, by DR. WAQUAR ANWAR
All is not well in the name of Islamic banking. There are grey areas and one should simply accept it without any hesitations so that scope of improvement can remain open. Whatever is happening in the name of Islamic banking and finance cannot be vouched. In many practices Islam in the name Islamic banking and Islamic finance appears to be misnomer. Some such aberrations are described hereunder:
Petrodollar drain approach: An added charm of initiating an Islamic Bank in a country appears to be a drain through which petrodollar will flow in. (Alternatively, it may be called counter-drain approach.) As the economy of the members of Gulf Cooperation Council (GCC) countries in particular and other members of Organisation of Petrol Exporting Countries (OPEC) in general is rentier based, the funds saved in these countries are mostly invested outside their own respective countries. The whole word is vying for the savings available in GCC countries. A new method to attract these funds is to assure that these can be invested in their countries in a manner that is Shari’ah-compliant. Here we find a justification for the popularity of Islamic Banking. There is no love lost for Islam or its Shari’ah but a gold rush to muster the funds in this manner.
Insufficient solutions: The economy of GCC countries is mostly rentier based. The developments of products and systems of Islamic banks have been in this environment of rentier based economies. Solutions for problems like equity participation, term lending, working capital finance, and cash-credit accommodation shall have to be addressed afresh. The solutions available till date are not sufficient for a vibrant production based economy.
Dilution of core idea: The justification of Islamic Banking emanates from denunciation of riba (interest). The original blueprints of the system, as proposed by scholars like Dr. M. Nejatullah Siddiqi and Dr. Umer Chapra, were prepared on the basis of replacing interest with profit. So we find that shirkat (partnership) and mudharabat (sleeping partnership)play the vital role in those proposals. The later development whereby murabaha (cost plus contract), ijara (leasing) and istiqna (hire purchase), etc. took the place of shirkat and mudharabat. It is not any improvement of the original proposition but a dilution of the core idea of riba being replaced by profit. Instead of approaching the challenges head on, the practitioners of Islamic Banking have chosen the easy route. The share of mark-up financial instruments of Islamic Banks may be more than 90 per cent. Such mark-up financing documents include trade finance by murabaha and investment finance by leasing. The overwhelming reliance on these financing instruments goes against the profit and loss sharing (PLS) system of Islamic economics.
Misplaced focus: The focus of Islamic Banking should be serving the maqasid-e-shari’ah (higher goals of law in Islam) of preserving Faith, Life, Intellect, Posterity and Wealth. We may add on the list of our concern in this regard and add Poverty Alleviation and Preservation of Environment for Quality and Continuity of Life on Earth. There can be no other justification for introducing any branch of the Islamic system if these basic concerns are not addressed properly. The Islamic Banking as practised till date has not to report home about in this area.
Lack of support: The system will not be noteworthy till it gets full support of Central banks and governments, and its performance outweighs the conventional banking to such a degree that the latter is made redundant if replaced by the onslaught of the new idea. The governments and central banks of most of the countries, where Islamic Banks have any presence, have not till date committed them seriously to the core idea of interest-free banking. Conventional banking continues to be the basic system in most of these places inter alia Iran, Pakistan, Sudan and Bangladesh. Islamic banks in these nations are in the “can-also-exist” mode. One may study the fate of Usury-free Banking Law and Islamic Banking System that became effective from 21st March, 1984, under Bank Markazi Jamhouri Islami Iran (Central Bank of Iran).
Acceptance of fallacy: Islamic banks are accepting the fallacy of Islamic banking window/counter in conventional banks. It is like Rooh Afza available in a beer shop! Interest-free banking is meant to replace interest-based banking. The idea of interest-free window in conventional banks is ridiculous. Sitting on the lap of what one is supposed to replace is simply a defeatist approach. It is like becoming a counter of what one had to encounter!
MAJOR CAUSES OF ABERRATIONS
Major causes of the aberrations cited above may be described as under:
Span of history: Islamic banking industry is relatively new. As against the 300 plus years history of conventional banking, Islamic banking in its present form is the case history of 30 plus years. Interest has become the dominant culture of the world today and all vested interests of financially strong and militarily powerful countries are linked to interest-based capitalist system. International financial institutions exist on this core idea of interest. Islamic banks have to face heavy odds.
Deviation from its base: Islamic economics is the theoretical base of Islamic banking. The industry has ignored, if not deviated from, the basic principles of Islamic economics. There is a mad rush for mimicking the products and services of conventional banks.
Market oriented research: Islamic economics as a subject emerged in the late sixties of the nineteenth century. Prior to that, scholars were presenting teachings of Islam relating to economics. Islamic economics as a distinct subject of learning with its own laws and practices was deliberated upon beautifully by many scholars. But this concentration on the subject did not live long. Almost all the experts on the subject became engaged in developing modules for Islamic banking and finance. Researches in Islamic banking and finance were market driven. Debates and delineation in Islamic economics went to the back benches.
These aberrations are challenges. These do not mean failure of the core idea of economy free of interest and injustices. Interest-based capitalist system has proved its failure and it is bringing more injustices and woes than cures. The solution lies in ethical practices based on the principles enshrined in Islam. Islamic economics is the solution. The challenge is to correct the aberrations caused by deviations from the basic principles.
DISTINCTIVE FEATURE OF AN ISLAMIC BANK
It is an interesting comment that the only thing common between Islamic banks and conventional banks is that both are called banks. They belong to two different genres, despite giving some common services to economy. This comment is more correct at least to the extent of commercial banks as operating in Anglo-Saxon nations and the countries following their system of banking. Whereas universal banking system as practised in Germany, Switzerland, the Netherlands, Japan and many European countries is concerned, there are more common features between that and an Islamic bank. It is useful to discuss the difference between universal banks and commercials before describing the differences between a conventional bank and an Islamic bank.
Universal banking provides both ‘Banking and Financial Services’ through a single window. As per the World Bank, “In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms (including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters.” Hence Universal banks give both loans and participate in equity financing. Its services include investment and participation in capital. The term ‘Universal Banking’ refers to those banks that offer a wide range of financial services beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Insurance, Credit Cards, Retail Loans, Housing Finance, Auto Loans, etc. It is in practice in European countries.
In Anglo-Saxon countries like UK and USA and their former and present colonies and areas of financial influences, financial institutions are divided into two forms: commercial banks and development financial institutions (DFIs). Commercial banks provide services like working capital, cash credit arrangement, overdrafts, bill discounting, etc. DFIs provide equity finance, long term lending and other forms of project financing. DFIs, in effect, become partners in the business of their clients and can have many forms of investment portfolios. Universal banking merges both the functions and all these services are done from the single window.
The basic difference between an Islamic bank and a conventional bank is that the former is engaged in trading activities like purchase and sale of goods and leasing of assets whereas the latter keeps such trading at bay. An Islamic bank deals with commodities and assets whereas commercial banks deal with their documents. As a natural consequence of this fundamental difference all the money outlaid by Islamic banks is backed by assets whereas this may not be true in the case of conventional banks. Such trading in goods makes Islamic banks partners to the industry which is not thinkable in a conventional banks. Conventional banks while considering any proposal for loan are more concerned about securities, collateral and credit worthiness of the promoters than about a serious analysis of the feasibility report of the business. Islamic banks, as partners to the business, are involved more seriously in the viability of the proposals.
In countries where commercial banking and developmental banking are separate entities, the banking laws become a bottleneck. In that atmosphere banks are not permitted to enter into trading arrangements of goods and services. But the countries where universal banking practices are in vogue can adopt the Islamic banking system more easily.
This discussion does not mean that an Islamic bank is akin to a Universal bank. The similarity lies only in the approach towards participation in the projects of the clients. Both of them can opt for equity participation and profit and loss sharing that is not possible in the case of a commercial bank. In other words, commercial banks are non-participatory, universal banks can or cannot be participatory and Islamic banks are cent per cent participatory in nature.
The distinctive feature of an Islamic bank is, obviously, that it is interest-free and it adheres to the recognised ethical principles and the values enshrined in Islam.
Recognised ethical practices (ma’aroof) and specific commandments of the Book of God and His Prophet are the basic sources of Islamic law. Economics in Islam and all its other branches including Islamic finance and banking are guided by these principles and practices.