The push towards transforming Pakistan's banking industry according to the tenets of Islam or more commonly known as Riba-free economy has seen many ups and downs since the establishment of the country.
Of late, the State Bank of Pakistan in its capacity as the guardian of the financial system has also been taking certain initiatives in the field.
Addressing a joint press conference on 4th March, 2004, with the Chairman, Board of Directors, Meezan Bank, and the Under Secretary, Ministry of Finance, State of Bahrain, Governor Ishrat Hussain introduced members of the newly constituted Sharia Board, headed by Dr Mahmood Ghazi, and made some pertinent remarks about the parameters of the new policy.
The Sharia Board would explore avenues for new Islamic banking products and provide policy guidelines to the State Bank.
According to the Governor, there were too many conventional banks and the central bank was stressing the need for consolidation and mergers.
Therefore, the State Bank in future would only issue banking licences for setting up exclusive Islamic banks.
Work was already under way to replace Treasury Bills with Islamic products. However, he made it clear that Pakistan would not take hasty steps which may fail the plan for the growth of Islamic banking.
Reaffirming the evolutionary approach, he emphasised that it was not up to the regulators to decide about the switchover to the Islamic banking but it would be individuals who would decide how to use the available options for investment and banking.
The State Bank, on its part, would provide a level playing field for both sectors of the banking.
Reference was also made to the growth potential of Islamic banking. On world-wide basis, it was already expanding at a rate of 15 percent per annum.
However, it was not made clear whether this growth referred to institutional capacity or actual growth in business.
In Pakistan, Meezan Bank was exclusively an Islamic bank while Muslim Commercial Bank was setting up exclusive Islamic banking branches.
The NWFP government has converted one branch of the Bank of Khyber into Islamic banking unit and if the experiment proved successful, more branches of the bank would be converted into Islamic banking units.
One of the biggest challenges in the field, holding back the potential, was the shortage of experts and skilled manpower to deal in Islamic banking.
The present initiative of the State Bank as enunciated at the press conference needs to be seen and appraised in its proper perspective.
From the very beginning, the Jamali government is committed to an evolutionary approach, which means that the growth of Islamic banking would entirely depend on the requirements and preferences of the economic entities and it not would be imposed arbitrarily by some outside force like the government or the central bank.
It was a laudable decision since the country had a well entrenched and developed conventional banking system which was serving the interests of the community quite satisfactorily and could not be dislodged in one go.
Also, it was felt that a slow transformation made after a thorough analysis of the situation would be ultimately more useful for the country.
The announcement at the press conference that it would be up to the depositors and finance seekers to opt for conventional or Islamic banking is in line with the earlier commitment of the government to facilitate the creation for an environment in which the two systems would be enabled to compete.
In our view, this assurance would go a long way in promoting a healthy competition and also accord necessary respect to the choice of the stakeholders in the financial system.
The approach, indeed deserves to be welcomed. However, the announcement of the Governor that licenses would now only be issued to Islamic banks appears discriminatory and against the spirit of level playing field which the State Bank has assured to provide.
What would happen if, for instance, market size at some future date dictates the establishment of new conventional banks which reputed parties are prepare to open and there is hardly any demand for the services of Islamic banks is difficult to predict.
If the approach is to be really evolutionary, the State Bank needs to be neutral in all respects.
In its zeal to promote Islamic banking, the central bank also needs to be certain about continued sound functioning of the financial system.
The basic objective of the banking industry is to mobilise optimal level of resources from the economy and allocate them to the most productive sectors of the economy.
It is also the responsibility of the financial managers to ensure that unscrupulous elements of the society do not take undue advantage of the Islamic banking system and the amount of non-performing loans does not increase with the shift to the new system.
The State Bank also needs to devise proper and affective instruments of monetary policy in a Riba-free economy so that inflation remains within acceptable limits. Besides, it has to be seen that the evolving system efficiently meets the requirements of a global economy and expansion in foreign trade.
We are quite hopeful that the State Bank is fully conscious of the problems and risks of its initiative and would not take measures which are harmful to the financial sector and to the economy.