ISLAMIC BANKING: A Utopian Idea Hard to Implement, Part 1
ISLAMIC BANKING: A Utopian Idea Hard to Implement, Part 1
FFI Contributing Editor Dr Radhasyam Brahmachari
At the end of 1999, Pakistan’s Supreme Court ruled that Islamic banking system had to be implemented in the country from July 1, 2001, and hence Pakistani bankers were facing the fearsome task of completely transforming the way in which they were so far doing their business. It may be mentioned that in several occasions in the past, the Government of Pakistan has tried to introduce interest free Islamic banking system to please the orthodox religious mullahs but failed. But this time it became a binding for the then Pakistani military dictator Pervez Musharraf and his finance minister Shaukat Aziz to implement at least a rudimentary form of Islamic economic system to oblige the Supreme Court verdict.
In this context, it may be mentioned that a circular issued by the State Bank of Pakistan  says that the aim of setting up Islamic banking system is to make Islamic banking the banking of first choice for the providers and users of financial services. Its mission is to promote and develop Islamic Banking industry in line with best international practices, ensuring Shariah Compliance and transparency. In fact, the Islamic Banking Department was established on 15th September, 2003 and has been entrusted with the task of promoting and developing the Shariah Compliant Islamic Banking as a parallel and compatible banking system in the country. It claims that Islamic Banking is one of the emerging field in global financial market, having tremendous potential and growing at a very fast pace all around the world.
“Al-Hamdulillah, the progress of Islamic Banking in Pakistan has also been commendable during the last Five years. Currently there are six licensed full fledged Islamic Banks and twelve conventional banks with standalone Islamic Banking Branches with the total branch network of over 336 branches operating in more than 50 cities of all the four provinces and Azad Kashmir in the country as of 17.07.2008 and applications for few more players are under consideration. Islamic Banking is a high priority area for State Bank of Pakistan. Steps are being taken to make Islamic banking industry in Pakistan robust enough to offer a viable alternative to conventional banking, should the market decide that Pakistan should have an exclusively Islamic banking system in the country”, it adds.
What is Islamic banking:
The question naturally arises – What is Islamic banking or Islamic economic system? The Koran, the holy book of Islam, condemns usury and receiving interest (riba), and declares it exploitative as ewll as unjust and evil. It says, “Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returneth (to usury) – Such are rightful owners of the Fire. They will abide therein” (2: 275). Allah hath blighted usury and made almsgiving fruitful. Allah loveth not the impious and guilty” (2: 276). “O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers” (2: 278).
What made Allah so displeased with usury or receiving interest? Scholars believe that during that time the Muslims were very poor and prosperous and wealthy Muslims used to exact money from their poor debtors, supposing that it was lawful for them. So, Prophet declared usury unlawful on the very day he conquered Mecca. Ibn Abbas, a companion of the Prophet believed that money extorted as interest causes, not pleasure, but distress and grief. Most importantly, the family of Umar, another close companion of Muhammad, used to exact money from the debtors at a high rate of interest.
What is an interest? It is a common experience that the purchasing power of money declines with the passage of time. The goods and services one can purchase by spending say 100 rupees (in India) today, he would have to spend say 500 rupees after 10 years to purchase the same goods and services. Banks try to compensate this difference in the form of interest. For example, a bank providing 5 per cent interest per annum to its depositors literally means that an individual who can purchase goods and services by spending 100 rupees, would be able to purchase same goods and services by spending 105 rupees in the following year. If one keeps his money in his personal custody, the money cannot grow. The fact tempts people to deposit their money with the banks. But, if the bank refuses to pay interest, it is as good as keeping money in one’s personal custody. So, the interest free banking suits an economy where the price of goods and services remain stagnant and do not rise. Or in other words, interest free baking is suitable for a stagnant economy.
There is another aspect of banking system that pays interest to its depositors. As pointed out above, the interest on deposits allures common people to deposit their money to the banks and the banks, on the other hand, use this accumulated money for providing loans to entrepreneurs for industrial and agricultural growth. It is usual for the banks to charge higher rate of interest from its borrowers than it provides to its depositors. The difference goes to the banker as profit which is necessary for good and healthy operation of the bank. So, it becomes evident that the interest free Islamic banking is suitable for a stagnant economy while the normal banking system based on interest is essential for a dynamic economy that looks for wealth creation through augmentation of trade and commerce, industry and agriculture, or a better and prosperous life for the countrymen.
The Muslim psyche:
But the Islamic psyche is completely different. In deciding things, they do not apply personal intelligence and experience. Two notions guide their entire activities – haram (not permitted) and halal (permitted). In several previous articles, this author has narrated how inbreeding or marriage between first cousins is turning the Muslims across the world intellectually crippled and stupid people. But the Muslims are not ready to accept the reports of scientific investigations and argue that, since Allah has not declared marrying cousins as haram, there cannot be any harmful effect of such marriages. So, they deplore the scientific reports in this field and say that all such scientific reports are concocted to malign Islam.
But it is really strange that the Muslims, particularly those who live in non-Muslim countries, deposit their money in ordinary banks and gleefully enjoy the interest, which Allah has made haram. There are several such examples. Allah has declared it haram for the Muslims to drink alcohol, but Muslims are ignoring Allah’s command every now and then. Allah has said that the Muslims should go for Mecca for Hajj pilgrimage by spending his own money. But the Muslims in India are cheerfully enjoining the subsidy in the air travel provided by the Government of India.
Driven by this Islamic psyche and to please Allah, Islamic scholars have been busy for past several decades in evolving an workable Islamic economic system free of interest. About 200 Muslim scholars were relentlessly working at Islamabad, Jeddah and even at Leicester to find out an interest free stable economic system. In fact, these scholars are striving their best to bridge the gap between the static dictates of the Koran and the modern dynamic global economic system.
The task was very hard indeed. For example, Islamic law approves private capital but disapproves the idea of a stock exchange declaring it to be an institute for monopoly in economics. Hence there is no place for a stock exchange in the Islamic financial system and one can easily guess the difficulty of framing a modern capitalist economic system without a stock exchange. The situation turns worse when majority of the Muslim rulers refuse to dispense with it and other monopolistic advantages. However, the scholars have produced several fundamental works on Islamic economics and to name a few are (1) Banking Without Interest by Dr Mohammad Nejatullah Siddique, (2) Monetary and Fiscal Economics in Islam by Dr Mohammad Arif, (3) Money and Banking in Islam by Dr Ziauddin Ahmad, Dr Munawar Iqbal and Dr M Fahim Khan and (4) Fiscal Policy and Resource Allocation in Islam by the same authors and so on.
Attempts in Pakistan:
It has been mentioned above that the State Bank of Pakistan is working to develop a progressive and sound Islamic banking system that is in line and compatible with the global financial sector, providing innovative Shariah compliant products and services so as to achieve equitable economic growth. The objectives of this endeavour are as mentioned below:
a) Drive and Implement the Strategic Plan for Islamic banking industry
b) b) Strengthen the existing regulatory framework for Islamic Banking Industry
c) Strengthen and broaden the scope and functioning of SBP Shariah Board through inclusion of more members and engaging of consultants of international repute
d) Arrangement of IFSB events, particularly Council and Technical Committee meetings, alongwith the side events in Pakistan in November, 08
e) Leverage from/support the efforts of IFSB, IDB/IRTI, AAOIFI, IIFM and other international institutions for promotion of Islamic banking in Pakistan
f) Coordination with BPRD regarding licensing of full fledged Islamic Banks (IBs) and their branches and Islamic Banking Branches of conventional banks (IBBs) and formation of Islamic banking subsidiaries
g) Coordination with BID for Shariah compliance inspection of IBIs and proper compliance of the observations/recommendations of inspection report (regarding Shariah Compliance)
h) Utilizing SBP-SECP Joint Forum for the promotion of Islamic financial industry
i) Support industry players in development of Shariah-compliant liquidity management instruments
j) Utilizing the Shariah Advisor Forum for conflict resolution and for discussion on AAOIFI Shariah Standards for their adoption in Pakistan
k) Conduct awareness programme within and outside SBP to eliminate the misconceptions and to develop the confidence of the public about Islamic banking
l) Publication of Islamic Banking Bulletin (IBB) and Islamic Banking System review (IBSR) and facilitate different departments in preparing various SBP publications
m) Human resource capacity building in the Islamic banking industry through coordination with educational institutes.
It is needless to say that the policy adopted by the State Bank of Psakistan is based on the theories developed by scholars mentioned above.
A few scholars who theorized Islamic economics:
Dr Mohammad Nejatullah Siddiqi is one of the pioneers among the Muslim scholars who could develop a workable theoretical formulation for interest free Islamic economic system. He was born in India in 1931, studied economics at the Aligarh Muslim University. He is the winner of the King Faisal International Prize for Islamic Studies,
Dr Siddiqi served as Associate Professor of Economics and Professor of Islamic Studies at the Aligarh University and as Professor of Economics at the King Abdul Aziz University Jeddah, in its Center for Research in Islamic Economics. Later, he was a Fellow at the Center for Near Eastern Studies at the University of California, Los Angeles and after that a Visiting Scholar at the Islamic Research & Training Institute, Islamic Development Bank, Jeddah. For his contributions to Islamic Economics, he was awarded the Shah Waliullah Award in New Delhi (2003). 
Dr M. Fahim Khan holds B.A. and M.A. (Statistics) degrees from Punjab University, Pakistan, M.A and Ph.D. in Economics from Boston University, USA. He was associated with the Islamic Research and Training Institute (IRTI) since 1988 serving at various positions such as Head Research Division, Head Training Division and Chief, Islamic Economics, Cooperation and Development Division. He is currently working as a Chairman of Riphah Center of Islamic Business, Riphah International University, Islamabad, Pakistan. His major works on Islamic banking are : Recent Theories of Profit: A Critical Examination (1971); Economic Enterprise in Islam (1972); Muslim Economic Thinking (1981); Banking Without Interest (1983) and so on. 
Dr Munawar Iqbal, a Pakistani economist. He has his M A degree in economicse from McMaster University Ph.D. from Simon Fraser University, Canada. He has worked as Senior Research Economist, Pakistan Institute of Development of Economics, Islamabad; Dean of the Faculty of Social Sciences, International Islamic University, Islamabad; Director, International Institute of Islamic Economics, Islamabad; and Economic Adviser, Al-Rajhi Banking and Investment Corporation, Saudi Arabia, before joining IRTI. He has published several books on Islamic economics and banking. 
These authors have so far managed to work out two kinds of interest free Islamic banking systems, namely (i) mudarabah and (ii) murabaha. We like to discuss these aspects in the next part of the article.
(To be continued)
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