KARACHI:
Previous to 1985, there have been no Islamic banks in Pakistan. Quick ahead to at the moment and there are six full-fledged Islamic banks (IBs) and 16 Islamic Banking Department Networks (IBBs). These are Islamic divisions or subsidiaries of standard banks. Islamic banking now accounts for almost 1 / 4 of all banking belongings in Pakistan and continues to develop sooner than the traditional sector.
So, what had been the components that led to the introduction of Islamic banking in Pakistan, and to what extent are these banks really Islamic? The story begins in 1985, when then president Ziaul Haq, through the latter stage of his Islamisation programme, sought to introduce Islamic banking in Pakistan. To this finish, he constituted two committees.
The primary was a committee of non secular students. Its goal was to look at whether or not Islamic banking might be carried out inside Pakistan’s present monetary and authorized framework.
The second was a technical committee led by the then finance minister, Ghulam Ishaq Khan, whose members included economists, bankers and monetary consultants. Its goal was to evaluate the technical and financial feasibility of transitioning to an Islamic monetary system.
Each committees had been tasked with advising Ziaul Haq on whether or not Pakistan might realistically transfer in direction of an interest-free banking system whereas remaining tied to the worldwide monetary order.
The technical committee was unambiguous in concluding {that a} complete transformation of the financial construction in Pakistan can be required to ascertain a genuinely Islamic financial system. This would come with modifications from the manufacturing to the consumption of wealth, alignment of financial procedures with Islamic rules, and institutional independence from world monetary our bodies such because the IMF and the World Financial institution. The committee argued that with out such systemic modifications, changing solely the banking sector to an Islamic mannequin can be inconsistent and technically unviable.
The committee of non secular students didn’t disappoint the rulers. Its members acknowledged that full implementation of an Islamic financial system was not possible below present circumstances. Nonetheless, they proposed incremental steps by the usage of authorized mechanisms (hiyal) corresponding to Murabaha, Mudaraba, Ijara and Bay Mu’ajjal. These mechanisms had been supposed to approximate Islamic monetary rules inside the constraints of the prevailing financial atmosphere.
When the suggestions reached policymakers, the technical committee’s report was put aside and the system primarily based on hiyal was adopted. Although among the students on the committee later expressed reservations concerning the ensuing framework, the hybrid mannequin was adopted, continues to function and is usually introduced as Islamic banking.
This led to the creation of an Islamic-looking system layered on high of a traditional financial construction. The broader argument is that each Islamic and traditional banking in Pakistan stay embedded inside the world, debt-based financial system. In consequence, labelling the system “Islamic” with out endeavor structural reforms dangers creating conceptual confusion and deceptive the general public.
The speedy progress in Islamic banking in Pakistan can, partly, be defined by the general public’s perception that there exists a really Islamic system of banking within the nation. Labelling a financial institution as Islamic opens the door to a flood of trustworthy depositors who’re loath to take care of standard banks.
That is low cost cash for the banks, since it’s held primarily in present accounts that don’t pay curiosity. In banking phrases, the price of funds for Islamic banks is zero. This permits them to provide excellent monetary outcomes. And for this reason 16 standard banks have jumped into the fray by forming Islamic banking subsidiaries – IBBs, as they’re referred to as.
If proof is required of the profitability of Islamic banking, contemplate that the main Islamic financial institution in Pakistan, Meezan Financial institution, earned a internet revenue in 2024 of Rs101 billion, with a return on fairness (ROE) of about 30%. Examine these outcomes for a similar yr with Pakistan’s largest financial institution, Habib Financial institution Restricted (HBL), which earned a internet revenue of Rs59 billion and an ROE of roughly 15%, regardless of HBL’s asset base being twice the scale of Meezan’s.
Islamic banking has given rise to so-called Shariah boards populated by outstanding Islamic students. These boards are retained by banks to advise them on whether or not their Islamic banking merchandise and investments are appropriate with Shariah. Since these boards earn revenue from the banks, there’s a pure incentive to inform the banks what they wish to hear.
There isn’t a dispute amongst Muslims that Islam doesn’t permit Riba, or curiosity, on the lending or borrowing of cash. So, the query is: do authorized mechanisms, complicated machinations within the construction of Islamic merchandise, and intelligent semantics corresponding to calling curiosity “revenue” render banking Islamic? On condition that it is a matter of religion and that an excessive amount of cash is concerned, it’s not probably that this query will acquire an unequivocal reply.
THE WRITER IS CHAIRMAN OF MUSTAQBIL PAKISTAN. HE HOLDS AN MBA FROM HARVARD BUSINESS SCHOOL
