It appears as if there is a strong positive correlation between the success of Islamic banking and the involvement of the top central banker (governor) of the country. In fact, Islamic banking started progressing in UK only after Eddie George, former governor of the Bank of England, started taking personal interest in Islamic banking. Another prime example of the positive correlation between development of Islamic banking and the leadership role of the central bank’s governor is provided by Malaysia. Dr Zeti Akhtar Aziz, the governor of Bank Negara Malaysia (BNM), is considered a champion of the cause of Islamic banking and her country is undoubtedly a strong player in the Islamic financial services industry. Similarly, Rashid Al Meraj, the governor of the Central Bank of Bahrain, is considered as one of the main forces behind the growth of Islamic banking and finance in the country.
In case of Pakistan, there has not been a single governor of the State Bank of Pakistan (SBP), who has actively pushed Islamic banking in the country. The closest is Dr Ishrat Husain, who gradually softened his stance towards Islamic banking, but by the time he was ready to play a serious role in Islamic banking, his tenure was over. Dr Shamshad Akhtar attempted to play a role similar to Dr Zeti Akhtar Aziz, but her tenure proved short-lived. For Salim Raza and the most recent governor, Shahid Kardar, it proved to be a bit too much and too soon to advance Islamic banking.
One area in which the State Bank of Pakistan can play a role is the utilisation of state-owned assets to generate cash for the ailing energy sector of the country. Many analysts believe that the recent energy crisis in Pakistan is primarily due to a complete breakdown of the payment system. The government should allow the central bank to issue shari’a compliant energy bonds (to be called Energy Sukuk) to raise money from corporate and private individuals. These Energy Sukuk may be issued on the principle of mudaraba (a kind of partnership contract between a financier and a business, which allows profit sharing between the two parties). A particular advantage of using mudaraba to issue the proposed Energy Sukuk will be that the sukuk holders will be able to freely trade them, even on discount or on a premium.
There are different types of sukuk issued in Pakistan. A sukuk that is issued on a physical asset like land, building and machinery is tradable for a price other than its face value. Thus a leasing-based sukuk (known as ijara sukuk) is tradable on discount or premium, if issued on the leased asset. It is, however, not tradable if issued on the rental stream of income. It remains tradable if issued both on the leased asset and the rental income to accrue, provided the value of the sukuk predominantly represents the leased asset.
In due time, when a significant secondary market develops in such sukuk, they can be used as new money (proposed to be called as E-money). This E-money has the potential to replace the current money, once it has achieved a critical mass and have other real assets to back its issuance.
The advantage of this type of E-money is that it will be asset-based and, hence, less prone to creating inflationary pressure in the economy. The E-money will be a true reflection of what people have invested with the government and must generate returns in the form of frequent dividends (to be issued in the form of new E-money). The process of creating E-money will be driven by the actual incremental increase in the value of the goods and services produced in the economy.
While the current energy crisis is a huge economic problem in the country, it offers an opportunity for the government to use the central bank to embark upon a process of creating real money rather than printing money to finance government deficit.
This is a huge task that requires not only strong political will from the government but also a visionary governor at the State Bank of Pakistan, who has the right set of skills and in-depth understanding of Islamic banking and shari’a issues. Is there such a person in the country who can promote this aspect? Well, this is something for the government to investigate.
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at humayon@humayondar.com