Many financial institutions operating in Pakistan and indeed worldwide under the banner of Islamic banking are working under similar exploitative system.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Mar 12 - 18, 2007

Although Islamic banking appeared on the world scene as an active player about a quarter century back, the concept gained momentum only during the last three to four years after posting a disappointing performance during 1980s and 1990s.

Under the guidance of State Bank of Pakistan, Islamic banking system has made strides in the country. With the grant of license to Bank Islami Pakistan now there are three full fledged Islamic banks operating in Pakistan with a branch network of over 85. Besides, the State Bank has allowed commercial banks operating on conventional lines to set up Islamic banking counters or Islamic banking subsidiaries. Bank Islami Pakistan, Meezan Bank and Al-Baraka Islamic Bank are the three exclusive Islamic banks operating at present. In addition to these banks, 30 branches of nine conventional banks are providing Islamic banking service to the clients in the country.

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 Islamic countries. This is the position not only in Pakistan but also applies to most of the Islamic 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 Islamic 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 mark-up payable to the House Building Finance Corporation, which claims to follow the Islamic mode on housing loans, come to about 15 percent per annum (as against 12% through conventional banks). The depositors on profit and loss sharing basis receive a return of 4 to 5 percent on their deposits.

In an article recently published in varoius national dailies, Dr. Shahid Hassan Siddiqui, former Chairman Research Institute on Islamic Banking and Finance, Islamic banks worldwide have failed to eliminate injustices of the interest-based system, as they have to follow the interest-based benchmarks. This is due to the faulty policy of allowing interest-based and Islamic banks to operate parallel to each other in Islamic countries. The pace of growth of Islamic banking has, therefore, slowed down and Islamic banks continue to follow the benchmarks of interest-based system. This is not receiving due attention of Muslim scholars and economists as also of the central banks of Islamic countries.

The Holy Qura'an prohibits charging of interest on financial transactions as it leads to injustices and Islam is against all forms of injustices and exploitation. The banks operating under the banner of Islamic banking have, however, failed to eliminate the injustices caused by the interest based system as during the last two decades these so-called Islamic banks have practically ignored the basic philosophy of Islamic banking. The fact of the matter is that Islamic banks worldwide, including Pakistan, are not only following the benchmarks of interest-based capitalistic system but are also resorting to predetermined second line fixed return techniques like Murabaha and Ijarah for bulk of their financing.

It is significant to note that as in case of conventional banking, Islamic banks are also exploiting their depositors under the system and practices enforced by them. Many financial institutions operating in Pakistan and indeed worldwide under the banner of Islamic banking are working under similar exploitative system.

While Islamic banks get sure earnings on their financing comparable with the prevalent rate of interest; these Islamic banks like interest-based banks assume no responsibility whatsoever for the operational losses if sustained by the entrepreneurs, which is the essence of Islamic banking. The net result of the transactions under the Islamic banking system does not therefore differ much from the interest-based transactions. Further, in some cases where Islamic banks provide financing on profit and loss sharing (PLS) system of Islamic banking as in the Musharaka agreements, the Islamic banks' share of profit is so fixed that in the final analysis the return earned by the Islamic bank is compatible with the corresponding interest-based income of the conventional banks.

It is, therefore, obvious that even if Islamic banks allow bulk of finances on Musharaka basis, the injustices of the interest-based system would continue under the existing system of following benchmarks of conventional banks. The Islamic banks would, however, have to assume additional risk of sharing in the losses, if any, sustained by the entrepreneurs. This among other factors is also discouraging Islamic banks from allowing more and more financial benefits under the PLS system based on Musharaka.

The main reason for this state of affairs is that interest-based banks are already operating in Muslim countries where Islamic banks subsequently started their operations during the last two decades or so. The conventional and Islamic banks are accordingly functioning parallel to each other. The fact, however, is that in these countries interest-based banks are clearly the market leaders and are expected to remain so even in the next decade in the wake of policies adopted by Islamic countries.

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 Islamic 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, a well-known scholar, 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 basis. 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 should also be given due consideration. There is a 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 a 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 hardwork 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 re-emergence of interest in diverse guises such as "mark-up", "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 a large number of bankers.

Experts are of the view that the State Bank should not act in haste but adopt a gradual approach after talking 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 - 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.


(Rs. in Bn)







Total Assets






%age of Banking Industry












%age of Banking Industry






Financing. & Invest.






%age of Banking Industry






Full Fledge Islamic Banks






Conventional Banks with Islamic Banking Branches






No. of Branches






Source: State Bank of Pakistan