'ISLAMIC BANKING OFFERS HUGE POTENTIAL TO BE HARNESSED'

Despite much hype of switching over to Islamic Banking, the process is too slow.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
July 31 - Aug 06, 2006

Performing the opening ceremony of the first Islamic bank in Pakistan, Dubai Islamic Bank, last week, Prime Minister Shaukat Aziz observed that the idea of Islamic Banking was growing in popularity and offering huge potential to be harnessed in this field by innovative bankers. Many banks operating in Pakistan have set up counters of Shariah-complaint banking for their customers, but opening of this exclusive Islamic bank is a first serious initiative in Pakistan, Shaukat Aziz said hoping that it will be received well by the people of Pakistan.

Askari Commercial Bank (ACB) entered the arena of Islamic Banking with the inauguration of its first branch at Rawalpindi. Askari Commercial Bank President Sheheryar Ahmed inaugurated the first branch of the bank with more branches in line across all four provinces. On this occasion, Mr. Sheheryar Ahmed gave an overall account of the bank's strategy to develop and progress in Islamic banking. Mr Sheheryar who is well familiar and has deep insight on the issues encompassing Islamic Banking has been linked with the concept and practice of Islamic Banking for over two decades when the concept was being discussed at various national forums in 80s.

Commenting on the concept and strategy of Islamic Banking, he observed that though there are certain difficulties but these can be sorted out with the passage of time and hard work. Responding to query about investment tools and options, Sheheryar Ahmed said we have chalked out plans and worked out various alternatives in this regard.

Of late, the State Bank of Pakistan has taken many initiatives towards establishing the essential parameters of Islamic Banking in the country. It has constituted a Shariah Board and would no more allow establishment of new banks functioning on traditional lines. However, despite much hype of switching over to Islamic Banking, the process is too slow.

The mode of Islamic Banking is not getting popular as it should have been in the Muslim countries. This is the position not only in Pakistan but applies to most of the Muslim countries, which have introduced Islamic mode of financing, including Saudi Arabia. According to a latest survey only 30 to 35 percent of the banks operating in Muslim countries have adopted Islamic Banking. Reason being that it is neither in the interest of depositors nor borrowers. Depositors get much lower returns on profit and loss sharing accounts while depositors pay more in comparison to the conventional mode of banking. The rates of markup payable to the House Building Finance Corporation in Pakistan, which claims to follow the Islamic mode on housing building loans comes to about 15 percent per annum as against 12% through conventional banks. The depositors on profit and loss sharing basis receive a return of 5 to 6 percent on their deposits.

In a recent press interview Dr. Shahid Hassan Siddiqui, Chairman Research Institute of Islamic Banking and Finance said that 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 entrepreneurs availing financing from Islamic banks. 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.

Continuing, Dr. Shahid Hassan said that it is unfortunately a fact that the spirit of Shariah 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 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.

Islamic Banking is commonly defined as that form of banking, which operates without the norm of interest. As a concept, it is comparatively of recent origin. It is only during the last fifty years or so that Shariah experts, scholars and economists in the Muslim world have made stupendous efforts to develop the theoretical foundations and the operational framework for Islamic Banking. As a consequence of these efforts, a vast literature has appeared on the subject of Islamic Banking and the associated themes such as Islamic economics, Islamic finance, and Islamic monetary system and so on.

Another expert on the subject, Dr. Aqdas Ali Kazmi, former Chief Economist in the Planning Commission of Pakistan, in his article read at a seminar on the subject in Islamabad, said a critical review of the literature on Islamic Banking and an evaluation of the so-called Islamic banks operating globally lead to a startling but significant revelation: Islamic banking both in theory and practice is nothing more than a mythology. This mythology has a genesis, a structure and socio-economic implications, which need to be analyzed in full detail.

By its definition, structure, organization, functions and methodology, a bank cannot exist without interest. These two concepts are too intertwined to be separated. Because of the inseparability between a bank and the norm of interest, it can be concluded that Islamic banking is a mythical and a contradictory concept. If the objective is to abolish interest, the entire banking system will have to be scrapped altogether. In other words, if the foundation of the banking superstructure, namely the norm of interest has to be eliminated, the entire superstructure would have to be dismantled. However, to justify Islamic Banking, the Shariah experts, economists, banking and intellectuals have continued over the last five decades or so to build a web of myths, which are increasing in number day by day.

The first or the primary myth which has gained common currency throughout the world is based on gross misinterpretation of the Qura'anic verses on Riba, which have led to the conclusion that Riba prohibited in the Qura'an and the bank interest are identical and as such interest must be abolished from all tiers of the economy, including banking. The Muslim scholars have never seriously and dispassionately discussed the three basic and inter-related questions. What is Riba? What is interest? Are Riba and interest co-equal or synonymous? As a result of the failure of Islamic scholars to critically address these fundamental questions, the myths on Islamic Banking continue to flourish.

The second myth around which the concepts of Islamic Banking and Islamic economy are developed, points out that interest is the basic cause of the ills from which modern economies suffer such as unemployment, inflation, depression, income inequalities, poverty, etc. Remove the norm of interest and the economic system would be fully purified (Islamized) with no unemployment, no inflation and no income and wealth inequalities.

The third myth is in the form of the popular claim that there are as many as 200 banking units or banking companies, which operate around the globe without interest, and that these banks represent alternative models to interest based banking. Even the Western secular banking companies are not opening branches of Islamic banks or Islamic windows to cater to the needs of Muslim investors.

The fourth myth is that J.M. Keynes as one of the greatest economists of the twentieth century, in his numerous writings has propounded and approved the structure of an economy which is free from interest. The Qura'anic injunctions and interpretations forbidding interest are thus supported by the worldly economists such as JM. Keynes.

The fifth myth is that the mode of profit-loss sharing (PLS) is truly an Islamic mechanism and as such it can best serve as the basis of Islamic banking. In other words, PLS can replace the norm of interest in the banking industry and can give optimal results.

The sixth myth stipulates that Islamic Banking will become a reality once the Islamic economic system is established in its totality. In other worlds the successful launching of true Islamic Banking is contingent upon realizing the objective of transforming the existing economic system, which is secular in its outlook with the spirit on Islamic lines. If a truly Islamic economic system is established in a particular country or globally, operation of Islamic Banking and financial system will be feasible and practicable.

The real issue is that the mythology of Islamic Banking is being propagated as a new science throughout the Islamic world. The Muslim scholars in Pakistan, Indonesia, Malaysia, Bangladesh, Sudan, Iran, Egypt and Saudi Arabia etc. have taken the themes of Islamic Banking, Islamic economics, etc. to a new level of research, interpretations and model building. However, the process of Islamization of the banking and financial system has serious implications for the future of economies of the Muslim countries. In case, interest is abolished through an ordinance or an administrative fiat, the Muslim world would face an unparalleled predicament of economic disorder and disaster, Dr. Kazmi maintained in his research paper.

It seems that the State Bank is determined to promote Islamic Banking in the country as early as possible. The head of State Bank's Shariah Board had assured that Islamic Banking would be promoted on fast track. It is, however, a general feeling that the country, instead of rapid forward movement, needs to think more seriously and move cautiously on this track. The views of people who think that modern interest cannot be equated with Riba also should be given due consideration. There is wide divergence in the interpretation of the nature and structure of Islamic economy. An Islamic economy, for instance, could be defined as the welfare economy characterized by higher employment of resources, including labour, broad-based distribution of income and wealth and freedom from all forms of corruption, exploitation and inequity. Analogously, concentration of wealth, feudalism, monopolies and cartels in various enterprises and oligopolistic tendencies are by definition repugnant to the Islamic spirit.

The policies of Islamization of the economy, therefore, need to focus on land reforms and anti monopoly and anti cartel measures etc. for wider distribution of industrial assets and means of production. An Islamic state is obliged to pursue the objective of eliminating poverty through well defined programmes and policies, provide universal literacy and basic health facilities to all the citizens of the state, besides ensuring that nobody dies from hunger. Also, there is no place for wasteful expenditures and ostentatious living in Islam. According to some authors, modern interest is the price paid for the use of capital like any other factor of production and the notion that elimination of interest is a pre-requisite for an Islamic economy is the outcome of misinterpretation of the concept of Riba. Keeping all these things in view, sometimes one fails to understand why Islamic scholars in our country are so much obsessed with Riba while other vices in the economy are not paid even scant attention.

Another aspect, which also needs to be taken into account, is that interest plays a pivotal role in the modern economic system which has been developed over centuries through a lot of hard work and it must be recognized that so far there is no serious alternative in theoretical terms to challenge this entrenched system. That is why all attempts to purge economies of the norm of interest have only led to zero sum game involving the reemergence of interest in diverse guises such as 'markup', 'commission', 'fees', 'premium', 'service charges', etc. The present system being in vogue for such a long time cannot be replaced with a stroke of pen. There are many thorny issues, which have still to be resolved. These include the financing of fiscal deficits, assurance of adequate returns to depositors in order to stimulate the saving rate, removal of legal hitches and training of large number of bankers.

Experts are of the view that the State Bank should not act in a haste but adopt a gradual approach after taking into account all the relevant factors and also try to keep pace with other Islamic countries, otherwise the financial system of the country which plays a crucial role for the development of the country could face serious problems. In fact, gradual and evolutionary approach towards Islamization of the banking system was approved at the highest level of the government. It may also be mentioned that eight Muslim countries, viz. Malaysia, Indonesia, Bahrain, Saudi Arabia, Sudan, Iran, Kuwait and Pakistan as well as IDB had joined hands and launched Islamic Financial Services Board (IFSB) in October 2002 for setting standards for Islamic institutions. The report or recommendations of the IFSB probably have not yet been finalized. For proper coordination between different Muslim countries and to avoid sudden disruptions in the financial system of the country, a very cautious approach needs to be adopted.