UNDERSTANDING RIBA-FREE ISLAMIC BANKING

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
June 23 - 29, 2008

Despite growing Islamic Financial Industry in Pakistan and in particular gradual increase of market share in relation to deposit, investment, financing of IBIs in total banking assets, there still are few alter opinions in the market about the veracity of Islamic banking operation. The arguments contend that in a predominant conventional financial system, Islamic transactions can not absolutely be exorcised of malignant influences of interest (riba), which is completely prohibited in Shariah-compliant economic system.

Terming these opinions as mere misperceptions, Dr. Muhammad Imran Usmani, Head of Product Development Meezan Bank said in past many so called Islamic banks had tarnished the image and sprung off scepticism over Shariah-based financial transactions in market. Now, the purpose is to purify underlying transactions as much as possible. That liquidity generation for banks must be free from interest (riba) is the objective, he said, saying perfection is not however possible; "for example, there are various ways of "Ijara" (sale). Only market workable financial solution can be profitable".

Islamic financial industry uses KIBOR that follows conventional financial mechanism as a benchmark to determine its profit. He said if we charge less or more than the benchmark then we are no more successful. Above all, Islamic financial industry is neither in a position to devise its own interest rate mechanism nor has sustainable derivative market and so it has to be around its circumstances.

Meezan bank is the leading Islamic financial services provider in Pakistan. It has competitive edge over other contemporaries of rolling down financial solutions and innovative Shariah-compliant products, which can provide efficient substitute to conventional financial products. As opposed to conventional the Shariah-based system at present has not a long list of financial solutions that can attract conventional system depositor's loyalty. The challenging financial engineering and that is too inline with the Shariah principles is slowly but consistently pouring out new products. At this stage, "IFIs as a whole need proper planning and support of aggressive awareness campaign", said he.

Dr. Imran is the son of Justice (Retd) Taqi Usmani and has acquired his PHD in Islamic finance from University of Karachi. Also haranguing pulpits, he consents that appeal of Islamic financial products must be globally targeted. "To secular minded people, IFIs have profitable intermediation services." In Malaysia, Islamic banking industry is recording an imitable growth rate because of having suitable rates.

He said without compromising Islamic fundamentals Islamic financial industry makes better out of its intermediation services to enter into the global financial market. Borrowers or depositors seek convenient and effective financial services irrespective of its being conventional or Shariah-compliant. "In case of later life after death would too be fruitful," he added.

At the preface in his book titled, "Meezan Bank's guide to Islamic Banking", Dr. Usmani says, [Islamic economic system] encourages circulation of wealth and regards its role as important to an economy as the flow of blood to our human body-the fact is that today 10 richest men in the world have more wealth than 48 poorest countries of the world".

He said it is also a misperception that all people would become equal. "Every one pays off in conformity with his or her capability," which differs not supersedes person to person. The speciality of one person may be a missing character in other. According to management basic principle one with wisdom has to get people things done. So, absolute equality is preposterous to the nature. But, it does not imply gathering of resources with targeted bourgeoisie. Islamic economic system likes distribution of wealth on equitable basis.

Uncertainty in profit or speculative investment is also prohibited in Islam, he said, adding the reflection of this profit is not actually seen on the mainstream economy. The Islamic economic principles restrict all parties involved in the agreement to quantify and specify prerequisites at the very beginning to avert uncertainty element, he said. "Risk and reward associated with a transaction should be prudent and transparent and transaction must not be contingent upon another."

According to Islamic (Muamlaat) injunctions all such transactions, which confine money into selected few hands and directed flow of money circulation from downward to upward due to riba (interest), are prohibited or Haram. In contrast, these injunctions encourage business and Musharka (partnership) on profit and lose sharing that unlike interest attached margin on principal amount tends to distribute profits with a particular ratio to all participants. Thereby, this promotes financer to make partnership agreement with the borrower and dole out profit or sustain loss.

To a question, he said, liquidity is not at all our problem. Usually Islamic banks have excess of liquidity. He said since the beginning Meezan bank has been holding excess of liquidity of average Rs. 10 to Rs. 15 billion. Rather, the dilemma is about how to utilize this superfluous liquidity. We have scant numbers of reinvestment avenues. IBIs have certain financing criteria, which do not permit raise funds for "Haram" project. Dr. Usman clarified provision of Islamic financial products through conventional windows operations is permissible provided there are separate accounts for non-shariah and Shariah-compliant transactions. IBIs have clear objective of encouraging interest free banking. If underlying transaction in banking service is according to Islamic principle then obviously it is Halal (permissible). He says, "He is unaware if liquidity generated from head office by Islamic branches of conventional banks is interest based". Dr. Usman is more interested to enhance awareness about entire IFIs and slightly hinted at Meezan Bank's branch network expansion in the rural and underserved localities.