Islamic banking

Of late, the State Bank of Pakistan has been moving rapidly towards establishing the essential parameters of Islamic banking. It has constituted a Shariah Board and would no more allow the establishment of new banks functioning on traditional lines.
On 16th April, State Bank's Shariah Board approved the essentials and model agreements for Islamic modes of financing to ensure compliance with the minimum Shariah standards by banks conducting Islamic banking in the country.
These essentials and guidelines would be enforced as prudential regulations for Islamic banks in due course of time.
For facilitating the Islamic banking sector and to create awareness about Islamic banking products, model agreements have been designed for Murabaha, Musawamah, Lease Agreement, Salam, Musharaka, Istisna, Intfree, Mudaraba, and Synd Mudaraba.
These model agreements could, however, be modified by Islamic banks with the approval of Shariah Board of Islamic commercial banks or Shariah advisors of banks having Islamic banking branches, ensuring that such changes are consistent with the principles of Shariah.
It seems that the State Bank is determined to promote Islamic banking in the country as early as possible.
Governor Ishrat Hussain said last month that Islamic banking had been provided with a level playing field and there was tremendous potential for its growth in the country.
The head of State Bank's Shariah Board had assured that Islamic banking would be promoted on fast track.
However, in our view, 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 characterised 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 Islamisation 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.
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 of 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 recognised 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.
We would urge the State Bank not to act in 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 Islamisation 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 finalised. For proper co-ordination between different Muslim countries and to avoid sudden disruptions in the financial system of the country, a very cautious approach may be in order.