Naveed Iqbal believes that more can be done to make Islamic banking a dynamic financial sector in Pakistan. In this article, he argues that a belief in the value proposition of Islamic banking and an understanding of product mechanisms will ensure Islamic banking grows considerably.
Introduction
Demand for Islamic banking services in Pakistan is strong. Since 2002, the industry has grown at an impressive rate. Promotion and advocacy of Islamic banking services really took off in 2002, even though Pakistan has toyed with the idea since 1979. Today, the scope for further expansion is vast and thus the inert demand potential for Islamic banking services needs to be tapped into quickly through active education drives for the population and training of bank staff.
Currently, there is a lack of education and lack of awareness of the benefits of Islamic banking to society at large. In order to grow, Islamic banks should educate the customer and have trained staff in Islamic finance that can influence customer opinions effectively. Fundamentally, a careful articulation of the value proposition of Islamic finance is important in attracting more customers. Islamic banking is not just another way of conducting financial transactions but an institution that should uphold social objectives and promote Islamic values towards their staff, clients and the general public. Other factors perceived to be important include contributing to the social welfare of the community, promoting sustainable development projects and alleviating poverty.
Islamic banking in Pakistan
In Pakistan, Islamic banking really started in the late 70s. Serious efforts were undertaken to transform the economy into one that was Islamic. The efforts of the late 70s laid the foundation for modern Islamic banking. However, the real growth of Islamic banking kicked off in Pakistan after 2002. This was the time when the State Bank of Pakistan changed its approach to the promotion of Islamic banking.
The first full-fledged commercial Islamic bank license was issued in 2002. Before this time, while there were Islamic financial institutions, they were not popular. Inadequate information about Islamic banking products and services were important factors for a lack of growth of Islamic banking. Today, there are 5 fully-fledged Islamic banks and 13 conventional banks with Islamic banking windows. According to State Bank of Pakistan (SBP), the total AUM of Islamic financial institutions has reached Rs 837 billion. The total Islamic banking deposits has reached a total of Rs 706 billion. These deposits now account for 9.7% of the total deposits of the banking sector in the country. The total size of net financing and investments has reached 8.1% of the overall banking industry. In July 2011, the Securities and Exchange Commission introduced new rules for takaful, designed to boost competition and lift the sector’s market share. Currently there are 37 general insurance companies, 7 life insurance companies, and 5 takaful and re-takaful companies operating within Pakistan. The latter institutions currently have a market share between 2-3%. The new rules are expected to increase the number of takaful operators as it allows the entry of conventional players with takaful windows.
“Islamic banking is an institution that should uphold social objectives and promote Islamic values towards their staff, clients and the general public. It should also contribute to the social welfare of the community, promoting sustainable development projects and alleviating poverty.”
The SBP has been actively reforming the Islamic banking industry to ensure competitiveness on the global market. This is only good for the growth of the Islamic banking industry in Pakistan as without the support of the central bank islamic banking industry can’t grow. The central bank is currently working on a 5 year strategic plan for the Islamic banking industry.
While these latest developments are good, it is a little disturbing that Islamic banking could not live up to much of its initial promise – contributing towards the equitable distribution of resources by offering distinct financial products.
The importance of education Education is very important in any field. It gives us knowledge and helps develop perspective and acquire an informed (not visceral) point of view on things. It makes us capable of interpreting things in the right way. The lack of awareness and, by extension, education creates ignorance and uncertainty thereby allowing emotion to dictate choice. In the Islamic finance industry, the lack of understanding is staggering leading to baseless assumptions. People have different opinions about Islamic banking and finance: some say it is the same as conventional banking; some say the opposite while others simply do not agree with Islamic banking and finance. These vagaries have an impact on the demand for Islamic banking services.
Now we have to find out the reason why there are such different mindsets. Why do some people not trust Islamic banking and finance, and are convinced about the value of conventional banking even though the fundamental concepts of the Islamic financial system (IFS) are as old as Islam itself? Herein lies the problem: individuals do not sufficiently appreciate the inextricability of Islamic finance and religious obligations. They consider the two separate and do not understand that a Muslim’s religious obligations encompass finance. Transacting with riba is prohibited as is the consumption of swine or alcohol but from a young age the latter two are emphasized far more than avoiding riba. From Prophetic hadiths, we can see that dealing with riba is a much graver sin than eating pork. Yet a lot of Muslims in Pakistan do not consider it as such. This is due to insufficient education and understanding of the financial tenets of Islam.
Undoubtedly, over 20 years ago, access to Islamic financial products was limited. But this has changed. Islamic banking has evolved over the years and this institution, which started off as a mere means to fulfil religious obligations, has now turned into a more planned and organized way of banking. In the last quarter of 20th century, the Islamic finance industry has made significant progress globally. Therefore, its religious underpinnings and its impressive global growth make Islamic finance an important constituent of the global financial system. In fact, promoting Islamic banking and finance is only good for the country and the economy at large. Malaysia, Indonesia, Qatar, Saudi Arabia, Kuwait, Bahrain and UAE are all examples of countries whose economies are richly benefiting from Islamic finance.
To join this heady list of countries, the Pakistani government and ancillary bodies need to expend more effort to educate. At first glance, it won’t be an easy task to educate people of a country where the literacy rate is only 56 percent (according to the World Bank). To overcome this hurdle, Islamic banks have to become more involved with local communities and have a branch within localities. The presence of Islamic banks will build awareness. It will also provide the base from which staff members can explain the difference between Islamic banking and conventional banking to customers. Islamic finance should be part of the school syllabus which will improve awareness from childhood. Just as the avoidance of swine and alcohol is imbued from an early age, the prohibition of riba should also be emphasized.
The centrality of Islamic finance in Shari’a
Many people say there is no concept of banks in Islam. This is true. Islamic banking is not defined in the Quran or hadith, but these two sources provide comprehensive principles that establish the foundations for the creation of Islamic banking. The Shari’a provides guidelines that aim to create a just and fair society where moral and ethical values are practiced and the distribution of wealth is done fairly and equally. The importance of creating an upright society in Islam can be seen by the number of rulings in the field of muamalat as compared to ibadat: possibly over 75 percent of the teachings of Islam are in this field.
“Why do some people not trust Islamic banking and finance, and are convinced about the value of conventional banking even though the fundamental concepts of Islamic financial system (IFS) are as old as Islam itself? Herein lies the problem: individuals do not sufficiently appreciate the inextricability of Islamic finance and religious obligations. They consider the two separate and do not understand that a Muslim’s religious obligations encompasses finance.”
These teachings are based upon the following Quranic verse (28:77): “But seek through that which Allah has given to you, the home of the hereafter: and (yet), do not forget your share of the world.” Whatsoever wealth Allah has given, the individual should spend in the way Allah has instructed as this will have benefits in this life and the hereafter. Muslims should not just be after making money by any means and forget the law of Allah. In the Quran, Allah says wealth is a trial but at the same time says wealth is a blessing. Now such a dichotomy can cause confusion unless one understands that the contradiction can be resolved by considering the utilization of wealth.
Dealing with money, in general, leads a person to injustice and sin. The more one is involved with increasing his wealth, the greater the chance that he or she will fall into sin while trying to accrue wealth. The lust for wealth leads to falling into numerous sins like bloodshed which emanates between warring countries or between tribes, breaking into people’s homes and businesses, and embezzling people’s money. Only the person who truly has a fear of Allah will be able to save himself from such temptation.
Fear of Allah is a starting point. People should then be aware of the negative impact that riba, maysir and gharar has on society. These 3 elements leads towards either dispute, or it will restrict the wealth to only few people.
Concentrating on riba, it is clearly stated in the Quran in verse 2:275 “Those who devour riba will rise up on the Day of Judgment like the man whom Satan has driven to madness by his touch. This is because they claim that trading is like interest and how strange it is that Allah has permitted trading and forbidden interest.” This verse is interesting in that it overemphasizes the evil of riba. Comparing the devourer of riba with a man destroyed by the touch of the devil suggests that riba is a satanic instrument. Other prohibitions do not hold the same gravitas. In the preceding verse, the Quran states “O You who believe, fear Allah and give up what remains of your demand for riba, if you are indeed believers. If you do it not, take notice of war from Allah and his Messenger.” The devil is considered an enemy of mankind, but not necessarily of Allah (Allah reprieved the devil). By declaring war the devourer of riba is an enemy of Allah and his Messenger. It can be argued that this is a far more serious conflict.
But it is not only the devourer of riba that should be concerned about Allah’s wrath; the prohibition is all encompassing. The Prophet said (Muslim), “Allah has cursed the one who consumes riba, the one who gives it, the one who witnesses over it, and the one who writes down the transaction.” By mentioning each party to a riba transaction, the Prophet is in effect ensuring that any party involved is aware that the sin of riba could fall upon them. The long term effect of this should be that if any party is charging riba, at least one of the three other parties would hopefully avoid the transaction thereby ensuring the whole transaction collapses. It has systematic effects.
Training the bank staff
The problem is most Muslims know this but they do not have faith in the efficacy of these rulings. Faith is very important for the success of anything; hence the staff of Islamic banks should have this knowledge and should believe in these teachings. When hiring, Islamic banks should hire staff with a strong belief in the value proposition of Islamic finance. The industry does not need just practitioners in Islamic finance that know financial practicalities; it needs people who also have Shari’a knowledge or at least the basic knowledge of Islamic banking and finance. It should be mandatory for Islamic bankers to at least have the basic knowledge of Shari’a along with banking knowledge. Anecdotal evidence has shown that staff in Islamic banks are not sure about the mechanisms of Islamic banking products. Therefore staff should have the requisite qualifications in the field. A well-trained staff with the belief in the importance and efficacy of the products will lead to more effective selling. Unfortunately, this is not as evident in Islamic banks as it should be.
Islamic banks should focus on training, and improving knowledge of their staff on products. The bank should send staff on regular training courses to update their knowledge of Islamic finance. Another way is to hire full time Shari’a advisors working in the Bank. It will make the imparting of knowledge easier and sustainable. The Shari’a advisor should make sure that the bank is running in compliance with Shari’a and regulations issued by the government and the SBP, The Shari’a advisor should provide seminars to existing and potential clients, and share their opinions on how to help the customer understand the products of an Islamic bank.
Through personal experience, I have noticed that a large number of those in senior management of Islamic banks started their career with conventional banks because there were no Islamic banks. Many of them moved to Islamic banking for a better career, higher salary and for better opportunities. However, there were a few who had a more faith-driven agenda in moving to the Islamic banking sector. These are the type of people who have a much more personal investiture in the industry and are likely to drive the growth of the industry.
Conclusion
Islamic banking consumption should be far higher but due to the lack of awareness of the public and misconceptions about the system, the industry has not reached optimum. However, the increase in market share over the last 10 years show that there is a growing interest in islamic banking. Given the various reforms and marketing strategies undertaken by the SBP, it is likely that the Islamic finance sector will continue to grow. This needs to be supplemented by a well trained staff that truly believes in the value proposition of Islamic banking. A surge in procurement of Islamic banking services.
