EDITORIAL: The Federal Shariat Court declared the prohibition of riba complete and absolute in all its forms and manifestations as per Islamic injunctions and directed the government to implement its decision by the end of calendar year 2027.
In this context, it is relevant to note that Bank of Islam Malaysia has been successfully posting profits for years by providing loans free of cost to its borrowers, identified through the application of a highly ethical process; and, without the need to take account of market fluctuations, the borrower no longer needs to constantly adjust his balance sheets, which account for lower defaults, lower non-performing assets and higher profits which are then shared with the lender bank that, in turn, shared its profits with the depositors. However, the Malaysian central bank, Bank Negara Malaysia, continues to set interest rates.
Non-performing loans (NPLs) are a source of serious concern in Pakistan, exacerbated by the decision of many Pakistani governments to implement interest-free loans/subsidised interest schemes to the poor and vulnerable, youth and/or other disadvantaged groups, however, this has an element of government subsidy and/or browbeating reluctant commercial banks to extend loans without collateral. Sadly, in these schemes there has been little application of an ethical process in identifying clients leading to failure to meet their overarching objective: alleviation of poverty.
Be that as it may, the implementation of the Federal Shariat Court decision would be a major challenge for the government on three counts. First and perhaps of most serious immediate concern is the fact that Pakistan today owes more than 130 billion dollars to foreign countries/multilaterals/commercial banks/debt equity from issuance of Sukuk/Eurobonds.
For the next five years, the country would have to register a surplus current account of 26 billion dollars each year to meet the deadline given by the Federal Shariat Court. Given that Pakistan has registered a current account surplus rarely, if ever, with the July-February 2022 deficit of 13.1 billion dollars the government may have to seek an extension in the implementation deadline at best.
An offshoot of this maybe the cessation of all linkages to the international financial market barring a few banks in Muslim countries who may hesitate due to the higher risk associated with such a delinking. While without doubt the very possibility of hot money flowing into the economy would evaporate, hot money whose summary exit is believed to be a major cause of the 1978 Asian financial crisis that caused much angst amongst the people of these countries, yet it may also inhibit foreign investors — institutional, government or private sector — from our markets.
Pakistan’s National Savings Centres give a profit and are regarded as the safest investment for those with a fixed income. This money is then credited to the government’s permanent debt profile under unfunded debt. The profit rates on these certificates are determined by: (i) the prevailing discount rate set by the SBP; and (ii) if the government requires more funds it raises the rate and in the event that the budget deficit is becoming unsustainable then it reduces the rate so as to reduce the domestic mark-up component of the budget. The government also borrows heavily from the domestic market, including through issuance of treasury bills which come with an attached interest. When the interest regime is abandoned it would be extremely difficult to claim a profit when the government budget deficit is at an unsustainable high of over 9 percent.
Second, the policy rate which is at present a critical monetary policy tool used by the State Bank of Pakistan to deal with liquidity issues impacting on inflation as well as dealing with the pressure on foreign exchange reserves due to an unsustainable current account deficit would have to be abandoned which would place the entire onus of adjustments on the rupee-dollar parity. In other words, inflation may rise well beyond the historical highs Pakistan has experienced as imported inflation would propel the rate of domestic inflation.
And finally, interest is viewed in the business world as an input, cost of capital, which determines the cost and pricing of the final product. The Federal Shariat Court’s decision would therefore require a sea change in the way businesses calculate their costs which in turn may require a re-education that may take time.
It is, therefore, critical for the government to set up a committee of domestic and international experts to thrash out the modus operandi of a riba-free society, which may serve as a model for other Islamic countries.
Copyright Business Recorder, 2022