DR.Shahid Hasan Saddiqui, Chairman & Chief Executive, Research of Islamic Banking & Finance, Karachi Pakistan,writes:-
Following the recommendations of Council of Islamic Ideology of Pakistan in his report of 1980, and under the supervision of State Bank of Pakistan(SBP),the transition of banking system of ADBP now renamed Zarai Taqiati Bank Ltd(ZTBL) conventional oriented to Riba free had been arranged.The lending onward 1984 had been shown as confined strictly under the banner of Islamic Banking System(IBS) but existing loan accounts of the said bank had not been changed from conventional to Islamic due to the reason that the documentation were arranged in these accounts on the interest-based system. The said system had been failed and reverted to the interest based system,with a change that accumulated interest(usury) is not being charged now from the borrower , but while calculating the amount of interest/markup the amount of loan and numbers of days are taken into account along with fixed rate of interest/markup,which varies, usually 9 to 14 percent. With some causes of reversion from IBS to interest- based system,one is,that the personnel of the bank had neither been trained especially with the knowledge of Islamic banking with its need and spirit, nor they were mentally prepared to face this important challenge,like to- days. Some lending reported to have been made under"Qard-i-Hasana) with 3 per cent service charges but to the influential persons and the loans were not utilized properly and had been devoured . This matter has not been taken seriously , because it is pending with FSC,as mentioned in the next para. We have chosen for here some paras from an article of Dr Shahid Hasan Siddiqui,written in 2008 and included in a book"Socio-economic challenges faced by Pakistan" published by International Institute of Islamic Economics-IIUI-Pakistan. These paras are reproduced with some comments where required.
ISLAMIC BANKING-THE PREVAILING STATUS.
The present system of Islamic banking in Pakistan was designed in pursuance of a meeting held on September 04,2001 under the Chairmanship of the than President Gen.Pervez Musharraf.The meeting was attended to among others by Governor State Bank of Pakistan (SBP),officials of Ministries of Finance & Law and some members of the Council of Islamic Ideology.It was decided in the meeting to shift to interest-free system in gradual and phased manner. This decision was not in conformity with the judgement dated June 14,2001 of Shariat Appellate Bench of Supreme Court of Pakistan(SAB) as far all practical purposes it visualized the continuation of interest-based banking system even after June 30,2002-the extended dead-line given by SAB for implementing its earlier judgement. This judgement was however,subsequently set aside in review appeal on June 24,2002.
COMMENTS.Maulana Muhammad Sadique Arkani, reveals that, SAB in May 2001,
had fixed dead line for the transition to a Riba free economy as June 2002 and Justice Rtd Mufti Muhammad Taqi Usmani was not agreed to extend the date of this dead line,hence he was removed from his services and ad hoc members/ judges have been appointed namely(Honorables) Allama Khalid Mehmood and Dr.Rashid Ahmed Jullundhari"(P-114-115 of Islami Bankari aur Ulama,published by Al-afnan kKarachi. Pakistan).
It is worth mentioning to note here that Dr.Rashid Ahmed Jullundhari had supported the writings of Mr.Yaqub Shah and Maulana Phulwavi when he was Director of Institute of Islamic Culture,Lahore,wherein they have stated that the" Commercial interest prevailing in the modern Banks" is not prohibited in the Islamic Shariah". Dr.Jullandhari is a prominent Islamic scholar and author. According to him"At present the so -called departments of Islmiyyat in our educational institutions are totally inadequate to promote understanding of the Shari'ah...the paradox of the age is that among the masses those persons are popularly known as'Ulama who may be suitable as imams of mosques and effective as khateebs but who can never be described as the Ulama in the true of the word...it is matter of regret that the Legislative Assembly or Council has failed to perform its role in making Pakistan a welfare state.In fact,the jugglery of words and empty slogans of politicians led us nowhere." After mentioning the current situation for the demand of Islamic Shariah,he write"this impression about the Shariah is a legacy of the age of decline in Muslim society and has no relevance to that Shariah which is known as the protector of the honor and dignity of human beings and whose objective is to promote the welfare of mankind and establish law and justice in the society."
While commenting about the problems of Islamic world he refers."A former Prime Minister of Malaysia was quoted as saying that his country is not like Saudi Arabia or Pakistan or Iran where the population is a 100 per cent or 98 per cent Muslim. In Malaysia non-Muslims account for almost half the population. Personal law problems of Muslims, like marriage and inheritance, are resolved through the application of the Shariah law,while a universally acceptable law prevails for collective matters. If sphere of the Shariah law is enlarged and this law is faced on the non-Muslim population, it will result in terrible bloodshed"
(Islamic Sharia and its application). The scholars of Al-azhar perhaps had the similar views regarding Riba.
Tajuddin Azhari, writes that " According to Alazhari Ulama(scholars of Al-azhar)the interest earned on Saving Bank Accounts is permissible, First Fataw on this subject had been delivered by Muhammad Abdah(d- 1904) which was published in the interpretation of verses-275 to 281 of Sura Albaqra regading Riba,by Allama Rashid Raza.The majority of Islamic world has not accepted this opinion(Ijtimai Ijtihad-IRI-IIUI-P-329). The opinions of the Islamic scholars have been compiled in"The Supreme Court's on Riba" published by the Shari'ah Academy IIUI Pakistan,where it has been proved that Riba in both commercial and consumption loans are prohibited in Islam.
However the matter is pending and new banks under the banner of Islamic banking have been established. The Islamic scholars are working with zeal and zest on the subject, although they have different opinions, observing the freedom to write and write within the limits of Islamic Shariah.
The banks operating under the banner of Islamic banking in Pakistan have failed to eliminate the injustices of the interest-based banking system. These banks are in fact exploiting their depositors and are also not contributing to the achievement of the socio-economic objectives of Islamic economic system.The activities of these banks operating under the banner of Islamic banking are also having the same negative impact on the economy as is the case with conventional banks.
Is is important to note that bulk of financing by Islamic banks is being made on the basis of second-line fixed return techniques like Murabaha and Ijarah etc, and that too on the bench-marks of conventional banking system. In these modes of financing,Islamic banks to not accept any responsibility for the operational losses of the entrepreneur as they are guaranteed a fixed return notwithstanding that the sharing of the loss is the essence of Islamic system of banking.Further,the returns guaranteed to Islamic banks on their financing are also based on the bench-marks of interest-based banks in the country.
Comments.Dr.Ejaz Ahmed Samdani, says that the present Islamic banking system is not complete and true Islamic banking system,but progress in this field is satisfactory".But we say that the said system is not child at the breast it should be true in all sense now. It is found that new avenues are not being explored, but there is vast scope,as" Income generating loans" may be advanced to the skilled persons in the rural areas. For cottage industries the loans can be advanced to the groups of women and men.
The fact is that Islamic banks,in the present circumstances can not,even if they want to, eliminate the injustices melted out to depositors/investors by the interest-based banks.For payment of real positive rates of return to their depositors,the Islamic banks would have to enhance rate of return on their financing in addition to reducing their spreads. This enchantment would not be acceptable to many entrepreneurs availing finance from Islamic banks as alternate avenues are available to them for securing advances at lower rates of interest from conventional banks.
It is there,crystal clear that the policy adopted by SBP to allow the conventional and Islamic banks to run parallel to each other for a long period is not justified since it is giving bad name to the Islamic system notwithstanding that the fault lies with us and not with the system. Although the Shariah Supervisory committee(SSC) of SBP has not approved this parallel system of banking,the general impression amongst the people dealing with the Islamic banks but ignorant of the fact is that this system has been approved by the authorities concerned. It is therefore, essential that SSC should explain this position to the public.
Maulana Maududi had observed that Islamic financial system can neither grow nor can be firmly established if interest-based translations are not totally prohibited. Allowing interest-based banks to continue to operate for an indefinite period,in any case,is un-Islamic. The Holly Qur'an ordains"Enter into Islam totally"(2:208) and while prohibiting riba transactions,directs Muslims to "give up what remains of your demand for riba"(2:278).
In the Musharakah mode of finance,both profit and losses are shared by the parties according to ratio of their respective capital. Shariah scholars have however,allowed that in Musharakah,profits can be shared in the mutually agreed ratio. This is creating serious distortions. In a large number of cases where Islamic banks provide financing on the basis of Musharaka, the ratio of profit to be shared is so manipulated that, in the final analysis,the profit earned by the Islamic banks is comparable with the corresponding interest income on advances earned by the conventional banks.
The SBP provides re-finance to Islamic banks on the basis of Musharakah but the ratio of profit sharing is so determined that the share of State Bank's income remains same as in the case of re-finance provided to interest-based banks. Similarly in the diminishing Musharakah modes of financing, the purchase of units by banks clients is not on the basis of market value of the property. Obviously,this is to keep the rate of return of Islamic banks in line with the rate of return of interest-based banks.
It is regretfully noted that Islamic banks have not opened a single branch in rural area and have not allowed Micro-finance and agricultural loans to land-less tenants(Harees) and small farmers. The behaviors of Islamic banks is not different from their counterparts. Their emphasis is on consumer finance scheme, which encourages people to live beyond their means. This scheme is not compatible with the spirit of Shariah. It is also having negative impact on the economy as discussed earlier.
Comments :- Above 70 percent of the population is engaged with agricultural sector directly or indirectly. The lending under "Bai Salam" can be made to the agricultural community. The bank may establish the procurement centers under his ownership or control which is allowed under Shariah laws,through which new employments can be made.
Maulana Maududi,while recounting the evils of interest-based banking,observed that a financier who advances money at fixed rate of profit is selfish as he is not concerned with the operational result of the business. He adds that the depositors of Islamic banks would hope to get unspecified but unlimited profit instead of fixed rate of interest. It is therefore, obvious that Muslim philosophers visualized large scale financing only on PLS basis and never on fixed rate of return(like in Murahaba and Ijara etc),which in any case is not dependent on the operational results of the entrepreneur.
Maulana Mufti Muhammad Shafi(Late),Grand Mufti of Pakistan, while referring to conventional banks observed:__"A person whose own worth is Rs.100,000/--engages in business employing Rs.1000,000. Of the hefty profit earned through such business, a small portion is paid to the bank by way of interest and the rest is pocketed by the businessman. The bank, in turn, distributes an even lesser amount to the depositors".
Mufti Shafi accordingly added that interest-based banks are"the instruments meant for sucking the blood of an entire community and pumping it into the veins of few capitalist." It is important to note that the total number of credit accounts of all conventional banks is 20.7 percent of total deposits accounts whereas in the case of Islamic banks,the total number of financing accounts is only 9.4 percent of total deposits accounts as on June,302007. The position is therefore,much worst in the case of Islamic banks as compared to interest-based banks,which were termed as blood suckers of the community.
In practice the conventional banks in Pakistan have been paying real negative rate of returns to their depositors and Islamic banks are no exception, notwithstanding that some of these banks have been enhancing their profitablity. As mentioned earlier, it was in 1993 that the then Governor, SBP had remarked" A banking system that gives a rate of returns to small savers which is negative in real terms, is exploitative one."
It is signifificant to note that Murabaha is the most popular instrument of finacing used by Islamic banks. In fact, Murabha is a particlar type of sale and not a mode of finacing in its, original sense. The Pakistan's sales tax regulations have been specifically amended for the purpose so that sales tax is not payable on the value-added price(amount of profit earned by the bank while"selling"goods in Murabaha transactions). This also implies that Murabaha financing can in fact be termed as a manipulation(Heela)just to escape from the label of interest and the net result of the transaction practically remains the same in both the systems.
The International magazine"Newsweek" reported that a Pakistani banker Shahid Hasan Siddiqui and other Muslims would like Islamic banking to remain true to Muslim values such as promotion of socio-economic justice and fair distribution of wealth. The banking can become Islamic, in the real sense of the word, only when it fully conforms to the Islamic values such as real risk sharing,promotion of socio-economic justice and fair distribution of wealth. This would be possible only if bulk of financing by Islamic banks is made on Musharakah basis(Profit and loss sharing) according to the ratio of capital invested in the business.
It is important to note that Muslim economists have all along been claiming that the elimination of interest and enforcement of the Islamic banking system would encourage savings and capital formation,ensure equitable distribution of income and wealth and establishing justice between the parties. It is also believed that the Islamic banking system within the framework of Islamic economic system would lead to optimum allocation of resources and economic stability. Now if the Islamic banks and entrepreneurs share the profit which corresponds to the prevailing interest rate, as is being presently done, these objectives are not likely to be achieved even if other financing policies of Islamic banks are properly defined to contribute to the achievement of the objectives of Islamic economic system.
i.In view of the difficulties in allowing large scale financing on PLS basis,it is suggested that a Model Islamic Bank should be established. The proposed Model Bank should undertake all normal banking business and allow financing only on PLS basis according to true spirit of Shariah. This Model Bank would hopefully pay much higher rate of returns to depositors as compared to the rate being paid be existing Islamic banks. The establishment of Model Islamic Bank would motivate other Islamic banks in Pakistan and abroad to enhance their share of financing on PLS basis. This proposal was also made before Shariah Appellate Bench of Supreme Court of Pakistan(SAB).
ii.Shariah scholars should announce in clear terms that the existing parallel system is un-Islamic and a time frame of say one year be given for complete switch over to interest-free banking system. It should be made clear that if this is not done, the support and authentication being given to the system would be publicly withdrawn. It is also suggested that the scholars concerned should accord their approval to the existing system of Islamic banking only when Musharakah financing is based on profit and loss sharing strictly on the basis of capitals employed and that the share of Musharaka in total financing is gradually enhanced according to a laid down time-frame so as to ensure that at least 50 percent of the new financing is made on the basis of Musharaka.
iii. Islamic banks must re-structure their financing policies keeping in view the objectives of Islamic economic system. The emphasis should therefore,also be on micro-finance rather than on consumer finance.
iv.Islamic banks should open more branches in rural areas to cater the financing requirements of the local population including landless peasants(harees).
COMMENTS.Armstrong(b-1930) an American Astronaut says"One small step for a man,one giant leap for mankind". Dr. Shehzad Iqbal Sham,in Fikar-o-Nazar(July-September 2010)IRI-IIUI-Pakistan has suggested for Mudaraba loan. The points mentioned there in useful. Who will take the step? It is oft told story that the competent authorities should take necessary action on the subject.
v.The Islamic banks must share their profit with the depositors in the real sense.
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