Now that Islamic banking and finance is a trillion dollar industry (US$ 1.14 trillion according to the Global Islamic Finance Report 2011), the ability of Islamic banks to influence government policy is much greater than it was fifteen years ago. However, there are some state-owned institutions and corporates in different parts of the world, which are resisting change by proclaiming that they are already shari’a compliant and that their shari’a compliancy is sufficient to ignore further external requirements. In the fast changing geo-political environments of a number of Muslim countries, especially in the Middle East & North African (MENA) region, it is important for the governments and ruling regimes to not only start recognising Islamic banking and finance as a viable alternative to the conventional banking system, but they must also start promoting it as a central agenda item in their socio-economic development plans. Islamic banking and finance must be promoted as part of the process of democratisation of the financial services industry.
In the Gulf Cooperation Council (GCC) countries, Islamic banking and finance has existed in all member countries except Oman – though the government has recently allowed the setting up of Islamic banks. In the other five countries, Islamic banks have operated for decades, especially in the UAE, where the first-ever Islamic commercial bank, namely Dubai Islamic Bank, was set up in 1975. Similarly, the Kingdom of Saudi Arabia (KSA) took the lead role in Islamic finance by establishing the most powerful Islamic financial institution in the world. The Islamic Development Bank (IDB) was set up in Jeddah in 1975 with significant contribution to the paid-up capital by the government of KSA. Two important Islamic financial conglomerates, namely DMI Trust and Dalla Albaraka Group, also originated from KSA.
Malaysia provides an excellent example of a government using Islamic banking and finance as a policy tool to bring socio-economic reforms in the country. It was used for the empowerment of the Bumiputra – the ethnic Malay Muslim population.
This article argues that it would have been a better approach to first develop a banking and finance framework in line with shari’a requirements in order to develop a modern Islamic economic system in Pakistan. Now that Islamic banking and finance has proven to be a viable alternative to conventional banking and finance, the government must consider using Islamic banking and finance as a policy tool to bring socio-economic reforms in the country.
The following steps could be taken to make progress in this direction:
n A Commission for Islamic Economic Development (CIED) should be set up at the federal level, which should be a body directly reporting to the prime minister and his cabinet. The proposed CIED should liaise with different ministries, houses of parliament, think-tanks such as the Council of Islamic Ideology, the Institute of Policy Studies and other such bodies and departments, to create awareness of the need for Islamic banking and finance as a policy tool.
n The CIED should also work closely with the State Bank of Pakistan (SBP) to promote Islamic banking in the country and to help the central bank in developing a comprehensive framework for the conduct of monetary policy.
n It should also conduct research for the benefit of different stakeholders so that they could achieve the objective of using Islamic principles and tools for economic development and financial sector reforms.
The proposed CIED should be a permanent body to be established by incorporating it in the constitution to achieve the objective of Islamisation of the economy. It will make Pakistan a modern Islamic state equipped to face the contemporary and future challenges economically and financially.
In conclusion, we see that the propagation of Islamic banking and finance is necessary in the majority of Muslim countries in order to achieve socio-economic development. The time has come for reluctant corporates and governments within Muslim countries to change their attitude towards Islamic finance and work hand in hand with other relevant stakeholders to assist in its development. Failure to do so would prove costly to their future social and economic development.
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at humayon@humayondar.com