Sunday, December 2, 2007

Is Islamic banking in Pakistan really Islamic?

Sunday, December 02, 2007
By Sajid Aziz

Doubts exist among consumers about the Islamic banking being practised in Pakistan, the growing popularity of this mode of banking and finance in the country and other parts of the world notwithstanding. People mainly raise the question, is it really Islamic? Those who raise questions about the authenticity of Islamic banking are, undoubtedly, firm believers in Islam, the Islamic economic system and the unity of the Muslim Ummah.

Eminent Islamic scholar and the chief of the Tanzeem-e-Islami, Dr Israr Ahmad, says: “Islamic banking is no different from the interest-based conventional banking. The Islamic banking being promoted and practised in Pakistan is nothing more than a fraud.”

He says second Caliph Hazrat Umar Farooq, in the light of Prophet Muhammadís (Peace be upon him) sayings, had ruled that any deal/business where there is a doubt about the involvement of usury/interest should not be accepted.

The argument as to whether Islamic banking is really Islamic has two different facets. First, whatever is being practised under the name of Islamic banking is apparently quite similar to the operations of a conventional financial institution, so it creates doubts in people’s minds and they ask on what grounds we can call it Islamic? So they feel that it is merely a change of name and documents and, in fact, it is no different from conventional banking. The second facet of the question is more important and pertains to the socio-economic factors associated with the overall Islamic financial system. Due to significance of these objections, we will discuss these two issues before looking on other arguments.

Merely a change of name and documents: Omar Mustafa Ansari, a prominent scholar and the author of a book on Islamic finance namely “Managing Finances ñ A Shariah-Compliant Way,” says the most common and most discussed argument against contemporary Islamic banking is that there is “no difference” between conventional banking and Islamic banking and it is merely a change of name and documents.

The second argument, which is actually derived from the first, is that even in Islamic banking the most common products being used, eg, Morabaha, Musawwama, Salam, Istisna, Diminishing Musharaka and Ijara Muntahia Bittamleek are based on fixed return. Even the Musharaka and Modaraba based products are engineered in a way that the profits are ‘virtually-fixed.’

Ansari says that one should realise the fact that unless we can distinguish an Islamic bank from a conventional bank, it would be difficult for us to rely on the former. It has been observed that Islamic banks try to ensure that their products are similar to those offered by conventional banks in all respects, even if for that purpose they have to incorporate a few provisions in products that are not considered to be good or a few of them are considered Makrooh (permissible but undesirable). In addition, Islamic banks’ endeavours are geared towards minimisation of their risk in every possible way, thus the essence of Islamic finance which is based on risk-taking is killed.

Most importantly, it should be borne in mind that in some areas there is a very thin line of difference between Haram and Halal. For example, by only saying aloud the name of Allah Almighty on an animal while slaughtering it makes it Halal and permissible and without pronouncing the name of Allah the meat becomes Haram. Likewise, by uttering a few sacred words in the presence of a few witnesses a man and woman become lawful man and wife.

Similarly, if a transaction can be engineered in a way that it becomes Shariah compliant, then we should not conclude that it is Haram only due to its resemblance to the interest-based financing, he says.

“Also, it is pertinent to note that since the Islamic financial services sector is in its infancy when compared with conventional banking, we unfortunately have to follow the conventional system in the pattern of financial products and are still not in a position to develop totally new financial services. Over several centuries, the conventional banking system has acquired a good understanding of human needs and psychology and has invented a considerable number of financial products.

For example, if they have running finance and overdraft as a financing tool, we have an alternative to it in the form of Istijrar with Morabaha or Musharaka based running finance model. Similarly, if they use finance leases as a financing tool, we have made it Shariah-compliant through Ijara Muntahia Bittamleek, or Diminishing Musharaka. These are only two examples. The list is long and for each interest-based financial product, except for those explicitly Haram, more than one alternatives have been formulated,” says Ansari.

No one can argue that fixed return-based banking, although being Shariah compliant, is not in keeping with the tenets of Islam. In addition, Islamic banking as being practised at present focuses more on consumer finance than on catering to the needs of SME and agricultural sectors and micro-finance, so it is not contributing enough towards a “just and equitable monetary system” that Islam desires, he explained.

Is it Heela banking? It is being discussed at various forums that contemporary Islamic banking is based on Heelas. From the perspective of Shariah, people take recourse to Heela to circumvent what is proscribed in religion. Those having an insight into the industry cannot disagree with this argument to a certain extent, as it has been observed that certain transactions are based on Heela.

The charge of Heela cannot be levelled on the entire industry. We should acknowledge that the industry is primarily based on the principles of the Holy Quran, Sunnah and Fiqh. It is worth noting that mostly a Heela is applied in the “execution of a transaction” rather than “designing of a transaction.”

In other words, we can safely conclude that the application of Heelas in Islamic banking is not due to any weakness due any weakness in the theories of Islamic banking, but actually it is entirely a matter of misuse/ misinterpretation of basic Shariah guidance in respect of various Shariah-compliant financial transactions.

So it becomes imperative that in order to support the growth of Islamic banking and finance on right footings, we should strengthen the Shariah-compliance mechanism for the industry. Also, there is the need to eliminate Islamic financial products that have the potential of misuse.

Use of interest rate as benchmark: is it Halal? Critics, including scholars and economists, say that most International Finance Institutions, while providing financing by way of any of the ‘Halal’ transactions, determine their profit rate on the basis of the current interest-rate benchmarks prevailing in the conventional money market. Scholars are of the view that by applying these benchmarks the Islamic banking industry makes their transactions ‘similar’ to interest-based transactions and, as a consequence, these transactions become doubtful from the Shariah point of view.

Economists say this makes these financial institutions a part of the prevailing capitalistic economic systems, so such transactions go against the tenets of Islam.

This issue, however, needs to be addressed by the government as well as the market players. A strong Islamic inter-bank market may provide us opportunities to develop our own benchmarks for Islamic banking operations, Ansari concludes.