Financial system is in transition
By AMANULLAH BASHAR
Sep 10 - 16, 2001
Under the ruling of the Federal Shariah Court, the financial experts are endeavouring to switch over from the existing interest based system to the Ribah free financial system in Pakistan.
Hence, the financial system which, supplies fuel to any economy is passing through a critical phase of transition, the uphill task however needed to be accomplished at the earliest to save the system from uncertainties which may result to delays in implementation of decisions.
The transformation of government's financial operations, mainly its borrowing into a mould of Islamic system has been termed as a formidable challenge by the Federal Finance Minister Shaukat Aziz.
Speaking at an international seminar on Islamic Banking recently in Karachi, the minister declared that House Building Finance Corporation has been selected as the first institution to transform all its operations in compliance with Shariah in next few months.
It may be mentioned that disbursement of house building loans has been suspended by HBFC for over a year, which has badly affected the growth of housing and construction sector in Pakistan.
The finance minister has pointed out three challenges in this transformation, i.e. how to protect the existing contracts and obligations, how to draw up a legal framework and the issue of government financing.
The minister spelt out difficulties being faced in replacing interest as the tool of monetary and financial operation and added that so far not many interest free products have been developed and minimum risk guaranteeing systems are not in place, he observed.
The government is the biggest borrowers with Rs1.7 trillion liability. It is also involved in many financial operations for which a mechanism has to set in place to make the process risk free.
At present the work to transform economy in lines of Islamic system is taking place at three places. One is the Commission in the SBP, which has given two interim reports, which are under consideration of the government.
Another Task Force headed by a senior civil servant is also working in the Finance Ministry to evolve systems that are risk free and is addressing the issue of government's financial operations.
Another team of experts headed by Dr. Mahmud Ghazi also looking into the relevant laws to make suitable amendments and prepare a legal framework.
He said that a draft law is reported to have been prepared which is being given final shape. The minister termed the Islamic Banking as a global opportunity for bankers in Pakistan where much headway can be made. He said that government is in touch with brotherly Muslim countries where a lot of work is being done to practice Islamic financial system. He said basic objective of transformation of financial system into Islamic mould is to create confidence among the investors both in Pakistan and outside.
Dr. Ishrat Hussain, Governor State Bank of Pakistan (SBP) who also spoke on the occasion said that there is no model of practicing the entire Islamic financial system before the government hence it is facing the difficulty in transformation. The SBP governor said that there are examples of certain Muslim countries and institutions practicing the Islamic system in piecemeal of certain aspects of Islamic finance system but there is no model worth the name adopted for the Islamic financial system as a whole.
He particularly spoke of the difficulties of putting Shariah into practice in case of the government's financial operations which he pointed out would need a lot of innovations and research to find solutions of many problems that confront officials.
For example, he said, the government through a variety of debts and public lending is now financing the deficit of the government budget. But how would you do this in an Islamic system to mob up finances when there are no assets?
Nonetheless he said that government was striving to find answers to many questions that arise in implementation of Islamic principles in operation of a financial system. He also spelt out the work being done by three task forces working in different directions but with a sole purpose to find solutions of the problems that ought to arise in transformation of the financial system.
In other context Dr. Ishrat said that many of those who have defaulted on payment of their banks' loans have become staunch supporters of Islamic financial system. He warned that such elements have no place in the Islamic financial system and those who think they would be able to escape the wrath of law by taking shelter under Islamic system are sadly mistaken.
He said that the government's strategy was to move gradually towards transformation of Islamic financial system without disrupting the existing system.
Islamic financial system is based on ethical values where loan defaulters have no place, he said.
He said that any bank or financial institution that has some innovative product to offer to the investors or general public can seek SBP permission to open a window for Islamic banking or even a bank we are ready to give permission to such banks, he said.