Articles on Islamic Finance

IEP Forum on FSC Verdict on Riba – Experts View – Omar Mustafa Ansari

Omar Mustafa Ansari


Accounting and Auditing Organization for Islamic Financial Institutions

Recently, Federal Shari’ah Court of Pakistan has given its judgement on the Riba case. The verdict reaffirmed the historic judgement on interest first given in 1991. But, the subsequent appeals process reopened the case. Concerns about jurisdiction further delayed the implementation of the historic judgement and delayed the case for several years. Now, finally, the verdict has come. The verdict has declared conventional banking interest to be Riba, which is prohibited in Islamic sources of knowledge categorically including Qur’an and Hadith. The judgement has also asked the government to transform the economic system on interest free basis within a period of 5 years to fulfil the constitutional requirement as well as completing the required implementation of the judgement.

Islamic Economics Project is making a humble effort to collect the views of Shari’ah scholars, regulators, practitioners, lawyers and academic experts to deliberate on the future course of action and generate ideas and debate on how to make this transformation possible.

In this regard, we got the chance to get reaction and response from Omar Mustafa Ansari. We hope that the views expressed and shared with relevant audience and stakeholders will generate practicable ideas and keep the momentum towards achieving the end goal of an economy that is in compliance with Shari’ah and is able to utilize the instruments and institutions in the Islamic economic teachings.

Question: What is your take on the decision by Federal Shari’ah Court of Pakistan on Riba?

Omar Mustafa Ansari: There is no disagreement on the correctness of the decision. It is a good decision and we welcome it. Though, it has come late and a lot of time had been wasted even after the issue about definition of Riba and conventional bank interest being Riba was settled in 1991. The current decision has reaffirmed the historic judgement of interest in 1991.

The decision is consistent with the constitutional requirement which clearly stipulate that Riba shall be eliminated from the whole economy by the state as soon as possible. The current decision is also in line with the aspirations shared by the founder of the country, Muhammad Ali Jinnah, who in his last public speech at the inauguration of State Bank of Pakistan urged that the institution shall conduct its operations taking full guidance from the Islamic sources of knowledge regarding the economic matters.      

Question: Do you think that it is possible to implement the verdict on transformation of economy on interest free basis in 5 years?

Omar Mustafa Ansari: If the timeframe of 3 or 5 years was given in 1991 after the historic judgement on interest came, it might have been more challenging. There was no full-fledged Islamic bank back then nor the asset management companies and insurance sector had major Islamic alternatives on ground.

But, things have changed by now. Islamic banking industry is touching 20% market share and even before this decision, the industry was buoyed towards reaching the target of 30% in next few years. As many as 80% of the conventional banks have Islamic banking windows and branches. So, they now have experience and initial portfolio. So, the conversion to Islamic finance is a portfolio revision issue for them rather than starting everything completely from scratch. There are full-fledged Takaful companies as well as insurance companies which have Takaful operations.

Even on the regulations side, we have dedicated Islamic banking department at State Bank of Pakistan. We have specific prudential guidelines for Islamic banks.

There is also no dearth of Islamic banking experts. Religious schools have contributed in training Shari’ah advisors. There is ample infrastructure to develop human resources. Pakistani diaspora is already working in GCC, South East Asia and Europe in Islamic finance in corporate financial sector, regulatory bodies, auditing firms, academic institutions and think tanks.   

Many universities have full-fledged Bachelors and Masters level programs dedicated to Islamic finance. Training institutions like NIBAF and others are also playing their role in training human resource who have already completed their regular university education, but require Islamic banking education in short period through diploma and certifications.

We must also not forget that Islamic banking is now a global industry. We may have been one of the pioneer countries, but now there are many countries where the share of Islamic banking in overall banking is even more than what it is in Pakistan right now. Therefore, cross-border finance, cross-border Sukuk issuance and bilateral and multilateral finance with countries where Islamic banking is present should not be a problem.

Some exceptions may remain due to which the deadline may be extended for transformation of external sector finance. Pakistan faces recurring balance of payments crisis. Therefore, it cannot be completely independent in choice of mode of finance. However, government has also issued Sukuk in past which have been oversubscribed in the international market. There is also a need to work on enhancing export competitiveness and introducing reforms to promote ease of doing business so that rise in exports and foreign investment can enable us to avoid balance of payments crisis.    

Question: What are the measures which can be taken to implement the verdict on transformation of economy on interest free basis in 5 years?

Omar Mustafa Ansari: It is pertinent to have a national level strategy. The constitution asks the state to eliminate Riba from the economy as soon as possible. Therefore, this goal should be taken by the state itself and should not be compromised by political instability.

A cabinet level committee shall be formed to develop plans and targets. Provincial level committee or task force is also required to coordinate matters in provinces. After 18th amendment, not everything is in the control of federal government. There are specific contracts and transactions between development finance institutions and provincial governments. Therefore, provinces also need to ensure that they take actions which are necessary to eliminate Riba in public finance and project financing.

In the banking sector, State Bank of Pakistan needs to ask conventional banks to develop conversion plans. These conversion plans need to be reviewed by experts to ascertain that the plan and targets can adequately be achieved within the timeframe. If banks are left on their own, they may not take proactive action. By asking them to develop conversion plans, they will not feel that something undoable is imposed on them and it will be possible to create flexibility yet urgency to keep the pace of transformation intact.

Educational institutions also have a role to play. The curriculum needs to be revised to include Islamic finance knowledge. Textbooks and reference books need to be developed. Training institutes also have a role to play in achieving human skills development in the area of Islamic finance. NIBAF is already playing a good role. ICMA, ICAP, CFA Society and ACCA Pakistan also need to be engaged to ensure enough coverage and exposure to Islamic finance in their members.

AAOIFI has contributed in developing specialized certifications for bankers, practitioners and Shari’ah auditors. It has also developed detailed governance standards which are now being increasingly followed globally as well as in Pakistan. Adopting more and more of these standards will also improve the governance and regulatory framework of Islamic banking and finance in the country in line with international best practices. Going forward, training for Islamic finance for lawyers, judges, bureaucrats and others will also be necessary to achieve the goal of eliminating Riba from the economy as soon as possible and to sensitize about Riba and how it can be avoided through approved Islamic finance contracts and alternatives.  

Question: What are the important obstacles that can be encountered along the way of transformation process?

Omar Mustafa Ansari: Political will of the government is key to determine the pace and direction of reforms. If political will is there, I see no major obstacle as to why at least the domestic economy and financial system cannot be transformed on Riba free basis in 3 years. Legal reforms are necessary to make them consistent with this judgement given by Federal Shari’ah court.

Resolve and will has to be shown by not only government, but other stakeholders as well, including regulators, private sector financial institutions, public sector organizations, private corporate sector and individual households from whose savings and investments, the financial institutions are majorly funded. If all show commitment, resolve and affirmative action to avoid Riba, then the goal of eliminating Riba can be achieved within the time frame. Only other obstacle could be economic instability. Since we are facing balance of payment difficulties from time to time and our bargaining power in sourcing external finance is little, we may not be able to decide on our own to prefer a particular mode of finance. This may require efforts to develop different product structures suited for external sector finance. It would also require some prudent convincing, advocacy and awareness while negotiating with international development finance institutions. So, everything is possible provided there is will to change.

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