Islamic banking in Pakistan: A case of vested interest?

Pakistan faces an uphill task to transform its financial system to accommodate strict Islamic principles, while staying within modern banking practices.

Senior government officials are now suggesting they are not fully prepared for Islamic banking and more time is needed to research to develop a variety of products and instruments dealing with different financial transactions.

The Shariah Appellate Bench of the Supreme Court of Pakistan in 1999 declared the payment of interest (Riba) as repugnant to Islam, and directed that all such laws be scrapped by June 30, 2001.

Shariah is Islamic cannon law derived from three sources – the Koran; the Hadith (sayings of the Prophet Mohammad); and the Sunnah (the practices and traditions of Mohammad). Riba literally means an increase or addition. Technically, it denotes any increase or advantage obtained by a lender as a condition of a loan. Any risk-free or “guaranteed” rate of return on a loan or investment is riba. Riba, in all forms, is prohibited in Islam. In conventional terms, riba and “interest” are used interchangeably.

Advocates of Islamic banking believe the opportunities for the growth of Islamic finance are immense, with the 10 largest Muslim countries having a combined gross domestic product of US$1.2 trillion. At present, Islamic banks have a total capital of $7 billion and deposits of more than $120 billion, catering to a large variety of clients by offering equity-based financing.

However, the Islamic system faces major structural challenges, such as fragmentation of the global Islamic banking industry, differing interpretations of banking practices, the absence of a strong regulatory framework, a narrow view of Islamic financing in regional, rather than in global terms, and an inadequate understanding of the principles and practices, which are prerequisites for transforming the system.

Since the Riba judgement of 1999, three independent bodies have been working to evolve an Islamic Financial System (IFS) in Pakistan. But the Shariah scholars, experts and economists dealing with the subject have failed to find Islamic alternatives to the existing large stock of domestic debt. Foreign debt obligations have been given full protection by the Court.

Pakistan’s existing debt stock of almost more than 100 percent of its GDP is a major stumbling block. It owes more than $35 billion to foreign creditors and about Rs1.7 trillion ($28 billion) to domestic creditors. With a narrow revenue base and highly inelastic expenditures, average budget deficit figures remained in the range of 7 percent of GDP during the 1990s, forcing the state to raise large sums of money, both from domestic and foreign lenders, to fill the gap.

Under the Islamic financial system, however, there is little room for raising loans simply for deficit financing or for debt servicing. And even if the foreign loans are excluded, the revamping of existing domestic debts is a challenging task. The authorities would need to rewrite all domestic debt covenants in terms of Shariah norms, which require collaterals. After pledging assets to existing lenders, the government would need to work out rental values of these assets, which is permissible under the Islamic system. These rental values would then be used as benchmarks to determine the rates of return on investments.

However, officials tasked with working on the subject says this system, known as Diminishing Musharaka, does not suit local economic conditions. They feel that even after pledging all national assets, a large number of existing loans would remain outstanding.

Under Diminishing Musharaka, a financier and his client participate either in the joint ownership of property or equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the financier’s units one by one periodically, thus increasing his own share until all the financier’s units are purchased, making the client the sole owner of the property, or the commercial enterprise, as the case may be.

The state-run House Building Finance Corporation (HBFC) is in the process of introducing new loans under this system, which would mean a joint ownership of the asset until the loan is fully cleared by the borrower. The rate of return is determined by the rental value of the particular premises.

Senior bankers suggest Islamic rules need to be introduced in specialized institutions before the full transformation of the whole system. Similarly, they suggest the need for Islamic banking windows in existing nationalized commercial banks (NCBs) and private banks to allow them to gain sufficient experience to develop their knowledge and skills.

The HBFC example could be used as a good case study, as well as and some small banking networks, such as Al-Meezan Investment Bank and Al Baraka Bank, which offer totally Riba free financial services in the country. However, their share in the banking sector is negligible.

The sector as a whole is plagued by bad loans due to political interference in the past, corruption and lack of accountability. This leaves little room for experimentation. Non-performing loans outstanding for more than 90 days account for almost 25 percent of the total loan portfolios of all banks.

The government is working with international financial institutions to restore financial health to the banking sector, but it is finding it hard to convince lenders, and official bilateral creditors at the Paris Club meeting recently questioned the Pakistani government’s policy. Finance Minister Shaukat Aziz, who is spearheading the loan rescheduling talks, had to give his word the government would not do anything beyond prudent banking practices. Pakistan has also signed an official agreement with the International Monetary Fund that it will honor all international transactions as they presently stand. It has also pledged that all international debt obligations will continue to be serviced.

Senior government officials working on the format of the IFS say the government may come up with a policy statement on the subject to clarify its future course of action. This could involve filing for a review of the court’s initial decision. There have also been reports that the government may use the United Bank Limited (UBL) as a test case. The UBL had filed an application with the court seeking more time.

However, backtracking at this crucial stage would be politically suicidal for the one-and-a-half-year-old government of General Parvez Musharraf, who is facing intense political pressure for the restoration of democracy, and the international community is unwilling to show any flexibility to the military regime.

Religious parties in the country, in particular, are very vocal on the question of Islamic banking as they believe it will help Pakistan escape its debt trap by saying no to the dictates of the IMF and the World Bank.

Experts believe the success of the system requires consistency in evaluation and interpretation in all issues relating to Islamic banking, the necessity of adopting globally accepted standards and procedures that cater to both Shariah principles and conventional banking practices, transparency in banking operations, and above all, a liquidity cushion and the injection of professionalism – key requirements that will not be met quickly.

Islamic Bank’s Success Story — in Bangladesh




 In 1983 Islami Bank Bangladesh Limited (IBBL) became the first interest-free Shariah-based bank to have been established in South and Southeast Asia.

According to a report posted on the bank’s website, IBBL started operations with an authorized and paid-up capital of 500 million taka and 67.50 million taka respectively. The capital is divided into ordinary shares of 1,000 taka each. The paid-up capital of the bank was enhanced to 640 million taka in 2001.

Of the 79,500 ordinary shares of the bank in 1985, foreign sponsors, including the Jeddah-based Islamic Development Bank, owned 56,000, while local sponsors and the general public owned 23,500 shares. The Investment Corporation of Bangladesh was allocated 20 percent of the bank’s issued capital, but the corporation subscribed shares of 0.5 million taka only. The bank is listed on both Dhaka and Chittagong stock exchanges.

The brain behind the bank was the late Fouad Abdul Hameed Al-Khateeb, Saudi Arabia’s first ambassador to Bangladesh (1977-1982). He mobilized a group of entrepreneurial Saudis and other industrialists from the Gulf to launch the financial institution. Another founder was Dr. Ali S. Al-Ghamdi, who was posted at the Saudi Embassy in Dhaka in the 1980s.

With more than 150 branches spread throughout the country, the bank has become a phenomenal success story and a role model for other Islamic banks.

At a Bangladeshi community gathering in Jeddah on Saturday night, Al-Ghamdi recalled how people would laugh at the idea of an Islamic bank in the 1980s.

“Islamic banking was unheard of in those days. I would meet so many Bangladeshi professionals — doctors, engineers, teachers, etc. — and they would all laugh when the idea of Islamic banking was discussed,” he said.

That was then. Al-Ghamdi said he recently met one of those Bangladeshi professionals.

“He talked enthusiastically about his investments in Islami Bank Bangladesh Limited. He told me he was making good money on his investments in the bank,” Al-Ghamdi said with a chuckle. “This is a source of pride for all of us, especially those of us who were associated with it in its embryonic stage.”

Mominul Islam Patwary, the executive committee chairman of the bank in whose honor the event was organized, said what was once an unheard of idea has become a welcome option for Muslims.

“Islamic banking,” Patwary said, “is no longer an alien concept. The idea has proved to be very successful and now that Islamic banks are available there is no reason for us to deal with regular banks. Earlier, there were no options. Now we have a choice. All the major banks are now coming up with Shariah-compliant instruments. This indicates that Islamic banking is here to stay.”

Al-Ghamdi reminded the gathering that the idea behind the bank was not to make money.

“It was certainly not a commercial venture. All those businessmen who came forward at the urging of Fouad Al-Khateeb did so out of their love and responsibility toward their religion and their brethren in Bangladesh. Material benefit was not on anybody’s mind. That it would be such a huge commercial success was something that nobody really imagined. We are glad we took that crucial and all-important first step and the rest, as they say, is for you to judge,” Al-Ghamdi said.

Al-Ghamdi pointed out that Islami Bank Bangladesh Limited should not be merely seen as a bank.

“It is an institution in itself. It is a charity institution, a medical institution, and a cultural institution. The bank is playing an important role in almost every aspect of the lives of Bangladeshis,” he said while exhorting everyone to join the institution and support it by either opening accounts at the bank or purchasing its shares.

Patwary listed the bank’s many achievements and answered many questions from the Bangladeshi expatriates at the gathering. He recalled one particular episode with pride.

“One of the government ministers told us to take charge of the government-run Krishi Bank. Why? Because he said it had become a burden on the government? And why us? Because he said we demonstrated how to run a bank successfully. This is a matter of great pride,” Patwary said.

He said the bank is committed to conducting all banking and investment activities on the basis of an interest-free profit-loss sharing system.

“In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope toward materializing a long-cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam,” Patwary said.

He said when people talk of Bangladesh they inevitably talk about the high level of corruption.

“Here we are, running the bank with no stain of corruption. Transparency has been and is the key to our success. We have become the role model for others. And for no small reason, we are the No. 2 bank in the private sector. You can check out our results on our website anytime (”

Ashraf Uddin, the Bangladeshi consul general in Jeddah, acknowledged the bank’s contribution in the development of the country. “It is beyond the pale of doubt,” he said.

Responding to some mild criticism from the community members that he was not proactive in promoting the bank here in Jeddah, Ashraf Uddin said as a diplomat he has certain bindings. “Since I am diplomat, I cannot support any specific bank. However, I have always openly supported the concept of Islamic banking,” he said.

Ashraf Uddin also praised the bank’s representative in Jeddah. “Mosharraf Hossain is the right man for the right job. He created a lot of visibility for the bank in Saudi Arabia,” the consul general said.

The two sons of Fouad Al-Khateeb — Muhammad Al-Khateeb and Abu Bakr Al-Khateeb — spoke about their late father’s vision and recalled how he would always talk about it in the 1980s.

“He was very confident of the bank’s success but he had a tough task in explaining his idea to others,” recalled Muhammad Al-Khateeb who is the member of the bank’s board of directors. “The bank helped us win the trust of the good people of Bangladesh.”

Abu Bakr Al-Khateeb, who is the senior general manager (engineering) at United Sugar Company, spoke in Bengali amid loud cheers from those present. He too recalled his father’s passion for doing something good for Bangladesh.

“He would always be busy thinking about giving the project a practical shape. It is a moment of pride for us as the bank marches ahead,” he said.

Abdullahil Mamoon Al-Azami, community development specialist at the IDB, recalled the contribution of the Al-Khateebs in the development of Bangladesh.

“Ustaz Fuad Al-Khateeb was a great man, a visionary. He thought about an Islamic bank at a time when nobody would give it a second thought,” he said.

Al-Azami is highly respected by the Bangladeshi community and is the son of professor Ghulam Azam, the former chief of Jamaat-e-Islami, Bangladesh. “We all should support the bank not only by opening accounts in the bank but also by generating ideas. That can also be a wonderful contribution,” Al-Azami said.

source :

Malaysia urged to expand Islamic Banking to Bosnia


SARAJEVO: Malaysia has been urged to expand its Islamic banking to Bosnia and Herzegovina due to the rising interest in such products and services, according to the countrys first Islamic bank CEO.

Amer Bukvic of Bosna Bank International made an impassioned plea to Datuk Seri Abdullah Ahmad Badawi to encourage Malaysian banks to capitalise on their expertise in Islamic financial banking and invest here.

He said Europes big financial groups were slowly moving towards that direction but they did not have the expertise and experience compared with Malaysia.

“And this is where Malaysia has the edge. You should move fast to benefit from the increasing interest in Islamic banking,” he said when elaborating on his question to the Prime Minister during the Malaysia-Bosnia and Herzegovina Business Forum on Thursday.

Apart from Islamic banking, issues ranging from as diverse as terrorism and barter trade to halal and mineral water and health spa products were raised during Abdullahs dialogue with more than 700 Malaysian and Bosnian businessmen and captains of industry.

Bukvic said Malaysia was, in fact, indirectly represented in the country as his bank was established by the Islamic Development Bank of which the Malaysian government was among the owners.

However, he said, Malaysian banks should expand directly to the Bosnian market since it had a well established Islamic financial system covering banking, insurance, Takaful and other products.

The Malaysian Prime Minister, Dato Seri Abdullah Ahmad Badawi, right,shakes hands with his Bosnian counterpart Nikola Spiric,left, during his visit to Bosnian capital of Sarajevo on Thursday. (AP Photo/Hidajet Delic)
He noted that there were 34 European banks in Bosnia and Herzegovina, all of which were making huge profits as the financial sector was well regulated..
Their investments are in excess of one billion euros as the top few banks alone are worth around 100 million euros each, said Bukvic, who is an alumni of the International Islamic University in Petaling Jaya.

He added the state faculty was establishing an MBA in Islamic finance due to the rising interest in such products.

In his response earlier, Abdullah urged the Malaysian delegation to take note of Bukvics remarks about the prospects of expanding Islamic banking services to the country.

The prime minister stressed that Islamic banking was not exclusively for Muslims but for non-Muslims too.

He added that Malaysias commercial and foreign banks had Islamic windows while some Islamic banks specifically set up by businessmen or banks from the Middle East were doing very well.

Their support, he added, came not only from Muslims but non-Muslims as well as they wanted to take advantage of the Islamic banking and financial services.

source : the star online