Despite misunderstandings about Islamic banking in different sections of the society, it is growing at a rapid pace in Pakistan and the growth will accelerate further if the central bank continues to chalk out policies.
These were the views of Executive Vice President Head of Product Development & Shariah Compliance, Meezan Bank, Ahmed Ali Siddiqui, who was speaking to a select group of journalists at a workshop on ‘Islamic Banking’ at Meezan Bank’s head office on Tuesday.
Siddiqui believes that Islamic banking will be a strong Rs1 trillion industry by 2015 and its size will be 20% of the country’s banking industry.
“Islamic banking is different from conventional banking and it is completely incorrect to say that both are same things with different names. Here your bank becomes business partner that provides you raw material for a joint business in which both profit and loss are shared among both partners,” he claimed.
Since Islam permitted trade and prohibited interest, Islamic banking focuses on trading by becoming a partner of its clients and does joint trading, he added.
“The size of Islamic banks in Pakistan is growing considerably, I believe that the time is not too far when people will start realising that this system is different and it can boost trade and economy of the country,” he stressed.
Islam encourages circulation of wealth and discourages its concentration in a few hands to narrow down the distinction between rich and poor. “The circulation of wealth is as important as blood in our body. As a blood clot paralyses the body, the concentration of wealth in a few hands paralyses the economy, which is why monopoly is prohibited in Islam,” he said.
Siddiqui said the concept of banking based on pooling of excess funds of depositors and channeling them towards those who require it for investment is not only approved but encouraged by Islam. However, he clarified that the concept of lending and borrowing on the basis of interest in not allowed in Islam.
A fixed rate of return is not permitted under Islamic Shariah. However, the fixed return does not make a transaction halal or haram such as profit on trading and rent on property, he explained.
The total size of the world’s Islamic banking industry is around $1.2 trillion whereas many leading conventional banks have Islamic windows such as Citibank, ANZ, RBS, Goldman Sachs, HSBC, Saudi American Bank, Saudi British Bank and USB AG.
Today, Pakistan has five full-fledged Islamic banks and at least 12 conventional banks are also operating Islamic banking branches.
KARACHI: That’s a very difficult question to answer, but one that has been asked many times. The thing is this question can only be answered by financial professionals within the Islamic finance world, or people who practice conventional banking. The first obviously say that it is. After all, it’s their baby, why would they say it isn’t. The second group consists of people who don’t understand the concept enough to give an answer, or they brush it off by saying that there is very little different, it’s just interest under a different name.
Whether it is different or not, really Shariah compliant or not, Islamic finance is gaining clout and influence every passing day. It is the fastest mode of finance in Pakistan and the world with assets and deposits growing faster than its conventional counterpart. It has now become a trillion-dollar industry worldwide and is expected to continue this growth as more and more Muslim countries climb the development ladder with rising incomes.
So this gives rise to another question. Is Islamic finance – considering its increasing clout – really a viable alternative financial system and solution? The answer would seem to be that yes it is.
Let’s get one thing straight, the simplistic description that any zero-interest-rate system is Islamic is superficial. After all, this is the exact term used by mainstream central bankers when they talk about policies pursuing what they call ‘quantitative easing’, so it is not something exclusive to Islamic finance. Islamic finance is a lot more than just the absolute prohibition of interest. There is also the effort to maintain high moral and ethical standards on the part of lenders and borrowers. In fact, if practiced and implemented in letter and spirit, this is perhaps the key thing that sets Islamic finance apart from conventional finance.
And there can be no denying that there is definitely a lot of room for ethics in today’s financial world.
In fact there can be no greater argument or rationale for a zero-interest-rate system than the John Maynard Keynes’s The General Theory, and I quote:
“Provisions against usury are amongst the most ancient economic practices of which we have record … In a world, therefore, which no one reckoned to be safe, it was almost inevitable that the rate of interest, unless it was curbed by every instrument at the disposal of society, would rise too high to permit of an adequate inducement to invest.”
Keynes’s endorsement does not necessarily make this system right, but his analysis does suggest that it should be regarded as a serious proposition.
And the single greatest reason why I feel that Islamic finance, for what it’s worth, can work and can be a successful alternative to conventional systems is the fact that although interest is prohibited under Islamic finance, profit is not; the latter is derived from various arrangements that combine finance and enterprise. In essence, this is a profit-sharing and risk-sharing system that is based entirely on equity finance.
This is the only area where I am not yet entirely convinced that there actually is equitable risk sharing. In theory, at least, Islamic finance contrasts with the current dominant system based on interest-bearing debt, in which risks are theoretically transferred to debt holders. I am not entirely sure if this is entirely the case in practice as well.
But this is where it gets tricky. One may agree that that if people adhere strictly to its ethical requirements, there would be fewer moral-hazard problems in Islamic banking. But we also know that whether any particular system is efficient in avoiding moral hazard is a matter of practice, rather than of theory. And if in the world of Islamic finance, this adherence to ethics cannot be guaranteed, there really is no need of it as a separate or alternative system.
Muscat - There is huge potential for significant growth of Islamic finance in Oman and we are confident of expanding our horizons and activities to create a very successful environment, said Dr Jamil el Jaroudi, CEO of Bank Nizwa .
Speaking at a recent economic forum dedicated to Islamic finance, Dr Jaroudi said, "We have established Bank Nizwa as a centre of excellence for Islamic banking where we provide a just and equitable model for economic growth through a range of banking tools. This is particularly true of our Islamic principles which leverage the economy to new heights through the financing of public sector projects."
Dr Jaroudi, a leading expert in Islamic finance, delivered a presentation under the theme "Islamic Banking, Great Hopes for Investments," which gave participants the opportunity to gain first-hand information on the importance of the industry to the financial landscape of Oman. It included in-depth insights into the Islamic banking tools available to realise growth in the economy.
The forum, which was facilitated by Al Roya newspaper, drew delegates from many important industries across the sultanate.
Dr Jaroudi's address was dedicated to pressing issues of the current stage of Islamic finance development in the sultanate and delved into new approaches to understanding the future for the industry. The guest of honour at the event was H E Darwish al Balushi, Minister Responsible for Financial Affairs.
The Bank Nizwa CEO outlined his hopes for Islamic banking playing a role in spurring the development of Oman's economy. "There is huge potential for significant growth of Islamic finance in Oman, and we are confident of expanding our horizons and activities to create a very successful environment."
Dr Ashraf al Nabhani, general manager, corporate support, Bank Nizwa , also participated in the panel discussion on "Capital Market - Expected Performance. (Zawya / 22 April 2013)
KARACHI: While Islamic financial institutions have passed the robustness test by exhibiting greater resilience during the recent global financial crisis, the crisis has also brought under the spotlight some important challenges the industry is currently facing. Going forward, the stakeholders of Islamic finance will need to address a broad spectrum of issues surrounding the industry.
Highlighting the inherent strengths of Islamic finance, the recent global financial crisis coincided with the growing concerns over the possibility that excessive financial innovation might lead the Islamic finance products to bend certain key precepts of Muslim jurisprudence to breaking point. Perhaps the most prominent example is the Sukuk – sometimes even called the “Islamic bond” – as many Islamic Sukuks have gone too far in mimicking conventional, interest-bearing bonds, which are prohibited in Islam.
Since there is little room for diversification of assets, the risk management capabilities of the Islamic financial institutions are limited. A direct consequence of this was observed in the last financial crisis when large exposure to real estate of Islamic financial institutions resulted in falling asset values in many of these institutions operating in the OIC member countries, particularly in the MENA region. A study by Ernst & Young (2011) reveals that the real estate concentration still remains a concern for Islamic finance industry and may affect its future growth.
The low penetration levels of Takaful (Islamic insurance) in OIC countries are posing another challenge for the Islamic finance industry. OIC member countries as key Takaful markets are characterised by low insurance penetration rates versus huge potential for rapid economic growth. Global Takaful premiums are estimated by Ernst & Young (2011b) to have reached $16.5 billion in 2011. Moreover, Takaful premiums remain highly concentrated in Iran which generated almost 30% of the global Takaful premiums in 2011. Similar to the relative size of Islamic finance to the global financial industry, the Takaful market represents only 1% of the global insurance market at present (Ernst & Young 2011c).
Regulation and standardisation
Another major impediment to the growth of Islamic finance industry is the weak Islamic finance enabling infrastructure in many OIC countries. Enabling infrastructure would include, among others, legislative, regulatory, legal, accounting, tax, human capital, and Shariah business frameworks. Although member countries such as Bahrain, Malaysia and UAE are among the major Islamic finance centres with developed infrastructures, in many others, an enabling environment is not in place. This, in turn, increases operational risks, including the risk of Shariah compliance.
Development of Islamic money and capital markets, provision of standardised liquidity management tools, improvement of the operational efficiencies of Islamic financial institutions, standardisation in products, synchronisation of regulatory frameworks, and human capital accumulation are other areas where the Islamic finance industry needs to take structural steps.
Broadening the skill base
The broadening of the global skills base in Islamic finance is desirable since the number of qualified practitioners, as well as Shariah scholars available for Shariah boards, is currently very low.
Representation of Shariah scholars on Shariah boards is highly concentrated. A survey by Funds@Work (2011) reveals that only the top 20 Shariah scholars hold 619 board positions which represent more than half of the 1,141 positions available.
All in all, with the challenges ahead, the growth of Islamic finance, free from interest and subject to high moral codes, will be slow in the long-run. And the slow growth of the industry would also slow down economic growth and wealth creation. However, the wealth created would be real, more equitably and profitably distributed, and would encourage spin-offs into real economy, creating jobs, increasing trade both domestically and internationally.
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