Understanding Basics of Islamic Banking and Finance for going forward
Muhammad Arif
Sometime back former Governor of SBP Mr. Yaseen Anwar made some comments on the subject and he was right to say that currently Islamic Banking in Pakistan and elsewhere are mainly relying on debt based fixed income products, so they should now move towards non debt based Islamic products which in fact are the essence of Islamic Finance.
As a solution he also suggested that first we should all become pious and respectful to each other. In this way we would be able to create environment for Islamic finance. However this argument goes against the historical facts. Just see how Islam came, nobody was accepting it, but with solid footing, Hazrat Muhammad (PBU) went on with his fight. The changes emerged with new codes and system that was brought in shape of Quranic instructions and practical examples of Hazrat Muhammad (PBU).
In recent example for implementation of Islamic Finance, Malaysian did not wait for the time till all their inhabitants turn in to disciplined and respectful to each other. For this they first brought changes in their legislation and these changes provided due support to the Islamic financial market. Since 2005 onward Malaysia has remained successful in meeting all its infrastructure requirements through Sukuk issuance.
So for Islamic finance we all need to study the dynamics of current financial system and to innovate products and market supported by due legislation. If these products can become better alternatives to conventional products than we can say that we have made some head ways towards our desired goal.
Fortunately I remained part of an international committee on this very subject. The committee was assigned to focus on development of Islamic financial market, so in nutshell I know that still we are at initial points and nothing has come in reality very substantially. But this argument goes well for conventional finance as well that has failed time and again and is in transformation after recent US and European recession.
Without going in to detail what our constitution says on the subject and what has been interpreted by the Supreme court regarding riba and what has been done by the different regimes especially General Ziaul Haq, we should try to deliberate on this subject very seriously.
Islamic finance does not recognize concept of time value of money i.e. inflation, but in fact it is not like this in the real world. The fact is that Islamic Finance currently exists as a small portion of total finance. Currently World GDP (PPP) in nominal terms is around $ 80 trillion in which Islamic countries (57 in numbers) have just GDP (PPP) of around $ 10 trillion. Hence Islamic countries GDP are 12.40% of the world GDP.
Now coming exclusively to Islamic countries they are even practicing a small part of Islamic Finance in their jurisdictions. In Pakistan it is just 14 % of total banking assets. In Malaysia it ranges around 20%.Therefore in ultimate Islamic finance is just small part of total finance, so to expect from it to become a catalyst in bringing change in the economic dimensions is futile to think at the moment.
So than what Islamic finance or Islamic banking means. To be rational it is a market niche and should be recognized like this for the time being. On conventional side they innovate many new products on daily basis so Islamic financial products are just addition on this regard.
While teaching on Islamic Economics in Sheikh Zayed Sultan Institute University of Karachi, I used to say to my students that Islamic finance is at its start and more frankly at zero. At this, once a Director of SBP commented that if you are holding this view than what you are telling to your students on Islamic economics. My answer was that I am telling them the truth and after recognition of this truth we can move forward.
To be more elaborate on the subject, I have finalized my own book on Islamic Economics which is available now. However in this book while defining Islamic economics, I witnessed that Islamic Scholars 700-800 years back like Tusi were more broad based on Islamic economics than current ones. Unfortunately we have gone further narrow in defining Islamic economics or Islamic Banking right now.
One must remember that revival of Islamic economics/finance started after decisions made in Makah conference in the decade of 70,s. Thereafter first Islamic bank was established in Egypt and onward in Dubai in 90,s. First Sukuk (bonds) were issued in Bahrain in decade of 2000. Islamic banking in current shape started just ten or twenty years back. So revival of Islamic banking or Islamic finance has a history of ten to twenty years. No doubt on evolution we have a history of 1400 years but that has no match with current financial innovations. That was the period of Islamic capitalism or Mercantilism (means trading era).
Now coming to current Islamic financial complexities, first we should know that like different sects we have different definitions for riba (interest). In Iran they have different definition and this is so in case of Malaysia and Indonesia. We are more close to GCC and Sudan. This needs rectification and a consensus definition needs to be coined. Unfortunately difficulties in this area are the religious scholars. In one meeting we 20 countries tried to coin some definition but at this Governor of Central Bank of Sudan said that “all right I carry this definition but if religious scholars in my country do not agree with this definition than I cannot do anything”.
This subject require long deliberations as Quran and Sunnah are clear on this subject but differences arise on their interpretations by four school of thoughts i.e. Hanafi, Shafi, Hambali and Malaki who basically differ on the point that how much weight-age can be given to the logic or Ijmah on making these interpretations.
Islamic finance is more complex than conventional. If not done with precision than it carries lot of risks as all its transactions are asset based and asset also carries its own risks. Take the example of mortgage financing in US that has brought havoc for the whole world in 2007 and even now.
Now coming to the subject of debt and non based Islamic mode of financing, mostly financial institutions trade on Murhabah (leasing). On non debt based financing we have Musharkah, Mudarbah and Ijarah. Ijarah is mostly in practice, however in case of Musharkah and Mudarbah they have mostly been practiced in Iran and Sudan from the government side. But in lump sum they have not been able to control liquidity through these modes. In Iran and Sudan the inflation has always remained above 16%. Secondly uses of theses modes require expertise to price an instrument on long term basis. This is very difficult. In some countries they have tried to develop some benchmarks through floatation of World Bank (IFC) or ADB papers or LIBOR or KIBOR in Pakistan. Take example of Pakistan. Can any bank is able to price infrastructure financing on right lines. So in fact this is a difficult area both for Islamic as well conventional finance. For example once Pakistan was offered funds through a currency swap arrangement by ADB but was not accepted as its cost was significant i.e. of currency swap.
However for growth of Islamic finance in Pakistan, SBP needs to take Islamic banks in its ambit. That has been done but its monitoring system is very weak.
Government of Pakistan Sukuk now amounting more than Rs 385 billion (now its stock as of May 2019 is Rs 71 billion) is a good addition in Islamic Finance in Pakistan. While in SBP I played some role in its development. It is Ijarah based but still I hold that it needs to be transformed in to short term instrument like T-bill available on discount. For doing this government would have to change its accounting procedures, however carrying quality of short term instrument with payment on cumulative basis it would be easy to price it in the market. Bai Muajjal with stock of Rs 8.8 billion has now been introduced but its volume is still not significant keeping Islamic Banks deposits around Rs 1.25 trillion.
For issuing GOP Sukuk, government once sold Lahore Islamabad motorway to the investors (with pledge to buy it back on maturity of the bonds) for raising $600 million through international market. For domestic sukuk they are using Islamabad-Pindi Bhatian motorway, Air ports etc etc. Externally Government has also procured $ 7.3 from Euro Sukuk.
The charm in issuance of Sukuk to provide government financing for meeting its deficit is that it automatically brings a ceiling on its borrowings since government has got limited assets.
Finally we all should recognize that overall public perception about Islamic finance is not clear in Pakistan yet and every one considers it like a conventional product. To me frankly currently banks and universities in Pakistan are not interested in giving true picture of Islamic finance. It has become a business and would result like this till it is treated like a business. Dr Younus of Bangladesh once said that I got success in bringing idea of microfinance in to reality because I was not a banker who always indulges in making decisions on the basis of their balance sheets.
Quality posts is the key to invite the people to pay a visit the website, that’s what this site is providing.
Попробуйте lucky jet краш – игру, где каждый запуск может принести прибыль. Зарегистрируйтесь на 1win и начните зарабатывать уже сегодня!
I like the valuable information you provide in your articles. I will bookmark your weblog and check again here frequently. I am quite certain I will learn plenty of new stuff right here! Good luck for the next!
Woah! I’m really loving the template/theme of this site. It’s simple, yet effective. A lot of times it’s difficult to get that “perfect balance” between user friendliness and visual appearance. I must say that you’ve done a fantastic job with this. In addition, the blog loads extremely fast for me on Opera. Superb Blog!
You should take part in a contest for one of the finest blogs on the web. I will recommend this site!
Unquestionably believe that which you stated. Your favorite justification appeared to be on the net the simplest thing to be aware of. I say to you, I definitely get irked while people consider worries that they plainly do not know about. You managed to hit the nail upon the top and also defined out the whole thing without having side effect , people can take a signal. Will likely be back to get more. Thanks
I was wondering if you ever considered changing the layout of your blog? Its very well written; I love what youve got to say. But maybe you could a little more in the way of content so people could connect with it better. Youve got an awful lot of text for only having one or two images. Maybe you could space it out better?
hi!,I love your writing so much! percentage we keep up a correspondence more approximately your post on AOL? I need an expert in this area to unravel my problem. May be that is you! Looking forward to see you.
Wow, that’s what I was looking for, what a information! present here at this blog, thanks admin of this site.
I’m not sure where you are getting your info, but good topic. I needs to spend some time learning more or understanding more. Thanks for magnificent information I was looking for this information for my mission.
Does your website have a contact page? I’m having problems locating it but, I’d like to send you an e-mail. I’ve got some creative ideas for your blog you might be interested in hearing. Either way, great website and I look forward to seeing it expand over time.
Hello! Do you know if they make any plugins to help with SEO? I’m trying to get my blog to rank for some targeted keywords but I’m not seeing very good gains. If you know of any please share. Thanks!
There is definately a lot to learn about this topic. I like all the points you made.
Hi, Neat post. There is a problem together with your site in internet explorer, may check this? IE still is the marketplace leader and a good portion of folks will miss your wonderful writing due to this problem.
Hi there i am kavin, its my first time to commenting anywhere, when i read this piece of writing i thought i could also make comment due to this brilliant post.
Excellent post. I was checking continuously this blog and I am impressed! Very useful information specially the last part 🙂 I care for such info a lot. I was seeking this particular info for a long time. Thank you and good luck.
An impressive share! I have just forwarded this onto a colleague who had been doing a little research on this. And he in fact bought me breakfast because I found it for him… lol. So let me reword this…. Thank YOU for the meal!! But yeah, thanx for spending time to discuss this topic here on your web site.
Very rapidly this web site will be famous among all blogging and site-building viewers, due to it’s pleasant posts
What’s up to every one, it’s actually a nice for me to go to see this website, it consists of helpful Information.
Pretty nice post. I just stumbled upon your blog and wanted to say that I have really enjoyed browsing your blog posts. In any case I’ll be subscribing to your feed and I hope you write again soon!
Asking questions are in fact nice thing if you are not understanding anything entirely, but this article provides good understanding even.
Hurrah! Finally I got a weblog from where I can actually take helpful data regarding my study and knowledge.
The other day, while I was at work, my sister stole my iPad and tested to see if it can survive a 40 foot drop, just so she can be a youtube sensation. My iPad is now broken and she has 83 views. I know this is entirely off topic but I had to share it with someone!
Hi, its nice piece of writing regarding media print, we all know media is a enormous source of data.
I am actually thankful to the owner of this web site who has shared this enormous post at at this place.
Whoa! This blog looks exactly like my old one! It’s on a completely different topic but it has pretty much the same layout and design. Outstanding choice of colors!
This piece of writing is in fact a nice one it helps new net people, who are wishing for blogging.
Undeniably consider that that you stated. Your favourite justification appeared to be at the net the simplest thing to bear in mind of. I say to you, I definitely get irked even as other people consider concerns that they plainly do not recognize about. You controlled to hit the nail upon the top as welland also defined out the whole thing with no need side effect , folks can take a signal. Will likely be back to get more. Thank you
I am in fact thankful to the owner of this website who has shared this great post at here.
Good info. Lucky me I came across your website by accident (stumbleupon). I have book marked it for later!
I am really glad to read this blog posts which consists of plenty of helpful data, thanks for providing such data.
I don’t even know how I ended up here, but I thought this post was good. I don’t know who you are but definitely you are going to a famous blogger if you are not already 😉 Cheers!
Remarkable! Its in fact remarkable article, I have got much clear idea regarding from this post.
Aw, this was an incredibly nice post. Taking the time and actual effort to produce a good article but what can I say I procrastinate a lot and never seem to get anything done.
What’s up to every body, it’s my first visit of this weblog; this webpage contains remarkable and truly good stuff for readers.
Your way of explaining all in this post is in fact nice, all be able to without difficulty know it, Thanks a lot.
Hi there Dear, are you actually visiting this site regularly, if so then you will definitely get nice knowledge.
It’s going to be finish of mine day, except before end I am reading this wonderful piece of writing to increase my knowledge.
Hi mates, good piece of writing and pleasant arguments commented here, I am really enjoying by these.
Hi to all, how is everything, I think every one is getting more from this web site, and your views are pleasant designed for new viewers.
Hurrah! At last I got a blog from where I can actually take helpful data regarding my study and knowledge.
Nice respond in return of this question with real arguments and describing all concerning that.
Great beat ! I wish to apprentice while you amend your site, how can i subscribe for a blog site? The account aided me a acceptable deal. I had been tiny bit acquainted of this your broadcast provided bright clear concept
These are in fact wonderful ideas in regarding blogging. You have touched some good factors here. Any way keep up wrinting.
I got this web site from my friend who informed me regarding this web site and now this time I am visiting this website and reading very informative articles at this place.
Thank you, I have recently been searching for information approximately this topic for a while and yours is the best I have found out so far. However, what about the conclusion? Are you positive about the source?
Every weekend i used to pay a visit this website, because i want enjoyment, since this this site conations truly good funny data too.
Woah! I’m really loving the template/theme of this site. It’s simple, yet effective. A lot of times it’s tough to get that “perfect balance” between superb usability and visual appeal. I must say that you’ve done a amazing job with this. Additionally, the blog loads very fast for me on Chrome. Superb Blog!
Wow that was strange. I just wrote an very long comment but after I clicked submit my comment didn’t show up. Grrrr… well I’m not writing all that over again. Anyway, just wanted to say wonderful blog!
Greate pieces. Keep writing such kind of information on your blog. Im really impressed by your blog.
Unquestionably consider that that you stated. Your favourite justification appeared to be at the net the simplest thing to be mindful of. I say to you, I definitely get irked even as folks consider worries that they plainly do not recognise about. You controlled to hit the nail upon the top as welland also defined out the whole thing with no need side effect , other people can take a signal. Will likely be back to get more. Thank you
This is very fascinating, You are an overly professional blogger. I have joined your feed and sit up for looking for more of your fantastic post. Also, I have shared your web site in my social networks