Significant development: Delinking Islamic banking from interest

Significant development: Delinking Islamic banking from interest

By Humayon DarPublished: September 11, 2016 Available at: http://tribune.com.pk/story/1180701/significant-development-delinking-islamic-banking-interest/

SBP has taken a number of steps to improve authenticity of Islamic financial products.

SBP has taken a number of steps to improve authenticity of Islamic financial products.
LONDON: Islamic banking and financial products are priced with reference to an interest-based benchmark, which makes them look and behave like interest-based financial products.

This attracts criticism from those who otherwise have serious doubts over viability of Islamic banking and finance as an alternative to interest-based conventional banking and finance. The users of Islamic financial services also show dissatisfaction with the use of interest as a benchmark.

The State Bank of Pakistan (SBP) has taken a number of steps to improve authenticity of Islamic financial products. In 2014, it sponsored a detailed study on Knowledge, Attitude and Practices of Islamic Banking and Finance in Pakistan, known as KAP Study.

It was conducted by a research team headed by Dr Farooq Haq. The study also identified dissatisfaction over the use of Karachi Inter-bank Offered Rate (Kibor) as a benchmark. On September 7, 2016, the SBP issued a directive allowing Islamic banks to benchmark their products based on participatory modes – known as Musharaka and Modaraba – and Wakala-based agency, with respect to an index other than Kibor.

This is a historic development that will allow Islamic banks to delink themselves from the interest rate mechanism. It will also allow Islamic banking to be more Shariah authentic for which Pakistan is already respected in the international markets.

SBP Deputy Governor Saeed Ahmed is expected to receive a special award at the Global Islamic Finance Awards to be held at Jakarta on September 29. This award acknowledges his personal initiative and advocacy role to promote Islamic banking and finance in the country.

While the likes of Finance Minister Ishaq Dar have received accolade for their efforts to promote Islamic banking, there is a need to acknowledge roles of bodies like the Department for International Development (UK) that sponsored the KAP Study and individuals like Dr Farooq Haq who conducted the study.

KAP Study has played an instrumental role in many recent developments in Islamic banking and finance in Pakistan. The establishment of three centres of excellence at the Institute of Business Administration (IBA) Karachi, Lahore University of Management Sciences (Lums) and Institute of Management Sciences (IMSciences) Peshawar is a direct outcome of the KAP Study.

In the recently concluded World Islamic Finance Forum at the IBA, a number of leading personalities and individuals from around the world were invited. However, many organisations and individuals who have been instrumental in the development of Islamic banking in the country were not represented.

Increasing influence of one religious school of thought (particularly one seminary in Karachi) in Islamic banking and finance is also frowned upon by many industry observers. This trend is certainly not healthy, despite huge achievements the SBP as a regulator has made.

If the trend continues, it will polarise Islamic banking and finance in the country on a sectarian basis, something the global Islamic financial services industry has so far successfully avoided.

While it is absolutely imperative that the SBP remains friendly with Islamic banking institutions, it is equally important that it provides a level-playing field to all banks – whether Islamic and conventional – which are involved in Islamic banking and finance.

With comprehensive engagement with all stakeholders in Islamic banking, the government and SBP can bring this latest initiative – delinking of Islamic financial products from Kibor – to the attention of the international Islamic financial community.

The London-based Global Islamic Finance Awards have identified achievements of a number of Pakistani banks involved in Islamic banking. In this year’s awards ceremony to be held at Jakarta, at least two banks from Pakistan will receive awards for their contribution to the development of Islamic banking in the country.

The writer is an economist and PhD from Cambridge University

Hindu Groups Oppose Entry of Islamic Finance in India

Available at: http://www.voanews.com/a/hindu-groups-oppose-islamic-finance-india/3450351.html

A Sharia-compliant international bank’s plan to launch its business in India is facing opposition from Hindu groups that say an Islamic bank should not be allowed to operate in a secular country.

The Islamic Corporation for Development (ICD), a subsidiary of the Saudi Arabia-based Islamic Development Bank (IDB), is expected to set up its first Indian branch in Gujarat city of Ahmedabad.

The ICD branch would operate as a non-banking financial company (NBFC), providing loans to small and medium businesses and sharing their profits and losses, instead of charging interest — which is the basis of the Sharia-compliant banking.

The exact date of the branch’s launch in Ahmedabad has not been announced.

Encourage religious conversion?

Although some Muslim experts believe the financial service offered by the ICD can benefit people belonging to certain underprivileged sections in India, leaders of Vishva Hindu Parishad (VHP), India’s largest Hindu religious organization, said the Sharia-based financial institution should not be allowed entry into India because it operates against the country’s principles of secularism.

 

Islamic Development Bank

“They are planning to launch ICD to introduce a Sharia-based financial system in India. By establishing it, they are aiming to implement Sharia law and promote Islam in the country,” Surendra Jain, joint general secretary of VHP, told VOA. “Banking activity in India is a totally secular activity. It cannot be controlled by any religious way or any religious system.”

He added, “If as a Hindu I seek a loan from this company, my application will be rejected. They will say, if you convert to Islam, I shall give you an interest-free loan.’ The establishment of this financial company in India will encourage religious conversions in the country,” he said.

But Zafar Sareshwala, who heads the ICD’s India operations, said those who are opposing the entry of the NBFC in India have no idea how it is set to operate in India.

“Those who are opposing don’t know what it is. This is not going to be the distribution of zakat [where only Muslims are the beneficiaries]. It will be a profit-making enterprise. Whoever stands the scrutiny of the lending norms will get the loans,” Sareshwala told VOA. “Across the world, most of the recipients of Islamic finance are non-Muslim.”

IDB, which is anINTERNATIONAL INVESTMENT organization, was established to provide funds for infrastructure projects in the Islamic world, as well as economic and social development programs. Following Sharia law, the IDB supports developments in 56 Islamic member countries.

Indian opponents of the ICD appear to be fighting an uphill battle in their campaign against the financial institution.

More branches planned

When Indian Prime Minister Narendra Modi visited Saudi Arabia in April, an extensive agreement was signed between his delegation and IDB to facilitate the bank’s launch in India.

Since the agreement, ICD, an affiliate of the IDB, has been in the process of setting up its first Indian branch in Ahmedabad, with plans to open more branches across the country.

Under the agreement, India’s state-run Exim Bank would provide a $100 million line of credit to help Indian exporters do business with IDB’s member countries. IDB has promised to donate $55 million to India to set up some 350 mobile medical units for rural regions.

H. Abdur Raqeeb, general secretary of the Indian Center for Islamic Finance, a New Delhi-based non-profit group that promotes Sharia-based banking in India, said Sharia-compliant banking will significantly contribute to development in India.

“The IDB and ICD sponsored NBFC in India will be operating on participatory and ethical principles based on profit and loss sharing, without charging interest. The enterprises often operate in risky markets and are sensitive to changes in economic environments. Therefore, there is a need of an alternative system of financing, instead of the conventional one based on interest,” Raqeeb told VOA.

“The NBFC is going to be warmly welcomed by the religious minorities and marginalized segment of India,” he said.