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EDITORIAL: In 2001, the Supreme Court’s Shariat Appellate Bench had ordered the implementation of steps aimed at ending the interest-based banking system in Pakistan. Two decades later, in April 2022, the Federal Shariat Court (FSC) gave the government five years to implement an Islamic and interest-free banking system in the country.

Knowing the sensitivities of the issue and given the inevitable linkages of the Pakistan banking and economic system with the international finance system, it seems well-nigh impossible to achieve this target in five years. However, the situation on ground is very different from what was the case in 2001.

At that time Islamic banking was virtually non-existent in Pakistan, and today around 20 percent of banking in the country is in the Islamic mode and growing. The direction is right; but it might not be possible to completely transit to the Islamic system in five years. Plus, the country must deal with the world for trade, investment and lending.

According to a news report carried by this newspaper earlier this week, Finance Minister Miftah Ismail has remarked that five-year target set by the FSC for conversion of current mix of Islamic and conventional (interest-based) banking system to a full-fledged riba-free Islamic system is ‘too ambitious’. He further pointed out that more time is required to achieve this goal. And the country would continue to move in this direction to comply with the FSC ruling. That is a wise and prudent response.

One needs to have full comprehension of the global finance. There is also a need to have strong appreciation of the fact that global economy is characterised by complex linkages.. However, achieving the goal set by the FSC should be a top priority of the government and must be pursued in right earnest.

At the same time, the focus should be on further incentivizing Islamic banking system to grow and achieve a dominant position in the market in terms of coverage. Having a timeframe of five years, would only pressurise the domestic banking system and could have adverse impact for the overall economy, and especially for commercial banks. Recently, the Acting Governor State Bank of Pakistan (SBP), Dr Murtaza Syed, echoed similar sentiments.

In his address to World Islamic Finance Forum (WIFF), he emphasised that Islamic banking has a key role in the growth of the economy and it is growing at a faster pace in Pakistan. Islamic banking assets are worth about $49 billion in Organisation of Islamic Cooperation (OIC) countries and growing.

The government should help in facilitating the Islamic banking by adding more avenues of government borrowing in it through issuance of Sukuks and should introduce a better taxation treatment for Islamic banking instruments which would incentivize the conventional banks to move toward Islamic finance. After the 2008 global financial crisis, there is growing acceptance of Islamic banking in the world because of its inherent nature of being less risky.

Moreover, it possesses better asset quality due to its products being asset backed and profit-loss nature of its lending. However, it is not easy or simple to make the transition from conventional interest-based banking to the Islamic mode more so when the rest of the world would not be moving in tandem. It is an arduous task and would require a much longer period than five years. The task would become easier if the rest of the Islamic countries move apace towards this goal. Pakistan should consider spearheading this effort and try to create a joint action plan in this direction to ensure that the entire Islamic world embraces this system. This is also important for reducing the share of informal banking within our economy as some people don’t use (or minimise) the banking exposure due to the element of riba in it. The government should use this to its advantage and slowly work towards achieving the goal that FSC has set for it.

Copyright Business Recorder, 2022

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Abdul Sheikh Jun 03, 2022 11:33am
Could someone give me side by side comparison of Islamic banking vs. interest based banking?
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