The global financial services industry is witnessing a rapid in the demand for Islamic Banking services. This demand has essentially been fuelled by the need of Muslims the world over to ensure that their financial and economic dealings are in accordance with the principles of Shariah.
The growing Islamic Banking infrastructure, an answer to this demand, is comprised of various critical stakeholders, namely Shariah scholars, financial institutions, and the consumer. In Pakistan, the Islamic Banking movement has had a checkered history, with an initial noble intention but an ineffective execution, resulting in the dilution of the credibility of this model and a further compounded misunderstanding of its essence in the minds of the public.
Renewed efforts, supported by extensive global success transfer, have resulted in a new premise with its own regulatory mechanism, track record, and in-built initiatives that seek to illustrate its meaningful difference from the conventional interest-based system.
This infrastructure's success is noteworthy with a tremendous growth in assets, a rapidly mushrooming customer base, and the prolific examples of leading Banks (both local and foreign) offering their own Islamic Banking windows, all to a demanding and discerning market. At the center of this growth and establishment in Pakistan, lies Meezan Bank Limited, the nation's truly dedicated Islamic commercial bank.
Islamic banking and finance is based on the laws of contract in Islam as laid down in Islamic Fiqh, and the transactions and products offered by most Islamic banks today are built around the various tenets of such laws. This fundamental point is inexorably linked to two important and illuminating facts which will be elaborated upon ahead: firstly the historical paradigm of Islamic Finance, and secondly it's present comparison to conventional banking.
Present day Islamic finance is nothing new per se in its essence and fundamentals. The basis of this infrastructure and approach is Islamic Law, detailed in the Qur'an and the authentic (Sahih) hadith of the Messenger (May Allah bless him and grant him peace), both sources forming the basis for the scholarly consensus of the Ummah over the last many centuries. Such sources have not changed and their immutability is unquestionable to both Muslims and educated non-Muslims alike.
Historically speaking, one may ponder as to what was the modus operandi of Muslims in carrying out their financial transactions. Pioneering Muslim progress in social infrastructure, engineering, science, medicine, trade and exploration (which was in itself the sole basis of the European Renaissance), represented a thriving civilisation that was a hallmark of Islamic values and human progress. In this dynamic setting, how was all this activity funded, transacted, documented, maintained, and controlled? By the basic financial transactions and structures that were in line with the Shariah. Fast forward to the present, and what we have are core financial transaction needs that are inherently similar, but just more complex. In this present setting the practice is also inherently similar, just packaged a bit differently.
Unfortunately, the rise and proliferation of the present interest based system was synchronous with the decline and subjugation of the Muslim world. As a result, the wealth of Islamic knowledge, guidelines, and processes so to speak were not only not used, but also largely forgotten. While this chronic absence of awareness and implementation set in, various misinformed and ill gotten notions about Islamic finance gained currency and replaced sound Shariah principles in the general understanding of the Ummah.
Secondly, looking at modern financial transactions many question whether Islamic finance differs meaningfully from conventional finance. Outwardly in form and packaging, many structures do bear a similarity in various respects. Again, the present day operating environment is a conventional one, from market structuring and dynamics, to rate benchmarks and the circulation of money, to regulatory controls as well. However, the way these two options function with respect to core defining parameters is very different. Many things look the same but are in essence different in fundamental perspectives.
We being with basic principles. One is interest based money lending, while the other operates like a trade house. What allows this difference? Two core principles lie at the centre, the elimination of Riba and Gharar. Any Islamic transaction needs to assess these two things first and foremost. The Qur'an itself clearly mentions Riba in a number of places (Surah's Rum, Imran, Nisa, and Baqra), with a very strong view against such people who indulge in it. Furthermore, any misgivings as to the relevance of these Divine regulations to the commercial interest prevalent today are completely baseless.
They are categorically the same through and through. It is now exactly the same as it was then. Just the methodology has evolved into a more complex form. One cannot also help but wonder as well as to why the recent gross misinterpretation of Quranic verse on Riba? Why this sudden promulgation that the riba spoken of in the Qur'an may be different from interest, when for the entirety of Islamic history, the consensus on this issue was consistent amongst the highest scholars of the Ummah. Interest was present always. It has always been rampant. Hence it was prohibited in the Qur'an.
Also, Islamic rulings covering loans (Qard) as opposed to investment transactions are different. The authentic definition from hadith (with the chain of transmission being Hazrat Ali) leaves no room for ambiguity: "every loan that draws a gain is riba." However, an 'investment' is different, covered under the trading ayat. When you invest with an Islamic bank your funds are used to essentially trade.
Furthermore, with these clear distinctions, how do we proceed? An extremist viewpoint is the complete annihilation of the present banking system first, followed by the establishment of an Islamic one. This is not only not practical, but also against the spirit of Islam.
The present day conventional system can be converted to a Shariah compliant one, with the targeted, thought through and effective elimination of riba and gharar. We don't need to completely wipe out the present day system to establish a Shariah compliant one. The rite for Haj provides a good example. Even in the time of ignorance and polytheism, many of the original sacrosanct practices were followed by the pagan Arabs.
When Islam achieved victory, these rites were retained and only the haram elements removed. To preserve and maintain is the focus of Islam.
As such, Islamic banking products are fundamentally and conceptually different from conventional banking products, although in order to facilitate customer ease and clarity of understanding, such products often emulate the packaging and presentation of conventional banking products. This does not mean that these products are the same as those offered by conventional banks.
Many recent articles printed in mainstream press attempt to dismiss the nascent efforts made in the Islamic banking industry. One common justification cited as being the fact that a society ridden with fraud, corruption and tyranny simply is not ready for Islamic banking. It is contended that any steps in such a direction are doomed to failure. In other words, no attempt should be made towards providing a Shariah compatible alternative to conventional banking until this society is completely cleansed from its roots in its infinite number of areas.
This idealistic but clearly unrealistic approach may possibly be commendable from a philosophical point of view, but unfortunately the practical realities of life are clearly different. Purposeful change is an ongoing struggle being carried out on innumerable fronts; social, economic, personal, etc, but all with a directional coherence aimed at a certain goal.
As we collectively struggle for the establishment of a just economic system (one such front), there is a substantial segment of society that has voted for Islamic banking as their preferred choice and are keen to give it a chance. Making any required change and its corollary effort, conditional upon such things as having a pure society first, is a form of self-defeating extremism that nullifies action and achieves nothing. It goes against not only the Islamic spirit, but also against be entire paradigm of human achievement and progress over the ages.
It is also alluded to that an important aspect facing Islamic banking is the critical role of insurance. The presence of an element of insurance in Islamic banking transactions makes such transactions totally 'unislamic', as insurance is prohibited in Islam. A number of clarifications are required in this regard. Firstly, insurance has been resorted to under compulsion of law, as the law of the land, namely the Prudential Regulations and other directives of the State Bank of Pakistan oblige all commercial banks to have the insurance of certain assets in place.
For example, in auto leases undertaken by commercial banks, the Prudential Regulations place a mandatory requirement for insurance of the vehicle leased. Meezan Bank being a commercial bank operating in this market is also therefore subject to these regulations. In Shariah, the concept of 'Dharurah' or necessity is a recognised fact, which applies incidentally to many areas of life.
However, Meezan Bank also consistently entered into a contractual arrangement with its customers whereby the parties agree that as and when an Islamic alternative to insurance (namely Takaful) is available, conventional insurance will be immediately replaced. This has now happened with the final availability of Takaful in the country and the immediate transfer of all applicable insurance to this Halal form. With the eventual availability of further forms of Takaful, all areas will be covered.
Regardless, even while this one regulatory and supportive necessity was there, how can we ignore the entire scope and nature of Islamic banking products and transactions? Can we allow this one aspect to liquidate and nullify the essence and practice of how this system differs from the conventional one and why? Do we ignore the essence of the contract; the processes adhered to, as well as the functionality of the Islamic institution, which brings together the providers of capital and the users of capital in accordance with Shariah?
It is again important to note that Islamic Banking's recent revival has occurred after a significant period of dormancy, as mentioned above, and this revival has raised itself in the present conventional system (a diametrically opposed scenario) and a rapidly evolving one. Therefore, the establishment of many of the proposed (and required) changes will themselves be subject to an evolution or gradual implementation. Such was the case with Takaful.
In summary, we must realise that Islam is a complete religion; it provides guidance for each and every aspect of human life. Economics is one of the most important aspects, as every human being needs involvement in some kind of economic activity for survival.
Islam has provided a complete economic model for a establishing a healthy society. A very important pillar of this model is thus the prohibition of riba, which is made clear by the following Qur'anic verse in which Allah (SWT) says:
"O, believers, fear Allah, and give up what is still due to you from interest (Riba), if you are true believers. If you do not do so, then take notice of war from Allah and His Messenger. But, if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it." (Al Baqra 278-279)
This serious injunction is obviously one that needs to be addressed immediately. It is not contingent upon any prior achievement. The prohibition of Riba and its seriousness has been highlighted several times in the Qur'an and Hadith of the Holy Prophet (SAW), and it becomes imperative for all Muslims to immediately work for the development of an interest-free economic and banking system.
Fortunately, the modern day scenario is one of revival. The Islamic Economic System, as stated earlier has illustrated its viability and success, and is being pursued vigorously with the objective of attaining its desired benefits and therefore evolving society towards the purity that Islam desires. There is no room for an attitude whereby healthy change is sabotaged in the name of idealist perfection that ultimately leads nowhere.
In this regard, Meezan Bank stands today at a noteworthy and critical juncture as the premier Islamic Bank in Pakistan and is truly leading the way forward in establishing a real, stable, and dynamic Islamic Banking system in Pakistan.
The foundation of this being the guidance of our highly qualified and globally renowned Shariah Supervisory Board headed by Justice Muhammad Taqi Usmani and including renowned scholars from the Middle East, who as a whole bring together rich knowledge base of Islamic Fiqh accumulated over the past 1400 years. Furthermore, with the able support of the SBP's Islamic Banking Department, all the products offered by the bank are very thoroughly scrutinised by these Shariah specialists in Islamic finance, hence approval of these products is not based on unqualified individual opinion or views, but on very sound assessment and jurisprudence.
Meezan Bank continues to educate the market in a transparent and open manner, as to what Islamic Banking is all about, how does it differ from the conventional system, and what are its many benefits advantages. We welcome and in fact urge all members of society to come and see for themselves as well. Visit any Meezan Bank branch across Pakistan or log onto our website at www.meezanbank.com.
(The writer is General Manager, Corporate & Business Development, Meezan Bank Limited.)
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