor's involvement in the profit earning process. This has always been a cause of all the wars.
International Overview: Giving the International Overview about Islamic Banking Mr. Saeed said that 42 countries have Islamic Banking products running parallel with their interest-based products. Out of this 27 are Muslim countries and 15 are Non-Muslim countries. 6 foreign market leader banks also have Islamic Banking Products. Major foreign banks have Islamic windows that include Citibank, ANZ, JP Morgan, and HSBC. At this point it is interesting to note that must of these banks operate in Pakistan and are not willing to open Islamic banking window in Pakistan. Current volume of Islamic banking market is around 200 billion US Dollars and it is the fastest growing banking sector in the world.
Talking about the local scenario the distinguished speaker pointed out that.
1. Supreme Court has passed a law in favour legalizing and enforcing Islamic Banking in Pakistan which would be implemented by June 2001.
2. All benchmarks laid down by Supreme Court are being followed.
3. A commission is working at SBP for transformation of current system to interest free system.
Readiness of Pakistani Market:
Talking about the potential of Islamic Banking in Pakistan he said according to the research carried out to study the feasibility of Islamic Banking in Pakistan:
There is a strong need for Riba free banking.
Rate of Return is not the deciding factor.
People perceive a number of emotional benefits.
People want to get rid of the guilt of being involved in Interest-based banking.
It is a general belief that Islamic Banking would help stabilize the economy of the country.
Major issues of Islamic Banking
According to the speaker following are the major challenges for implementing Islamic Banking:
Awareness should be created about Islamic banking rules and principles.
Banks need to understand Islamic Banking and they need to device ways to minimize risk against fraud and deception.
It is a paradigm shift for the Central Bank and the Govt. of Pakistan. Currently they just manage the supply and demand of money but later on they will have to concentrate on the economy.
It's not a legal but a change management issue, cause it can not be run properly if people do not change their opinion/correct their opinion about Islamic Banking.
Change in attitude
Another major issue pointed out by Mr. Saeed is that we will have to change our attitude.
He rightly pointed out that:
We believe the newspapers but question the Quran.
We all want to go to heaven provided we don't have to do anything for it.
Even the Holy Quran says about our behaviour that some people accept only a part of the book, which suits their purpose, but ignore the remaining and those involved in such acts will be humiliated in this world as well as on the Day of Judgment.
The presentation basically concludes that Islamic Banking is a reality and is practiced in different parts of the world by many banks and financial institutes. We should welcome the Supreme Court decision and take it as an opportunity to shift toward the Interest-free system of banking. The banking sector should take this issue seriously and should work sincerely to align their operations according to the Supreme Court decision. This will benefit our country in recovering from the mess created by Interest and will improve our economic condition. Moreover, it is also our religious and moral duty as well to establish a Islamic economic system.
Ahmed Ali Siddiqui, Nasir Hussain, Saad Hussain & Imran Majid of CCS, IBA, organized the session.
IBA Seminar on Islamic Banking in Pakistan
IBA has a tradition of organizing seminars on current topics of National Importance. Keeping up with this tradition, the BITS Club and the MFS Students forum of IBA jointly organized a seminar on the topic of Islamic Banking on Monday, September 25, 2000. Islamic Banking has gained importance due to the Supreme Court decision against Riba. According to this decision, all banks and financial institutes in Pakistan are required to change over to interest-free transactions. Farhan Cutlerywala the seminar coordinator of MFS welcomed the distinguished guests and highlighted the purpose of the seminar.
Mr. Pervez Said, Business Development Head, Al Meezan Investment Banks spoke on the occasion. Mr. Pervez Said is an experienced banker and had worked with Citibank, he was also the Chief Executive of Johnson & Johnson Pakistan. Moreover, Mr. Said is working in the area of Islamic Banking from past 2-3 years.
In his presentation Mr. Pervez Said explained philosophy of Islamic Banking in an historical perspective and highlighted economic development before and after Islam, the drawbacks of Interest based banking and benefits of a interest free system. He also discussed the steps taken by the SBP for elimination of Interest from the economy. He also highlighted the fact that interest free system was pre-dominant in the Islamic World upto the 18th century.
Differentiating between Interest based banking & Islamic Banking, he said that traditional banking is based on money and price of money is interest. Therefore, interest is the profit of the bank. While in Islamic Banking the subject matter is economy and profits are earned through participation in real economic activities.
In Islamic Banking, the bank earns profit/makes loss by selling goods and services. Whether it makes a profit or loss, the depositors of money equally share it. On the other hand in Interest-based banking, whether the bank makes a profit or incurs a loss, it is not a concern of the depositor. Each month they simply get a percentage of the capital they invested in the bank.
Islamic Banking in Pakistan
Talking about the local scenario the distinguished speaker pointed out that the Supreme Court has passed a historical decision against Riba and has ordered to implement in Pakistan by June 2001. Uptill now the Govt. of Pakistan has followed all benchmarks laid down by Supreme Court and a high level commission is working at SBP for transformation of current system to interest free system.
Mr. Pervez Said pointed out that implementing Islamic Banking system is a change management issue and we need to change our attitude from opposing the change to becoming the agent of change, which would be to our own betterment.
In the end, Mr. Zaheeruddin Asif, faculty member and student councilor IBA, presented a shield to the distinguished speaker. The Chief Organizer of the event Ahmed Ali Siddiqui thanked the speaker for giving an enlightening presentation. The organizers of the event include Irtiza Rizvi VP-MFS Student forum, Faraz-ud-din Haider, Sanam Kohati, Zubair Naseer, Imran Yousuf and Mahreen Yousuf.