Issues in Islamic Banking and Finance in Pakistan
There is a popular belief that Islamic finance or banking is for Muslims for their personal satisfaction and for getting “Janat” in the world and above. Contrary to this it is not so in its complete sense. In Quran it has been repeatedly said that “Allah” means for all living on this planet. So if Islamic Banking and finance is implemented in real sense than it can serve all human beings irrespective of the fact whether they are Muslims or not. But for that we have to lay its foundations on an ethical and fair financial system, which consequently affects the socio-economic conditions of the market with the objective to come up with socio economic justice for all.
Yet, this stance is not as clear as how it should replace the centuries old financing methods firmly embedded within the economic system and how it is going to tackle issue of inflation or time value of money.
First of all market is confronted with the issue of lack of awareness about concept of Islamic banking since it has been commercialized fairly instead of adopting right course of action. Banks and asset management companies are still struggling with how better to portray Islamic products for consumers’ understanding in minimal ad spaces. There is also a communication gap between the Sharia councils issuing the fatwas pursuant to Islamic Finance, and the managers devising products and drafting the advertisements.
Above all the bigger issue is that even financial advisors lack awareness of the concepts behind Islamic finance. If you ask any financial expert to come up with the merits of funds in which one wants to make some investments – the difference between conventional funds and Islamic funds. The answer would be a disappointing “nothing!”
An instant answer to the question would be the often-repeated phrase – ‘Islamic products do not offer interest (Riba)’. The statement is without doubt true, but this is not the sum total of Islamic finance.
Riba is indeed deemed haram in Islam, for the reason that it is ‘unfairly’ exploitive in nature. It is ‘unfair’ because Riba requires the lender to return the borrowed money, plus an extra amount. This requires the borrower to work harder to return not just the principal, but also the interest or mark-up levied on the amount. But in real terms borrowers from a bank has to return the principal with some additional amount which they call profit or markup but not interest. So what is the difference?
Secondly, interest is set arbitrarily. The concept treats money as a tradable entity which fluctuates with volatility in the markets. There is no set ceiling; meaning that loaning money may become cripplingly expensive for the borrower.
Thirdly according to different Fiqahs, Riba is being defined differently. In Iran it is different, In Malaysia it is different. In Pakistan GCC and Sudan it is different.
Islamic financing is asset-backed and believes that only assets with an intrinsic value may be sold for a profit, instead of exchanging money – which is considered to have no intrinsic value – for interest.
Moreover the problem starts from onward when we categorize Islamic financing products in to two categories i.e. Non debt based as Musharakah, Mudarbah and Ijarah and Debt based as Salam, Diminishing Musharakah, Murhabah, Istisna and others. The products as debt based are difficult to trade as they require different documents to be agreed and signed. This makes them basically non tradable. Now realistically every country and in Pakistan we see almost 80% financing based on debt based products i.e. Murhabah or Diminishing Musharakh. With this how you can perceive an Islamic Money or long term debt market. For this no formidable solution has been arrived as yet.
On equity side different practices exist in different countries that how much debt can be accepted for a company to consider it as Islamic. In Pakistan this ratio is 30 to 70 i.e. 30% debt but in Bahrain and other countries the ratio is different.
By taking in to account these facts Stakeholders in the industry must now step forth and present a clear picture of Islamic finance: one which presents it as a way of rethinking economics and finance, instead of just as a cosmetic solution tailor-made for religious investors finicky about where their money is going.