Article 227 of the Constitution of Pakistan stipulates that “All existing laws shall be brought in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah, in this Part referred to as the Injunctions of Islam, and no law shall be enacted which is repugnant to such Injunctions”
Existing situation of Pakistan’s financial system (only referring to banks) is far away from the constitutional requirement and related guidelines. As per the list issued by the State Bank of Pakistan (SBP), there are 25 banks operating in Pakistan and out of them only 5 banks are what we generally refer to as “Islamic Banks”. This renders majority of our financial institution as conventional or Non-Islamic.
There is an ongoing argument amongst the financial professionals regarding the pace at which the Islamic Financial System is being implemented. Initially, I was in favor of the argument that the existing pace of establishing an Islamic financial system is adequate. However, after an interesting debate and conversation with my colleague Mr. Emad Bin Saleem, I have come to realize that pace of change is very slow and accelerated efforts are required to ensure that our Islamic financial system is in line with the constitution and Shariah guidelines.
This article primarily focuses on one option and/or suggestion which could accelerate the pace of change for implementation of Islamic financial institution in Pakistan. The option and/or suggestion which I have set out explores the possibility of government-backed direction to the State Bank of Pakistan (SBP) to roll out a 3 to 5 years transformation program to be followed by all banks (conventional) to convert their operations from the conventional to Islamic banking. This program should include adequate milestones, timelines, and support required to assist the banks in executing this change. Faysal Bank is currently going through the process of converting into a full-fledged Islamic financial institution. The experience of Faysal Bank can be used as a case study in this regard.
On the face of it, this option may seem too radical and fundamentalist, however, considering the progress made by our financial system so far, these sort of efforts and changes are required if we are to truly establish a shariah-compliant financial system and adhere to the constitutional requirements.
However, there are certain commercial and operational implications for this option which I have discussed in the below paragraphs.
Increase in deposits and advances: It is a well-known and established fact that the majority of the population in Pakistan is unbanked and they often avoid dealing with the financial institutions primarily due to access and their religious beliefs. If all the banks in Pakistan start offering shariah-compliant deposit and advances products, it would certainly increase the number of customers as they won’t be concerned about their transactions being in-Islamic. As a result, banks shall have higher deposits available to support their lending and investment activities.
New Hub of Islamic Banking: Pakistan as a country shall become a hub of Islamic banking. Once all the financial institutions are converted from the conventional model to the Islamic model, all the banks shall try to introduce new products, schemes, structures that follow the shariah guidelines and hence we as a country shall start leading the Islamic Banking industry in this regard. In addition, this shall also result in an increase in the number of experts for Islamic financial services within the country which could positively impact the job market.
New Investment in Stock Markets: The religious beliefs curtail investments in the stock market within Pakistan. A KME Meezan Index (KMI-30) is established for those investors who wish to invest in companies that are screened for shariah compliant criteria. Amongst several other factors, debt to total asset calculation of the respective company is considered to be eligible to qualify for KMI index. Where the debt to assets ratio is not in accordance with the guidelines of shariah principles, the respective company is not included in the KMI list and therefore is not suitable for a specific segment of investors. Once all the banks have aligned their advances and other portfolios in accordance with the shariah standards, the debt to asset ratio shall become irrelevant for those investors who avoid investing in companies with high debt due to the consideration of interest. As a result, more investors shall be willing to invest in the stock market.
Interest / Profit Rates: Currently, the profit rates offered by the Islamic Banks on advances are higher as compared to other conventional banks. It is a conception amongst the general public that the reason for this high profit-rate is first that the transaction being offered is shariah-compliant and the second that the Islamic banks are prone to a higher risk level as opposed to the conventional banks. The option suggested will eliminate the visible differentiation of profit rates / interest rates between the Islamic banks and conventional banks. Moreover, regardless of the personal preferences of any particular individual or entity, all their dealings with the financial institution shall be shariah-compliant.
Notwithstanding the benefits and positive attributes, there would be concerns over this model as well. Some major concerns are elaborated below:
Radical and Fundamentalist Measure: Many of the pseudo intellectuals would argue that this option promotes radical and fundamentalist thinking and the state should not enforce such measures. I would oppose this argument by stating that the constitution clearly states that Pakistan is an Islamic Republic and all the laws within the country shall be in accordance with the shariah guidelines. There is a difference when an individual develops his own thinking by misguided narrative or brainwashing to execute a radical or fundamentalist task, however, when a state decides to implement any decision it goes through a rigorous process which is handled by people from various class, background, religious beliefs and political backgrounds. Therefore, we could argue that this option cannot be considered as fundamentalist but rather a well thought out process in line with the Constitution and Ideology of Pakistan.
Aligning the interest of conventional banks: Apparently, this may seem like a very tedious, lengthy exercise with various operational implications. However, when you consider the commercial impact of this decision i.e. increase in deposits, advances, investments, and new opportunities created, it would definitely outweigh the associated costs. And let’s be honest, the commercial banks exist to make money and they would definitely opt for an option which can provide an opportunity to do so.
Although this option may seem very optimistic and its implementation would not be as smooth as we would like it to be. However, the pace with which we are progressing is not sufficient and I believe it is the time to adopt more proactive approach to ensure that our financial system is aligned with our constitution and Shariah guidelines. Some of the merits discussed in this article definitely outweigh the concerns and costs associated with this option. However, one merit which we often fail to consider during the commercial and operational discussions is that when the financial system of your country eliminates riba and complies with the shariah standards, the impact of Barakah (blessing) would be unquantifiable.
Disclaimer: The views expressed in the article are the author’s own and do not necessarily reflect Dunya News’ editorial stance.