Islamic Banking & Finance Page 08-03-2019

Editorial

Seminar by National Bank of Pakistan titled as “Islamic Banking Challenges & Opportunities”

The seminar was held on 2^nd March 2019. Aitemaad Islamic Banking Group Divisional Head Syed Muhammad Shahid and Syed Ibne Hassn Sr VP represented NBP who also played the role of moderator as well.

It was briefed that based on the market demand and requirements, NBP-Aitemaad is developing more products on deposits as well as financing side, Professor Barrister Habib Ur Rehman Former Dean Faculty of Law KU who presided the seminar said that with government’s serious efforts, the Islamic Banking would flourish further in the country.  He said that as per ICD-Thomson ‘Reuters’ Islamic finance Development Indicator for selected countries, Pakistan stands in the middle of the 20 countries selected for the indicator.

Manzar Naqvi, Mubesher Mir and Col. Mukhtar Butt, also attended the seminar.

The National bank is expanding its market outreach and has become a PKR 2.47 trillion Bank by the balance sheet size and its deposits have increased to PKR 1.8 trillion with profit before taxation as Rs 2.2 billion. Its Islamic Banking sides hold Assets of Rs 53.5 billion with Rs 49.0 billion as deposits wit Loss before taxation of Rs 67 million as of 30-09-18.  . The NBP Islamic banking branches have gone to 180 and now 192 branches as of today,

NBP Islamic banking accounts are Aitemad current, Term, Aasan Mahana Bachat, Income support Senior Account, Institutional deposit account. FC current account is also available. The accounts are extended to Individuals, Sole Proprietorships, Partnership and Corporate using mudarbah mode of financing. Profit sharing ratio stands as 55% for Rabul Maal (depositor) and 45% for Mudarib (Bank). Weight ages assigned to profit run on the basis of deposit amount with 0.75% at the lowest and 1.3% at the highest if deposit stands for 1-7 years.

Financing done as of 30-09-18 is based on  Murhabah amounting Rs 4.billion, Diminishing Musharkah amounting Rs  9 billion, Ijarah amounting Rs 500 million, Istisna amounting Rs 1 billion and  Wakalatul Istimismar amounting Rs 8.5 billion. So basically almost all financings are done on debt based and are not transferable.

Financing are done for purchase of Vehicles (both Commercial and Private) Office Equipment Plant and Machinery, Cement, Sugar, Rice, Flour, Steel Items, Fertilizers, Garments, Construction of building Acquisition of fixed assets. Aitemaad Istisna is designed for Corporate / Commercial / SME / Agri Customers and is based on ‘Istisna with wakalah’ where production and value adding activities are involved. Aitemaad Tijarat can also be used for financing of Cement, Sugar, Rice, Flour, Steel Items, Fertilizers, Garments etc.

Mufti Ehsan Waquar Ahmad is the Chairman, Shariah Board with Dr. Mufti Khalil Aazami and Mufti Muhammad Imran – as Shariah Board Members.

Now coming to discussion in the seminar though most of speakers just came with simple wordings that we have reached to the point where everything is based on Islamic banking but by making justice to the subject of the seminar it also came to light that worldwide and in Pakistan growth of Islamic banking and Finance still faces huge challenges. They are-

Legislation is required from the Government side on Islamic Banking and Finance.

Strict Monitoring is required by the regulators i.e. SBP and SECP in case of Pakistan on the subject.

Products development specifically for non debt based products using Musharkah, Mudarbah and Ijarah are required.

Universities and educational institutions have to change their curriculum according to current needs and to constitute research centers on Islamic Banking and Finance with actual work going thereon

Shariah advisory structure needs to be restructured giving them absolute independence from the banks managements.

Editorial Board for the page

Muhammad Arif Chairman

Manzar Naqvi

Mubesher Mir

Dr Rtd Air Commodore Tahir Bhutta

Basics of Islamic Banking and Finance

The basic objective of Islam is against anything that oppresses people and in this way interest (Riba) comes in its way that has many ways of exploiting others, namely the depositors and borrowers. Also, profitability is not seen as the soul target for performing business in Islam. Rather Islamic banking is responsible for social objectives, such as equal distribution of wealth. Social goals are not to be ignored in any part of Islam and this should be the basis of Islamic banking.

As stated above Islam treat Riba as a tool of exploitation so its definition becomes important to design Islamic social system. For example, some time it is argued that current Islamic banking is based on a limited concept of Riba or interest that allows rent on assets providing a basis to Mudarbah contract, the very basis of current Islamic banking. According to these arguments rent tantamount to excess on principal in form of money or other assets. Since in Quranic verses, the excess is not permissible so as per these arguments, rent comes under the definition of interest and thus bringing in to structure of whole Islamic banking under question.

Riba has been discussed at 20 places in Quran. However there is a difference in approach in understanding Riba in its strict sense. These approaches have been elaborated in the Supreme Court of Pakistan (Shariat appellate Jurisdiction) judgment 2000.  According to this:

One school of thought says that the verses of Quran which prohibit Riba were revealed in the last days of Holy Prophet (PBU) and he could not have time to interpret them properly, hence no hard and fast definition can be found in Quran and Sunnah. According to this approach the prohibition of Riba should be restricted to the limited transactions expressly mentioned in the Hadith and the principle cannot be extended to the modern banking system which was not imaginable at that time.

Second approach says that Riba only refers to the Usurious (personal) loans on which excessive rate of interest is used to be charged by the creditors which tends towards exploitation. As for modern banking interest, it cannot be termed as Riba if the rate of interest is not excessive or exploitative.

Third approach says that differentiation should be made between consumption loans and commercial loans. Since consumptions loans (mostly consumed by the poor people) tend towards exploitation so they come under the definition of Riba but commercial loans used for commercial or productive purposes do not come under the definition of Riba.

Fourth approach says that Quran has prohibited Riba al jahlia. This was a particular transaction of loan where no additional amount over and above the principal was stipulated in the agreement of the loan. According to this theory if an increased amount is stipulated in the initial agreement of loan it does not constitute Riba-ul-Quran; however it does fall in the definition of Riba al Fadl prohibited by Sunnah.

However, after listening these arguments Shariat Appellate court of Pakistan gave its verdict as “any additional amount over the principal in a contract of loan or debt is the Riba prohibited by the Holy Quran”. Further to this following transactions were also termed as Riba as per Sunnah (1) a transaction of money of the same denominations where the quantity of both sides is not equal either in a spot transaction or in a transaction based on deferred payment (2) A barter transaction between two weighable or measurable commodities of the same kind where the quantity on both sides is not equal, or where the delivery from one side is deferred. (3) A barter transaction between two different weighable or measureable commodities where delivery from one side is deferred.

According to verse Al-Baqrah 2:278-79, any excess compensation over and above the principal without due consideration has been termed as Riba. However in the same verse it has been further said “Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the devil: this is because they say; “trade is like interest” while God has permitted trade and forbidden interest”. So it is very much clear that if transactions are backed by trading activities than excess earned through this mean is not Riba.

Four imams viz: Imam A’zam Abu-Hanifa, Imam Maalik, Imam Shaafi and Imam Ahmed-bin-Hambal are very close in defining Riba, however they technically vary. The Hanafi says that Riba is the extra or the increment of wealth without any return in the exchange of wealth according to Sharia legal measurement. The Hamblis says that Riba is a contract which is the extra or the increment of something which is defined according to legal Sharia and legal measurement. The Shaafi and Malaki say that Riba is a contract which is without equal return or something defined according to sharia legal measurement during the contract or with lapse of time in exchange.

As explained above, Riba in Pakistan has been defined strictly as any excess which is predetermined over the principal sum in a loan transaction.

In Iran the Riba is defined as receipt of any extra amount in excess of principal amount of loan if and only if such receipt has been preconditioned. The preconditions are

• Existence of indebtedness i.e. if in any deal the factor of indebtedness is avoided than the receipt of any extra amount will not be considered as Riba.
• Existence of debtor independence from creditor i.e. in Iran it is presumed that if lender and borrowers are not independent and interdependent like son and father or central bank and government than receipt of any extra amount on principal will not bring it under Riba definition. Taking advantage of this, the problem of public debt and statuary reserves have been solved in Iran.
• Existence of a precondition i.e. if a condition for receipt of extra amount is not included in the lending agreement evidently, nothing is payable. However, if in the absence of that condition any amount in excess of principal is paid than it will not be treated as Riba.

In Malaysia they have factored in secondary market trading of debt and debt based securities by making it possible through Bai-ul-Dayn that is not permissible as per most of Sharia Scholars. Even in Malaysia most of the scholars do not agree with this permission though this transaction is supported by underlying asset. The traditional Muslim Jurists are unanimous on the point that Bai-ul-Dayn with discount or premium is not allowed in Sharia, however some Sharia scholars have allowed this kind of sale by referring ruling of Shaafi School but they also consider this fact that the Shaafi School of jurists allowed it in cases where debt is sold at its par value. All this situation transpires that three main groups exist on definition of Riba in Islamic world: Pakistan, GCC, Sudan follow one school of thought; Malaysia another; and finally Iran another based on their Fiqah where only Quranic definition of Riba is considered as important. These are technical deviations but matter a lot in case of their applications.

Hence efforts are required to have one definition of Riba with the consensus of all Muslim Countries and main stakeholders. This looks difficult but not impossible if efforts are made in real terms.

Legislation on Islamic Banking

Unfortunately currently only one Muslim country i.e. Malaysia exists with clarity on the legal infrastructure for Islamic Finance. Some other countries with Iran UAE and Bangladesh have moved in this respect to some extent but rests of the Muslim countries have to yet to bring such changes in the coming days.

In legal infrastructure for Islamic banks three areas are important. One is protection to the depositors and investors, second one is equitable tax treatment as compared to conventional side and third one is empowerment and clarity on Sharia boards and power to the regulators for development of new products and carrying out awareness and education to the staff of the Islamic banks.

It is seen that different tailor-made products and procedures for financing in particular areas are made by commercial conventional banks. For healthy developments, Islamic Banking Institutions should be asked to develop more products based on non debt based financing (Musharkah, Mudarbah and Ijarah), in line with market prices and rentals. Islamic banking industry has been trying for the last over twenty years to extend it’s outpace to bring it at least to the level of conventional banking. But the absence of Sharia-compliant legal framework which is needed to make interest-free banking acceptable and create sound financial institutions is the major hurdle behind its low infiltration in the financial markets. Attempts should be made to modify the existing structure to provide better products and quality service within the ambit of Islamic laws.

CAIF in collaboration with Editors Club and The Financial Daily and Daily Farz is ready to work on legislation of Islamic Banking and Finance in Pakistan to support government in this respect.

Comparison of Enactments in Major Muslim Countries regarding Islamic Finance
Country	Central Bank Act	Banking and F/I Act	Islamic Banking Act	Insurance Act	Takaful Act	Islamic Micro Finance
Malaysia	Central Bank of Malaysia Act 1958 (Revised 1994)	Banking and Financial Institutions Act 1989 (BAFIA)	Islamic Banking Act 1983	Insurance Act 1996	Takaful Act 1984	Nil
Bahrain	Central Bank of Bahrain and Financial Institutions law	Central Bank of Bahrain and Financial Institutions law/Bahrain Stock Exchange law	Nil	Nil	Nil	Nil
Saudi Arabia	Banking Control law/ Currency law	Kingdom of Saudi Arabia Capital Market Law	Nil	Cooperative Insurance Companies Control law	Nil	Nil
Pakistan	State Bank Act	SECP Act 1997/ Stock Exchanges Act 2008	Nil	Nil	Nil	Nil
UAE	Union law of 1980 concerning Central Bank, the monetary system and organization of banking	Federal Law of 2000 concerning the Emirates Securities and Commodities Authority and Market	DIFC law 2004 regulating Islamic financial business/ Federal Law of 1985 Islamic Banks	Nil	Nil	Nil
Qatar	Law No 15 of 1993 establishing Qatar Central Bank/law No 33 of 2006 Qatar Central Bank	Law No 33 of 2005  and law No 14 of 2007 regarding Qatar Financial Markets Authority and Qatar Securities Market	Nil	Nil	Nil	Nil
Turkey	1970-1211 Law on Central Bank/Law 2005 Banking Law	Law 1981-2499 Capital Market Law	Nil	Nil	Nil	Nil
Indonesia	Act 23 of 1999 on Bank Indonesia	Nil	Nil	Nil	NIL	Enactment of Bank Indonesia regulations for Islamic Micro Finance. Asset Management and rating of Islamic Banks in 2004,2005,2006 and 2007
Iran	Monetary and Banking Law of Iran	Nil	Law of Usury (Interest fee banking) Iran	Iran Insurance Act	Nil	Nil
Sudan	Bank of Sudan Act	Public Corporations Act 1976	Nil	Nil	Nil	Nil
Nigeria	Central Bank of Nigeria Act 1991	Nil	Nil	Insurance Act 2003	Nil	Nil
Bangladesh	Financial Institutions Act	Securities and Exchange ordinance 1969	Islamic Development Act 1975	Nil	Nil	Micro Credit Authority Act
Source The world Law Guide (Lexadin)