THE NEWS
Tuesday, December 25, 2007
Nadeem Ul Haque
We are looking for ways to accelerate growth so that poverty can be reduced and living standards improved. We go borrowing and begging to do this! Yet not many of us question the myriads of opportunities for investment that careless regulation stifles. The most glaring example of this is urban regulation which through Pakistan's history has stifled huge investment opportunities.
Construction leads growth. That is why analysts in the US always watch it. But look what our city planning paradigm has produced.
No tall buildings or apartments anywhere! We are all supposed to live in kothis!
The last time serious construction took place was in the sixties. Even today the tallest and the best building in Lahore remains WAPDA house made in 1966! Contrary to what people think, tall buildings and less regulated development does not lead to social and environmental ills. Research shows, that despite propaganda, US cities continue to develop at a rapid pace while their environment is getting cleaner and social evils like crime are declining.
Hotel construction too has been seriously retarded since Ayub's time. Why are their only two hotels in Lahore and they were also built in the sixties and seventies? Despite Lahore being rich in history and culture, why is their no tourism in Lahore? No conventions? Indeed none anywhere in Pakistan. Dubai has large conventions and boasts hundreds of thousands of hotel rooms. Lahore barely makes a few hundred 5-star rooms. Is this to protect a certain hotel monopoly? One should ask the related question, why has there been no entry into the hotel industry in the last 40 years? Why are multinational hotels not visible in Lahore and everywhere in the country? They will say that there is no demand. Of course there is not when they have to build out of the city. Why not a city centre location?
Indeed why do we not exploit our history and our mountains, beaches for tourism? Why no hotels near Moenjo Daro and Harrapa? No hotels in the mountains? Why? Tourist industry is huge and growing in the world with countries like Turkey getting $20 billion a year from it yet we have virtually willed it away.
Nathia Gali and Murree still have a governor's house which is hardly used and which could be a lovely high priced hotel? The hills still have rest houses being preserved for the VIPs at government expense. Rest houses were made in areas where there were no hotels for the touring judges or civil servants. Why not replace them with hotels? How many of these rest houses are properly used for government business? Is there any study of this?
Where is the commercial centre in any of our cities? No downtowns. I was told by one regulator that the heart of Lahore should now move to Bedian. By fiat even though the connection to the rest of the country is over the Ravi, yet the city centre should be by the Indian Border. People have to be moved from the old city and their current locations in Gulberg further out to preserve government real estate in the centre of town?
We have no highway infrastructure, pollution is already a problem. But no matter, spread the city out more and destroy the green fields of Punjab. Why is the heart of the city government owned? Almost all the land from the Charing Cross to the airport along the Mall is owned by the government. Some of it is not even fully utilized. Some examples of this are the Staff College (which can easily be moved to join up with the civil service academy near DHA), Civil service academy (now State Guest House and there is an academy near the DHA) NIPA, Government house, Navy War College (where is the sea?), the never-used the chief justice house (preserved only for weddings of the well connected).
The US government owns only the White House (smaller than our governor's mansion and the Vice President's House. All of us know the famous town house 10 Downing Street? The UK government maintains no housing for its permanent secretaries or judges! Why do we, a poor country, maintain expensive housing for officials?
Why is the urban regulation paradigm still friendly to an urban sprawl based on kothis? Why do kothi wallahs determine the pace of development by having the right of refusal to commercial development? Apartment blocks because of height and other restrictions are made economically infeasible. Where can you get readymade serviced office space in Lahore? Where is good warehouse space? Retail space is on now 3-marla plots? What can you build on that?
Why do we maintain rent control? Every major city in the world has eliminated rent control. All rent control does is reduce the supply of rental real estate and destroys the incentive to maintain quality real estate. Our regulators, however, are of the view that they know the value of rental real estate better than the market. Not surprisingly, Mall Road has shabby property that tenants have been renting for years at a rent that has not kept pace with inflation or real estate values. People who have had leases for decades continue to hold them and sometime even sublet. Rent control must go as an urgent priority if the construction sector is to be revitalized.
Urban construction is one of the most growth and poor-friendly activity in a country. Financial markets, pension funds can be based on it. It is sad that we are holding it back. Developing urban centres rather than urban sprawls are also intellectually and culturally invigorating. After all, most of mankind's major achievements--philosophy, democracy, industry, drama, art--have taken place in congested city centres. Let us embrace commercial development not fear it.
The writer is a former vice-chancellor of the Pakistan Institute of Development Economics.
Email: nhaque_imf@yahoo.com
Monday, December 24, 2007
Sunday, December 2, 2007
Is Islamic banking in Pakistan really Islamic?
Sunday, December 02, 2007
By Sajid Aziz
THE NEWS
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.
By Sajid Aziz
THE NEWS
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.
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