WEB DESK: Federal Finance Minister Ishaq Dar while addressing the World Islamic Finance Forum organised by the Institute of Business Administration – Centre for Excellence in Islamic Finance – stated that “we are ready.
That is why I had formed a steering committee at the State Bank of Pakistan to develop comprehensive reports and strategies soon after assuming office.” He added that the committee shared its research findings with the government prompting the latter to set up a high-powered implementation committee which would include Governor and Deputy Governor of SBP, Chairman Securities and Exchange Commission of Pakistan, Secretary Law Ministry, and Chairmen of the Institute of Chartered Accountants and Institute of Cost and Management Accountants. Dar then proceeded to state that “we have Rs 19 trillion debt. How can we change it overnight?” He added that industry players must come up with innovative products in view of the energy and infrastructure projects under the China Pakistan Economic Corridor (CPEC).
Even though shariah-compliant institutions accounted for only one percent of total world assets in 2014 yet this was, according to the Ernst and Young, growing faster than banking assets as a whole – at an annual rate of 17.6 percent between 2009 and 2013; these are forecast to grow at 19.7 percent by 2018. Thus to get on the ground floor at this time is highly advisable and the efforts in this regard by the government must be appreciated.
The Minister, however, did not share the recommendations of the steering committee or the innovative products proposed. Four shariah-compliant products that available research has identified are as follows: (i) An Indian economist, Mohd Najatuallah, winner of the King Faisal International Prize for Islamic Studies, suggested a two-tier mudarabah model notably when the bank acts as a capital partner with the depositor on one side and the entrepreneur on the other with fixed return models – mark-up, leasing, cash advances for purchase of farm produce or for manufacturing assets; the results in this model are quite similar to those of interest-based models; (ii) Murabaha envisages lending the buyer money to purchase an item say a car – a bank may purchase the item from the seller, and resell it to the buyer at a profit, allowing the buyer to pay the bank in instalments. However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment but to protect itself against default, the bank asks for strict collateral; (iii) home loans, referred to as Musharaka al-Mutanaqisa, allow for a floating rate in the form of rental wherein the bank and borrower form a partnership with the two providing capital at an agreed percentage to purchase the property.
The property is then rented out to the borrower and a rent charged which is shared between the bank and the borrower based on the current equity share of the partnership. Concurrently, the borrower buys the bank’s share of the property at agreed instalments until the full equity is transferred to the borrower and the partnership ended. If a default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party’s current equity; and (iv) Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company’s individual rate of return with the bank’s profit on the loan equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded.
As the foregoing products reveal Islamic banking by itself cannot guarantee credit to the vulnerable or greater prosperity to the country or indeed lower reliance on government borrowings.
As noted above, the Finance Minister touched upon changing the existing debt to Islamic banking but wisely cautioned that this would not be possible overnight. Be that as it may, he must be aware that total debt or its servicing is unlikely to decline under the Islamic banking system and the way forward has to be through a reduction in reliance on debt – foreign as well as domestic.
Source: Business Recorder