The future growth of Islamic banking is dependent on the input by the regulators and the religious scholars

Aug 15 - 21, 2005

Few years back the Pakistan government made a policy decision to facilitate creation of Islamic banking system in parallel with the conventional banking system. This may have irked the religious scholars, who were in favour of elimination of Riba in one go. However, the effort to create an alternate banking system, which is compatible and comparable with the conventional banking system, is yielding better than expected results. The growing faith in Islamic banking is making the transition smoother and growth is faster than the growth achieved in many other countries.

The single largest exhibition of the faith in Islamic banking is the phenomenal growth in deposits maintained with these banks. According to Pervez Said, Head of Islamic Banking Department, State Bank of Pakistan, "about 1.5 percent of total deposits of Pakistani banking system are now with Islamic banks. This figure may look too small. However, the point of jubilation is that Malaysia achieved this level in almost 20 years but Pakistan has achieved this landmark in about two years."

Every Muslim wants to earn Riba-free income, just like he wants to eat 'Halal' meat. There was a latent demand and availability of banking services, which are Sharia compliant, catering to the needs of this niche market. However, it is important to highlight the role being played by the central bank and the efforts being made by the banks. The central bank is busy in creating the enabling environment and banks are busy in providing access to Sharia compliant products and services.

The first Islamic bank, offering full fledged commercial banking services, commenced its operations in 2002. Since then three more licences have been issued and other three applications are under process. Nine conventional commercial banks have established 69 designated Islamic banking branches in 11 cities. A comparison of branches offering Islamic banking facilities with the network of infrastructure of conventional banks may prompt the critics to say: "It is too small a growth". However, it is also a fact that Islamic banks have attained this level in a very short span of time. As against this conventional banks have been operating in this part of the world for ages. One of the reasons for the expansion and growth of the conventional banking system is the empirical evidence of their success, which provides faith to the clients. The lack of empirical evidence, however, does not allow people to completely switchover from conventional banking system to Islamic banking system.

One may ask, if the growth is there, why is it taking so long in expanding the Islamic banking infrastructure? Some of the analysts are of the view that expansion in branch network is due to limited availability of the qualified and experienced bankers in the country. Since the conventional banking has been in existence for decades, curriculum and faculty is available for the training of staff. As against this none of the business schools/educational institutions has been able to develop curriculum and prepare the faculty. Whatever expertise was available has been fully deployed and the demand has surpassed the supply.

According to some sector experts the growing shortage of human resources in the Islamic banking is due to two reasons 1) lack of facilities for providing the basic education and 2) preference of people for working for conventional banks. Whereas, some analysts are of the view that people with entirely different mindset are required for the two systems. The heartening fact is that both the regulators and the banks have realized this impediment and are making the best efforts to overcome the situation. With the help of religious scholars and some educational institutions the curriculum for Islamic banking is being developed. In the first phase training is being imparted to the trainers, who in due course will impart training to others. Some diploma and/or certificate courses are being offered and on-the-job training is also provided. Many business schools offer courses, which lead to specialization and award of MBA degree in Banking.

One of the positive points is that the quest for Islamic banking is global. A number of countries are doing a lot of research and development work at their own and also sharing the experience with each other. A lot of literature is available and researchers and religious scholars are busy in preparing standards, both for the products and accounting standards. Bahrain Monetary Authority and Islamic Development Bank in collaboration with the central banks of various Muslim countries are busy in making Islamic banking comparable and compatible with the conventional banking.

There is a common perception that Islamic banking is a preferred choice of Muslims only. However, the global experience provides empirical evidence that non-Muslims also constitute a substantial share of the total clientele. The Pakistani experience also substantiates this. When one of the top five local banks moved applications for the opening of Islamic banking branches in interior Sindh, there was some skepticism. However, over the period it started attracting a lot of business, much higher than the expectations. Later on it was discovered that bulk of the business was coming from non-Muslims.

Some of the banking sector experts say that the keen interest of non-Muslims in Islamic banking is based on their belief that Islamic banking is more efficient and transparent as compared to the conventional banking. According to an expert on Islamic banking, "The effectiveness of Sharia compliant system is that money creates goods (assets) and services, whereas in the conventional banking money creates more money and it is often not backed by assets or services. That is the reason Islamic banking is emerging as a preferred choice of the clients, irrespective of their religious faith."

The future growth of Islamic banking is dependent on the input by the regulators and the religious scholars. The regulators have to create conducive working environment by adapting rules and regulations on the basis of ongoing research and development. The religious scholars have even larger responsibility as the burden of Ijtihad is on their shoulders. This Ijtihad cannot be done by the scholars alone and they have to team with economists, bankers and legal experts, whereby each constituent plays its due role.

This is an enormous responsibility because each product has to be scrutinized to ensure full compliance with Sharia. Then it has to be made compatible with the existing legal and regulatory framework. This is a long drawn process and none of the constituents should lose its patience. The process of evolution is mainly dependent on Ijtihad or continuous pursuit for the best. The effort can yield results when the discussions/deliberations are held without making an attempt to prove the other side wrong. The correct judgment can only be arrived at when all the ambiguities are removed. According to an observer, "the task has become difficult for the present generation because Ijtihad virtually remained suspended for centuries. This is the age of information technology and efforts should also be made to take advantage of the work done in the past. All the fragmented efforts should be linked to avoid reinventing of the wheel".

Some of the banking sector experts demand that the regulators should provide some incentive for adopting Islamic financial system to encourage people to switchover from conventional banking system to Sharia compliant system. However, the propagators of Islamic banking say, "We do not want any incentive but have a right to demand level playing field. There are certain rules and regulations, which in turn penalize the followers of Islamic banking system. These distortions should be removed at the earliest.

The creation of parallel Islamic banking system offers a choice to people. It was very aptly said by an ardent follower of Islamic banking, "In the market two chickens are available, one which has been slaughtered according to the teaching of Islam and the other in violation of these rules. In such a scenario the logical choice for Muslim is to buy the chicken that has been slaughtered according to the Islamic teaching. The same is also true about Islamic and conventional banking, one conforms to Sharia and other does not. Therefore, it is the responsibility of every individual to pick up only that product which is Halal.

Keeping in view the low literacy level in the country and poor level of awareness among the masses, it is necessary that programs should be arranged where religious scholars, bankers economists and regulators should respond to the queries of the people. In this regard the latest effort of Standard Charted Bank deserves specific mention. The bank invited to prominent Sharia scholars to Pakistan at the opening of their second Islamic banking branch. Taking the advantage of their presence it also arranged 'Meet the Scholars' program. The two distinguishing factors of this program were 1) there was no monologue (long speech) and 2) carefully picked up questions by the moderators. Dr. Abdul Sattar Abu Ghuddah and Sheikh Nizam Yakubi very eloquently responded to each question. Though the program was pretty lengthy but a large number of questions could not be taken up due to time constraint. The program was also recorded and aired by a channel, which must have provided an opportunity to general public to listen to these scholars. However, there are two suggestions 1) that the bank should print the proceedings in the form of a booklet and also prepare CDs/video tapes and make them available to general public. It will be a great service to the cause of Islamization of the financial system.

Since all the banks involved in Islamic banking have religious advisors they should also arrange similar programs. There is still a lot of ambiguity about the Islamic banking as well as Islamic financial system. This can be removed only by arranging greater interaction with the religious scholars and the bankers. It is also suggested that banks should also sponsor such programs on television networks. According to an old saying, "The taste of pudding is in eating" and people cannot get the experience unless they experience the Islamic banking mode.

It is heartening that Islamic banking has been working in parallel with conventional banking system in the country. The central bank and the players have created the infrastructure and now it is up to the public to use it. One may say there are still some weaknesses in system. However, these weaknesses cannot be removed without active participation of all the stakeholders.

The confidence of the sponsors of Islamic banks in the system is evident from the fact that all these banks are starting their operations with larger capital base. The minimum paid-up capital requirement is Rs 2 billion till 31st December 2005. This, in fact, helps them start operation with greater liquidity and remain free from borrowing funds from others.

Though the point may not be too relevant but needs specific mention. A number of Islamic funds have been floated in the country. They are in a position to participate in pre-IPO placements as well as ensuring adequate liquidity of the shares of the companies offering Sharia compliant products and services.