Pakistan Today

Islamic banking novelties

There is a famous idiom ‘to put old wine in a new bottle’, which means presenting an old item in a new way. Though this idiom is suitable for various situations but its cent per cent fits on Islamic banking, which is sharply growing in the country. State Bank of Pakistan (SBP) established Islamic Banking Department on September 15th, 2003 with the task of promoting and developing the shari’a compliant Islamic banking as a parallel and compatible banking system in the country.
Earlier, the apex court in the country asked central bank for developing such system, which should not be based on interest (riba) and should be compliant with the Islamic principles. According to SBP till August 2009, there are six licensed full fledged Islamic banks and twelve conventional banks with standalone Islamic banking branches with the total branch network of over 336 branches operating in more than fifty cities of all the four provinces and Azad Kashmir.
Although central bank played an important role in spreading Islamic banking but at the same time it failed to develop a proper Islamic financial system, in which people feel mental peace while borrowing from the banks and show full sincerity in paying back the money to the banks. Currently, Islamic banking is not at all different from the conventional banking system. Former President Zia ul Haq tried to Islamise the society by imposing ban on alcohol, lashing the culprits in public. Last but not least, he also opened bank accounts on profit and loss basis. Before the Zia regime, bank accounts were opened on profit basis and the customers were given an agreed amount from the profit but after Zia’s government people were asked to open account on profit and loss basis. Interestingly, the policymakers at that time only decreased the interest rate and said that now the bank accounts are operating on profit and loss basis. Those steps invited many people to criticise the Islamic financial system.
Similarly, the current Islamic banking system is not at all different from conventional banking, the product names have been changed while the rest remained the same. For instance, if you want to avail ‘insurance’ facility, you can use ‘takaful’, if you want to lease a car, you can use “car ijara”. All the procedures and requirements will be same apart form the name of the products. For instance, if you want to lease a car from a conventional bank then you will have to pay certain amount over the current price of car, and the installment will be for a specific time period. Now let’s see how an Islamic bank will finance you a car. Literally, there is no difference of mark-up between conventional and Islamic bank. The Islamic bank being an owner of the car, will give it to you on rental basis. What you have to do is to pay an agreed amount, as rent of the car to the bank for a specific period. After completion of this you will become owner of the car. Mostly people prefer it and differentiate it from conventional banking by saying that Islamic bank don’t charge any penalty for late payment, as it is also considered riba. But they are wrong since they are also charging penalties for late payment in the name of ‘charity’.
According to a senior banker, despite many shortcomings in Islamic banking, a large number of people prefer it over other conventional banks because of their strong belief that these banks are following Islamic rules. The financial institutions are aware of this belief of customers; therefore they are promoting Islamic banking, which has grown three-fold in the last two years. All most every conventional bank has opened Islamic banking windows and in some cases the count of these branches has crossed conventional banks branches. It is need of the hour that a true Islamic monetary system be introduced otherwise such banking system is only meant to satisfy ego and would never deliver.

The writer is commerce reporter, Pakistan Today

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