There is a significant population of consumers who believe that Islamic banks are simply paying interest and dressing it as profit on trade and investments. What's the reality and how does Dawood Islamic Bank plan to change this perception? Answer: To reply this question, first we will have to understand the basic difference between Islamic and conventional banking.
Islamic Banking is basically transformation of lending based money to money transactions (being practised by conventional banks) into assets based financing. Thus, Islamic Banks first procure the consumable commodities and tangible fixed assets. Such consumable commodities are then;
a) Sold to traders and manufacturing concerns on credit to fulfil the traders' finished goods and trading concerns' raw materials requirements. By availing the finished goods and raw materials on credit from Islamic Banks, instead of making cash payment on spot to the suppliers of the goods, the traders and manufacturing concerns become able to manage the operating cycle of their businesses. The goods are sold by the Islamic Banks at profits agreed with the customers at the time of selling the goods on credit to the customers.
The bench mark for profit calculation is to be based on conventional money market bench mark, which is the requirements of State Bank of Pakistan, in absence of Islamic profit bench mark. This is the area, where some people think that there is no difference between conventional banking interest and Islamic Banking profit, but the matter of fact is that Islamic Banks, by bearing risks of ownership while converting their funds into consumable commodities and then selling them to their customer at fixed profit rate, make this profit permissible for them as against conventional banks which lends money and charges interest on money lent.
Though the profit is based on money market bench mark, still does not make the contract of sale impermissible and thus such kinds of sale based transactions have been approved by the renowned Shari'ah Scholars, through out the world.
b) On the other hand tangible fixed assets are provided to Islamic Banks customers on "Ijarah" basis, which is Shari'ah compliant leasing contract, having some very fundamental difference with conventional finance lease contract.
The rent of the tangible fixed assets are received from the customers, again based on money market bench mark but as stated in point (a) above, the fixation of rent based on money market bench mark does not make the Ijarah contract impermissible and thus this product has been approved by the renowned Shari'ah scholars all over the world. Another way of financing tangible fixed assets to customers is to execute partnership agreement between Islamic Banks and their customers.
Thus, Islamic Banks provide 100% usufructs of the tangible fixed assets jointly owned with the customers and receive consideration from the customers to utilise by them non divisible part of the asset owned by the Islamic Banks as joint owner of the asset. This consideration is again based on money market bench mark, due to limitations disclosed in point (a) above.
Thus, we can safely conclude that bearing risks of ownership by the Islamic Banks over tangible fixed assets make the rent and the consideration for the sale usufructs of the assets, permissible for Islamic Banks as against interest received by the conventional banks, which lends money to their customers and charges interest, while executing conventional finance lease contracts with their customers.
Question: Changing public perceptions might involve huge costs; does the industry stand together in this regard? How can DIBL contribute?
Answer: The different seminars, conferences and events are jointly sponsored and participated by almost all the Islamic Banks to create Islamic Banking awareness among the general public. Different publications and supplements in the print media are used to create such awareness as well as different television programs are also conducted by the Islamic Bankers for this purpose. Of course all such activities require costs but these cots are taken care while preparing budgets for Islamic Banks.
Question: What makes DIBL distinct from other Islamic banks?
Answer: Customers' friendly innovative products, strict Shari'ah compliance and the majority of the foreign sponsored equity are the distinguished features of DIBL. The innovative products coupled with strict Shari'ah compliance have Alhamdulillah led to get assigned for DIBL, AA Rating for Shari'ah quality by Islamic International Rating Agency (IIRA).
Question: Islamic Industry financing has shown tremendous growth in the past seven to eight years. How has DIBL contributed to it since its entry?
Answer: We have been distributing market competitive profits since our inception. This has led the confidence among the general public upon overall Islamic Banking sector. Our brand is getting strength day by day and this market acceptability is a good sign for the whole Islamic Banking sector of Pakistan. We have booked suitably diversified assets portfolio and our contribution to wards booking Islamic Banking assets has been remarkable. Due to strict risk management, we are saved from major reduction in the profitability and non performing assets during the recent economic crises, which have given a positive signal to the general public as far as the confidence upon Islamic Banking assets is concerned.
Question: Islamic banking has a different orientation towards risks due to unique nature of the contracts used for structuring financial transactions. Can you go through the kind of exposure that your bank faces and how you have been able to tackle it?
Answer: Executing proper legal documentation with the customers and conservative risks management and utilisation of suitable product according to situation are the techniques we have used to mitigate such kind of risk.
Question: Given the recent trend of market consolidation in the banking sector, how do you see an operational set up of your size coping with the bigger lenders? What will be your basic strategy?
Answer: As we have big institutional based majority of foreign equity, we did not face any problem as regard the fulfilment of Minimum Capital Requirements is concerned. Thus this is not a threat for us. As far as the market consolidation due to other reasons is concerned, being a commercial organisation our Board of Directors will certainly look monitoring the market trends in this respect.
Question: DIBL's growth in total assets has shown a healthy increase ever since its entry into the market. Looking at the rapid growth of the total assets of the Islamic banking industry as a whole, what is your strategy for sustained growth of DIBL and for keeping it competitive?
Answer: To become a bank ready to serve to all sectors of the economy as much as possible taking care the risks management aspects.
Question: Islamic banking industry's strategy was to finance sectors such as SME and agriculture that gave it a more socially responsible role as a financial alternative; yet the bulk of financing goes to the corporate sector. Do you plan to change this anomaly by venturing in the sector - especially in rural areas?
Answer: We have prepared a concrete strategy to serve rural areas of Pakistan. Under this strategy we are establishing Rural Business Centre (RBC). These RBCs are set-up in such a manner that NADRA and Engro Chemicals have also establish their services centres adjacent to our rural branch to provide necessary banking and other services through one window facility.
Question: Given that conventional lenders are shying away from power sector because of rising number of bad loans, does the local Islamic banking industry plan to capture that share and what plans DIBL has in this regard?
Answer: We are taking care this matter with the close consultation of other Islamic Banks and will try to make combined decisions among all Islamic banks.
Question: So what sort of new products do you plan to introduce in the near future?
Answer: a) Running Finance Musharakah which is a very practical substitute for conventional banking running finance products.
b) Restricted Mudarabah which is very practical substitute for conventional banking Foreign and local bills purchased products.
c) Ijarah for extending financing to the services sector of Pakistan, which is very unique as regard the Islamic Banking practices is concerned.
d) Kushhal saving plans for PF, Gratuity and Pensions funds through which we will try to give high returns to PF, Gratuity and Pension Funds managers to serve for the betterment of their old lives.
Question: A recent look at segment wise break-up of financing of the Islamic Banking Industry shows heavy increases in commodity financing. Has your bank been doing the same?
Answer: Yes. Basically it has two reasons. Firstly due to excess liquidity deployment and secondly to facilitate trade finance related financing requirements of the customers, mainly due to increase in the imports.
Question: Despite the growing depositor's confidence over the past couple of years in the Islamic banking sector there has been a shift from foreign currency deposits to local currency deposits. What do you think could be a possible cause for this phenomenon?
Answer: There may be different reasons not directly related to Islamic Banking.
Question: With State Bank's plans to increase the share of Islamic banking to 12 percent by 2012, how do you see Dawood Islamic Bank's trajectory and the role it plays in the Islamic banking sector?
Answer: We have prepared a detailed budget and presented to State Bank of Pakistan to sow our goals to achieve the objective set by State Bank of Pakistan.
Question: There has been a fresh wave of interest in Islamic financing world-wide since the onset of global financial crises? Do you see this trend growing globally?
Answer: Yes and we see that Islamic Financial Institutions over the globe are making positive efforts to avail this opportunity.
Question: Where do you see Islamic banking in the next decade in Pakistan? Do you think Islamic banking will replace conventional banking in the near future?
Answer: We strongly believe that a time to come when Islamic Banking sector will capture the majority of the total banking assets, insha'Allah and we are ready to share our efforts to reach this target.
(An interview with Pervez Said CEO & President, Dawood Islamic Bank Ltd).