Friday, November 13, 2015

Islamic Financing: The Soul of Banking

Majyd Aziz

“I shall watch with keenness the work of your Organization in evolving banking practices compatible with Islamic ideas of social and economic life. We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice.” Quaid-e-Azam Muhammad Ali Jinnah, at foundation stone laying ceremony of State Bank of Pakistan, July 01, 1948.

These stellar words spoken by Pakistan's Founder are a manifestation of his vision that a real time Islamic way of life was imperative for the nation to have an inclusive economy and survive. The concept of Islamic Banking has picked up tempo in Pakistan and there has been a remarkable exodus of accounts from the conventional banking system to the Islamic mode of financing. In the past, the traditional bankers were reluctant to venture into Islamic banking and they would emphasize and promote what was being done within the normal banking framework. Today, a better and clear understanding of the modes of Islamic banking and finance has provided impetus to product users and savers to adopt these Islamic modes.

There are different products of Islamic banking that facilitate trade related activities. These products include Murabaha (cost-plus financing), Salam and Istisna (forward sales), Wakalah (agency-based contract), Musawamah (bargain sale) and Musharakah (partnership contract). A leading Islamic scholar, Justice Mufti Muhammad Taqi Usmani, highlights Mudarabah and Musharaka as ideal financing products since these enable the user to know exactly what the cost would be in advance. Faisal Shaikh, Head of Shariah Advisory and Structuring at BankIslami Pakistan, in one of his presentations, noted that conventional banking deals in documents and not goods, while Islamic banking deals in goods and documents. This very appropriately signifies the difference between the two banking systems.

Justice Usmani, in his book, "An Introduction to Islamic Finance" states that "The basic difference between capitalist and Islamic economy is that in secular capitalism, the profit motive or private ownership are given unbridled power to make economic decisions. Their liberty is not controlled by any divine injunctions. If there are some restrictions, they are imposed by human beings and are always subject to change through democratic legislation, which accepts no authority of any super-human power. This attitude has allowed a number of practices which causes imbalances in the society. Interest, gambling, speculative transactions tend to concentrate wealth in the hands of the few." Furthermore, he writes, "Islam has put certain divine restrictions on the economic activities. These restrictions being imposed by Almighty Allah, Whose knowledge has no limits, and cannot be removed by any human authority."

For the first time in its history, State Bank of Pakistan has a Deputy Governor, Mr Saeed Ahmed, overseeing Islamic banking. SBP has reiterated its commitment for promotion and development of Islamic banking. Due to its persistent efforts, the share of Islamic banking in total deposits of the banking industry has surged to nearly 13% as of June 30, 2015 and is consistently growing with a cumulative average growth rate of over fifty percent during the past 12 years. Mr Saeed Ahmed disclosed that "five full-fledged Islamic banks, one Islamic banking subsidiary, and 17 banks with dedicated Islamic banking branches are operating with over 1,700 branches spread all over Pakistan."

According to EY’s Global Islamic Banking Center, "Islamic trade finance could provide new opportunities and become the preferred choice for emerging rapid growth markets (RGM) such as Turkey, Indonesia Malaysia, Qatar, Saudi Arabia, and the UAE. RGMs are emerging as hot spots for global business and they promise to permanently alter the global trade scene over the next 10 years. Many of these markets already have strong trade links with other 'core' Islamic finance markets, which offer new opportunities for growth for Islamic trade finance."  

Trade and industry has largely depended on self-financing or conventional banking. The desire to grow and the yearning for enhancing operations often compel businessmen and industrialists to seek external financial facilities. However, those who were not comfortable with conventional banking and considered interest or markup as Riba had to compromise on their principles or put on ice their expansion strategies. Islamic banking has provided them a cover to achieve financing without, in a broader perspective, taking resource to channels that disturb their religious convictions. A Karachi industrialist once remarked, "When I do conventional banking, I know I am doing a sin, but I can pray for forgiveness, but when I do Islamic banking, even though I am not yet comfortable with it, I have no recourse to seeking Allah's forgiveness." It was his way of pointing out that banking is banking, no matter what the mode.

Although Islamic banking is expanding and creating a solid niche in the financial arena, there are many who are not satisfied with the terms and conditions of Islamic banking and lay stress on certain conditionalities that, according to them, are sanitized versions of the conventional banking lender safeguards. They focus on the penalty clause in the agreements between the lender and the user as they are of the opinion that this clause vitiates the very essence of Islamic banking modes. Notwithstanding this argument, a senior banker explained that the "purpose of the penalty clause is to ensure that the product user performs the obligation in a timely manner and does not take the facility for granted". Ayesha Ashraf Jangda, Section Head, Corporate Strategy and Business Planning, BankIslami Pakistan, informed that "the amount generated through penalties is routinely used for charitable purposes and not passed on to shareholders." Islamic banking is here to stay as it is evolutionary and will be more vibrant as more efforts are undertaken to achieve favorable and encouraging legal and policy frameworks for banks, users, and for Shariah-compliant products.

"And for their taking interest even though it was forbidden for them, and their wrongful appropriation of other people's property, We have prepared for those among them who reject faith a grievous punishment." Holy Qur'an, Surah Al-Nisa, verse 161.

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