Riba is a barometer of corruption and manifestation of dysfunctional and mismanaged economy, while interest is fulcrum of general equilibrium of economy and essential tool of monetary and fiscal management. This was stated by Dr Aqdas Ali Kazmi, Chief World Trade Organisation (WTO), Ministry of Industries and Production, while speaking at a roundtable discussion organised by Pakistan Economic Forum (PEF), here on Friday.
Dr Aqdas said that there is no substitute for interest as it is foundation of modern banking, credit and finance institutions; means of socio-economic development, whereas Riba is normative and value oriented phenomenon pertaining to theology and ethics. "Riba is foundation of decadent and regressive societies and a constraint on socio-economic development, with elimination of Riba, the society becomes active and progressive," he added.
He said interest is price of capital like wage of labour, rent of land and profit of entrepreneurship, while Riba is exploitative price of capital (usury), rent seeking plus source of other misuses.
Most of the participants of the debate opined that the controversy of Riba and interest definitions is creating confusion that which system is near to Islam. It is like comparing oranges with the apples as Riba was older than the advent of Islam, while without interest the credit or debt, which are the basic functions of bank can not take place, they remarked. Qarz (debt) is prohibited in Islamic banking and if taking debt is not possible, than how could the banking industry become viable, they questioned.
Earlier, giving an assessment of Islamic banking in his presentation, Dr Aqdas said that it is in initial stage of transformation of conventional banking into Islamic banking system. The modes on fixed rate techniques allowed to perpetuate by Islamic banks and financing on PLS basis is not gaining momentum, he added.
He said in Pakistan, the Islamic banking had allowed 92 percent of their total financing on Morabaha, Ijara and diminishing Musharika based on fixed return techniques where operational losses are not shared by the Islamic banks like interest-based banks. The Musharika and Modaraba based on profit and loss sharing, he said, are the true modes of financing under the Islamic banking framework but only 2.3 percent of their total financing has been allowed by Islamic banks under these modes.
He claimed that the Islamic banks are also paying negative real rate of returns to their depositors/investors, which is denting their image. Replying to questions raised by the participants, whether Islamic banking system is really Islamic, he said that the Finance Ministry had negotiated $1.5 billion consortium loan led by Islamic Development Bank during Musharraf regime, but the conditionalities attached to it were horrible.
"Hafeez Pasha, the then finance minister turned down the offer being too harsh. The loan was being taken on five percent above Libor. Moreover, Pakistan was required to pledge its three valuable national assets such as oil refinery, fertiliser, electricity plants, etc to lenders," he said.
Elaborating issues related to both the banking instruments (Riba and interest), he said they are not identical, howsoever broadly defined. "Riba and bank interest are two diametrically opposed and mutually exclusive concepts," he added.
Replying to another question, Dr Aqdas said Islamic societies are Riba-based as these suffer from corruption, feudalism, nepotism and exploitation. This is partly due to misinterpretation of Riba by Islamic scholars who continue to equate Riba with interest, he observed.
He stressed that interest, being the price of capital cannot be abolished from the economic system and there are no possibilities to conduct monetary policy, fiscal policy, commercial policy and planning policy in an economy, which is interest-free.
Explaining the challenges faced by the Islamic banking system, he said it lacked financial engineering, illiquidity of asset structure, implications of globalisation, lack of profit sharing on asset, short of mechanism to deal with loan defaulters, have short-term asset structure, lack of opportunities for short-term placement of funds, lack of lender of last resort, lack of risk management tools and scarcity of co-operation among Islamic banks.
The challenges also included absence of uniform accounting practices, transparency in profit sharing ratios among capital providers, inability to meet financial needs of clients for different types of funds and not having portfolio diversification along with supervision by the central banks. For this purpose, he said, the clients also feel insecure due to non-existence of deposit insurance.