Parliament should frame laws for Islamic Banking'

By Ashraf Khan
Aug 15 - 21, 2005

Dr Shahid Hasan Siddiqui is Chairman of Research Institute of Islamic Banking and Finance. Being a veteran economist and chief of the institute he has an insight of the issues pertaining to Islamic mode of banking in Pakistan.

In an interview with PAGE, he came out critically on the officially defined Islamic banking system and urged for its implementation through an act of the parliament.

PAGE: What's your definition of Islamic banking?

DR. SIDDIQUI: Simply, interest is prohibited in Islam as it leads to injustices and Islam is against all forms of injustices and pleads an economic system that aims to secure extensive scoio-economic justice.

PAGE: So how do you see the Islamic banking system in Pakistan as well as in the rest of the world?

DR. SIDDIQUI: The system designed under the banner of Islamic banking worldwide, including Pakistan, has failed to achieve the objectives of prohibition of Riba as laid down in the Verse 279 of Surah-e-Baqrah, which says: "deal not unjustly". The reason is that Islamic banks are following the benchmarks of interest-based banks and are not really adopting the true modes of financing, based on profit and loss sharing i.e. Musharaka and Mudaraba. The Islamic banks have resorted to large scale financing on Murahaba and Ijara, etc. Like interest-based banks, Islamic banks assume no responsibility for the operational losses sustained by the entrepreneur availing financing from Islamic bank. The West is closely monitoring the performance and operation of Islamic banks worldwide and many analysts see this system as a mere change of name.

PAGE: How do they see the system?

DR. SIDDIQUI: The international magazine Newsweek sometimes back wrote, "Purists think schemes like Malaysia's housing loans," for instance, violates the spirit of Sharia banking. The magazine comments came after the writer went through one of my write-ups. It must be kept in view that the Islamisation of the banking system is a part of the overall Islamic value system and is not merely refraining from interest-based transactions. "Siddiqui and other strict Muslims.... reject the weight of hand accounting that allows institutions to claim that they are not charging interest."

Shaikh al Azhar, in a verdict in 2003, said that the pre-determined profit at fixed rates given by banks to their depositors or investors is not Riba and hence not prohibited in Islam. It is the prime responsibility of Muslim scholars to say in clear words that this not correct.

PAGE: Is it not confusing for a common believer?

DR. SIDDIQUI: It is unfortunately a fact that the spirit of Sahriah is not being fully observed, consequently leading to the continued exploitation of depositors and investors. The number of those Muslims is increasing who either believe that bank interest is not prohibited in Islam while many others feel that on their financing when conventional banks lower their rate of markup/interest and enhance the rate of returns/profits when interest rates are higher in the conventional banking system.

PAGE: How the Islamic banks are doing whatsoever their mode of banking is?

DR. SIDDIQUI: It is sad that banks operating under the banner of Islamic banking are paying return of 2 percent to their depositors and investors whereas the inflation in Pakistan is presently 9.4 percent, meaning thereby that Islamic banks are also paying a real negative return of over seven percent which is nothing but exploitation. In Murabaha and other modes of financing based on fixed returns techniques, Islamic bonds are guaranteeing a pre-determined fixed return, they assume no responsibility of sharing operational losses, which is essence of Islamic banking and the net result in most cases is the same as in interest based transactions. In any case, Murbaha is a sale transaction which was transformed about 25 years ago as a mode of financing for inventory period only but now it appears to have been perpetuated by Islamic banks.

PAGE: So what is the solution of the problem?

DR. SIDDIQUI: Although interest is prohibited in Islam but Islamic banking is not practicable in modern times. Islamic banks by making bulk of financing on fixed returns technique not sharing in operational losses, paying negative rates of returns after adjusting for inflation, following footsteps of conventional banks and resorting to large scale financing under consumer finance schemes and generally ignoring true modes of financing under the Islamic system i.e. Musharka, are not serving the cause of Islamic banking.

There is, therefore, a need for change of thinking and strategy. In our view the Riba Case pending in the Federal Shariat Court should be withdrawn and the parliament should frame laws for Islamic banking in the light of the Supreme Court judgment dated December 23, 1999.

Moreover, considering the difficulties in adopting the profit and loss sharing system (PLS) for bulk of financing, a model Islamic bank should be established in public sector, whose entire operation should be on PLS basis only. It is expected that this bank would be able top pay profit of over 12 percent per annum to depositors. Last but not the least, the existing Islamic banks should be directed to reduce share of financing on fixed return techniques in a phased manner and enhance financing on PLS basis.