Evaluation of Pakistan Banking Changes

The Supreme Court judgement is a landmark. It conveyed the message that elimination of riba should be looked upon as a challenge and an opportunity and not something that is hurdle. There should neither be despondency, nor complacency. The task is great and challenging that deserves to be pursued sincerely. We hope to make a fresh beginning and a new start. What was done in the past in the name of Islamization of economy and of the banking system had been rather disappointing. That is why it led to a miscarriage of Islamization. It could not produce a dynamic movement towards Islamization. We hope that the new team would try to make a fresh start, with commitment, vision and a systematic effort. Islamization is a process which will take time and shall unfold only if we move firmly and powerfully in the right direction.

The most important area for immediate work is awareness. Fear of the unknown is always there. Serious effort deserves to be made to honestly and objectively understand the judgement and work out its implications. Understanding of the availability of the alternatives is important, both at the conceptual level, where immense work has been done while need for further research, reflection, review is always there, and at the practical level. It is good to make a successful beginning. However, it should not be ignored that it is a continuous unceasing process and whatever has been achieved and done is remarkable. Though the experience is short, piecemeal and limited, yet it has many lessons to teach and should be seen in the light of the theoretical work. Experience and greater awareness at all levels, at the level of the government, policy makers and the financial institutions, from State Bank down to the smallest root branch of banking is necessary. Business community and industry should also be active participants in this process.

The Institute has recently concentrated on two countries - Bangladesh and Malaysia. The Bangladesh Islami Bank, established in 1983, over the last 16 years has been able to capture about 1/10th of the total external trade of the country. With a humble start, it has now 105 branches, over 700,000 depositors and over 20-1/2 billion Taka deposits and assets. But what is significant is that 52% of those who have taken advances from the bank, consist of account holders having accounts in the range of 100,000 to 5 million while those who have above 5 million are about 48%. As a quick look back, the Pakistani situation unfortunately is that those who have in their accounts Rs. 5 million and above, their accounts are only 0.64% of total accounts and yet advances received by them go to make up 70.4% of total advances. So distributive justice dimension is missing in Pakistan, while the Islamic Bank is moving in that direction.

Tabung Haji started in 1963 with a humble deposit of about US$ 12,000 and 1081 accounts. Now in 1999 the accounts are 4 million in a population of 22 million where the Muslim population is about 12-13 million. Four million accounts are a great achievement and their deposits are over 7 billion. These success stories give hope and if we create this awareness among the people the apprehensions would die and hope and light could be seen beyond the tunnel.

With this background, we shall also try to sum up some of the ideas that emerged in this seminar, particularly for the government to reflect upon and to do something.

First is the need for a legal and judicial framework. The priority should be given to this because unless we provide the supporting mechanism, the Islamic banking and finance would not be able to properly take off. Efforts should be made within a short span of time to build up the legal and judicial framework.

The second and most important point is making profit attractive and profit bearing investment effective. At the moment, the whole system is geared to favor interest and discourage profit-based investments. At least level-playing should be the objective. We are happy to note that a group is working on this and will soon be coming up with a comparative study of the position of interest and profit in our system identifying what fiscal and other measures are needed at least to bring the two at par.

Third is the monitoring mechanism, because confidence in the Islamic system would come if the people were assured that banks and financial institutions or bank borrowers, as the case may be, would not run away with loans. Absence of interest does not mean absence of return on capital. Elimination of the interest does not mean that profitability and accountability have run amuck. Islamic banking demands professional integrity. It is business, it is professionalism and everything has to be done in such a way that while we hope that people are expected to behave morally, in case they default they will be taken to task effectively. They should know that they cannot run away. For that, monitoring system is needed.

Fourth, it is very important that people must have the confidence that the new system would be authentic Islamically and tricks will not be played in the name of elimination of riba. So for that, it is important that Shari‘ah Board, Shari‘ah Audit and Shari‘ah based training should be given priority. Further, an effective training program at all levels is needed so that government functionaries, bankers, businessmen, industrialists are trained to make possible use of Islamic opportunities.

Next is the question of research, discussion, dialogue and use of new technologies. Islamic banking institutions should not lag behind any one; they should be ahead of others in the field of technology.

And finally it needs political will and communities’ participation so that we move ahead in the direction of bringing about fundamental changes in our financial system and move from a debt-based economy towards a more equity-based, stake-taking, risk-sharing economy, where we move from an exploitative system to more sharing system and where welfare, well being and equity and justice are the key words. That transition is required to be made.

Source: Towards Islamic Banking: Experience and Challenges, Institute of Policy Studies. Republished with permission.