Implicit Strategy for Islamization

In retrospect one can discern that the Islamization process was guided by an implicit strategy that kept it within the confines of the executive authority, thus affording enormous flexibility in steering its direction. Explicit positions were avoided on critical issues, such as the definition of Riba, and for unexplained reasons, strategically important areas, such as foreign currency transactions and government finances, were excluded from the operation of the new system. No law was framed which would have obligated all persons and institutions to refrain from interest-based transactions. Rather, the changes undertaken in the existing laws were only to accommodate the proposed measures within the larger framework of interest-based system.

By refraining to define Riba, government retained the flexibility of declaring anything of its convenience as being falling outside its scope. Thus a new phraseology, derived from Fiqh literature, was promoted in the name of non-interest based modes of financing, which were openly conflicted with the provisions of Shari'ah. Far from committing its program within a legislative framework, the government did not even allow an independent board of Shari'ah experts to determine the permissibility of the approved modes of financing. Thus we see Ulema of all shades of opinion to have vehemently opposed the approved modes of financing. The exclusion of government finances and foreign currency transactions greatly reduced the scope of the new system. To appreciate this point one needs to examine the structure of the financial sector in Pakistan. This is done in the following table:

Table 1

Structure of Financial Sector in Pakistan

                            (Rs. in billion)



Public Debt 

Domestic (1998-99)

Foreign (stock on 31-12-98 - Pr.)




Scheduled Banks' Advances (Stock on 30-6-98)


Ratio of Bank Advances to Public Debt

1: 3.8

Annual Credit by Banking Sector (Three Year      Average, ending June,1997)


Annual Government Borrowings*

(Three Year Average, ending June, 1997)



Ratio of Bank Credit to Government Credit


Demand and Time Deposits with Scheduled Banks

(Stock on 30-6-97)



Time Deposits in govt. schemes + resident deposits in foreign currency accounts (Stock on 30-6-97)



Ratio of Bank Deposits with Government Schemes


In the above table we have identified the relative size of the government sector vis-à-vis the private sector. Measured in terms of the outstanding stocks of public debt and private sector advances, the Government is four times the size of the private sector. Similarly, the annual flow of credit to government is four times larger than that flowing in the private sector. What is worse, with appropriate adjustment for the foreign currency accounts, which effectively belonged to it, the Government is a bigger banker than the entire formal banking sector in terms of the size of outstanding deposits.

In this background, the exclusion of government finances and foreign currency transactions was not innocuous. It effectively curtailed the domain of the application of the new measure to a highly restricted space which was no more than 1/4th of the desirable space. The exclusion significantly constrained the operations of the new system. It preserved the entire edifice of the interest based system as the monetary policy continued to be conducted along the standard and familiar patterns. The instruments of monetary policy largely remained in the old framework as government securities occupied the status of approved securities required for satisfying certain operational conditions of banking companies.

The attempt to preserve the interest-based financial system is equally evident from the fact that all legislative changes were aimed to accommodate the new measures as opposed to catering for the inherent needs of the Islamic financing system. The most visible form of this attempt was reflected in casting participative modes within the framework of debtor and creditor and to expand the scope of recovery laws to include such modes as well. With the exception of Mudaraba Ordinance, no other law was framed to provide for the special features entailed by the Islamic modes of financing. Indeed, the design of a new recovery law, specially for financing under the new modes, smacked of a bias against such methods of financing as they were thought to induce non-performance.


Source: Experiences in Islamic Banking: A Case Study of Islami Bank Bangladesh, Institute of Policy Studies. Republished with permission.
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