Road to Islamic banking

With the success of almost full and successful conversion of National Commercial Bank (NCB) of Saudi Arabia, and relatively smaller but equally successful conversions of Middle East Bank into Emirates Islamic Bank, Sharjah National Bank into Sharjah Islamic Bank, and relatively slow (but important in a Pakistani context) and yet to be completed conversion of Khyber Bank into an Islamic bank, we do not observe any further full conversions of conventional banks into fully-fledged Islamic banks. Many industry observers would have expected to see full conversion of the likes of Muslim Commercial Bank and Habib Bank, but despite Islamic windows of these banks full fledged conversion does not seem to be on the horizon. Why?
A number of new Islamic banks have been set up in different parts of the world in the last few years. This means that a new breed of shareholders is entering the Islamic financial services industry. Also, the incumbent players in Islamic banking & finance are opening new banks in new jurisdictions. Five Islamic banks in UK, for example, have shareholdings from the Middle Eastern investors. The likes of Dubai Islamic Bank, Kuwait Finance House and Al Rajhi Bank have gone to new countries in their attempts to internationalise their businesses. It may be argued that this is not the reason for lack of conversion, as the article should attempt to answer why this is happening and not the conversion of conventional banks.
There are a number of reasons for this lack of conversion, firstly, it appears as if the governments in most of the countries where Islamic banking exists do not believe in Islamic banking. Apart from Malaysia where promotion of Islamic banking is part of the government policy, no other government is fully committed to Islamic banking and finance. Pakistan is not an exception to this trend. While State Bank of Pakistan has supported Islamic banking for some time now, but other government authorities in Islamabad are at best indifferent to this phenomenon.
Secondly, the subsidiary model has worked against the full conversion of conventional banks. In the UAE, for example, all the major players in the market have Islamic subsidiaries (in the form of investment companies and specialised consumer finance companies). In Pakistan, now almost all the big players have limited Islamic operations, and it appears as if the shareholders are not interested to further develop Islamic banking.
Thirdly, shari’a requirements in terms of irreversibility of the process of Islamisation may in fact be a hindrance to full conversion of conventional banks. While, it is acceptable in shari’a for a conventional bank to get involved in Islamic banking and finance (as long as they observe segregation of Islamic business for the conventional), shari’a does not allow Islamic banks to do any shari’a repugnant business. This means that being a conventional bank with some Shari’a compliant business is considered as the optimum form of business. This is consistent with other economic phenomena. For example, the firms facing a choice between debt and equity would almost always adopt a mixed debt-equity capital structure. This means that in an environment where there is a choice between Islamic and conventional banking, it will always be the case that conventional bank would like to offer Islamic financial products to the extent of demand for such products. Conventional banking, being less restrictive, will always remain a choice, even if it is not a preferred one.
Unless governments in the Muslim countries start supporting and promoting Islamic banking and ensure that there is a level playing field for Islamic banks, conventional banks will continue to operate as they have traditionally been for a long period. In the current political environment, it is a window of opportunity for a major political party to adopt Islamic banking as a part of its election manifesto to appeal to an increasing number of shari’a sensitive people. If the likes of Pakistan Muslim League and Pakistan Peoples Party fail to capitalise on this opportunity, is it time for Pakistan Tehrik-e-Insaf to start patronising Islamic banking?

The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at [email protected]