Articles on Islamic Finance

IEP Forum on FSC Verdict on Riba – Experts View – Faisal Siddiqui

Faisal Siddiqui

Unit Head, Shariah Compliance

Meezan Bank Limited

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 Faisal Siddiqui. 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?

Faisal Siddiqui: It is a satisfactory decision, but what is important is implementation. It must lead to action and urgency. It should become binding on key regulators and institutions. The earlier experience of delaying tactics is still fresh in mind. Unnecessary appeals process delayed the implementation of earlier verdict given in 1991 and upheld in 1999 after the appeals process. It is still feared that when the time for completing reforms becomes near, delaying tactics are going to be used again.

Regulators including government need to be confident about viability of the Islamic banking and finance system. No riba does not automatically mean that there cannot be any commercial finance in Islamic financial framework. With risk sharing and asset backed structures, it is possible to provide commercial financial services through risk sharing and asset investments.

Question of viability is irrelevant now. Islamic banks have shown to be profitable, liquid, solvent and manage credit risk in a better way than conventional. Even in a dual banking and financial system, Islamic banks are now 20% of the banking industry.

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

Faisal Siddiqui: Yes, it is very much possible. Legal reforms should not take much time. Islamic banking is a practical reality. Islamic mutual funds and Takaful companies are a practical reality. Now, the government is also realizing the potential of Sukuk and using it in public finance.

Conversion of Shari’ah non-compliant institutions into Shari’ah compliant institutions would provide impetus to the reforms. In addition to the organic growth, it is important to work on well-defined targets simultaneously. Coordination and steering reforms is key. Impetus will come from the top regulators in every industry and business segment.

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

Faisal Siddiqui: It is important to move away from dual banking system. Conventional banking sponsors may think that there will be loss of business, but if they look at their own Islamic banking portfolios, they have done well by and large.

First of all, the mind-set needs to change. If a particular product or service is considered illegal, hardly anybody would feel that there is a loss in not having a market for it. Now, everybody must realize that bank interest is Riba in the light of Islamic principles and now also a crime and illegal in the eyes of law of the land.

Conventional banks may have this apprehension that if dual banking system goes, they will be able to generate returns, but with limited product structures than before. Even besides Islamization of banking and finance, there is need for more real-economy centric intermediation. From economics standpoint as well, banks in Pakistan are complacent and reluctant to provide access to finance to the private sector. Regulators need to bear in mind that Islamic banking offers a potential to bridge the missing link and foster real-economy based intermediation.

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

Faisal Siddiqui: Political will and change of mind-set is key from those who are involved in conventional banking and who are patronising it or providing it a cover so far. If the mind-set is to delay reforms and to take every step while expecting similar results as in conventional banking, then things may get delayed.

Conventional banks want to take best of both worlds. They may not like to give up easy parking facility to invest their liquidity in T-bills, money market instruments and derivatives. They are used to getting risk-less returns on money lending which does not necessitate link with real economy and real assets. They offer Islamic banking as well where the depositors are less elastic to return on deposits. Therefore, it is important that mind-set shall change and the regulators shall provide impetus to the reforms process by setting clear targets.

Another major hurdle is public finance. By and large, our government takes on fresh debts to retire earlier debts and to service the previous debts. Islamic finance has solutions, but there are some specific conditions which need to be fulfilled.

Currently, in the sale and leaseback structure, government is able to meet the needs. But, going forward, if the appetite for financing by government keeps on increasing, then there might not be found enough real assets which are not already made part of other transactions and structures. Ideally, it would be better to avoid going towards asset-light and Tawarruq based transactions.

Furthermore, Islamic banking principles and ethos do not promote carrying forward debt without making productive use of it. So, the long term solution for public finance is not creating more and more avenues to generate finance, but to create fiscal discipline, austerity, professional management of State Owned Enterprises and increasing the role of private sector to contain losses and fiscal bleeding.

Of course, in external financing, things get more difficult. First, the financier may not have any sensitivity to use Riba-free modes of financing and may not have knowledge of them as well. Secondly, in external financing, foreign exchange is involved. Therefore, selling national assets to private financiers who cannot be paid simply in local currency involves more risk than domestic finance.

However, this should not be taken as a excuse. Rather, the work shall start on conversion of retail banking, reform of national saving schemes, replacing bonds with Sukuk in public finance and binding government run institutions to convert their debt into Islamic structures of financing. Gradually and with simultaneous work, we may get nearer to the target. But, change of mind-set, political will, regulatory impetus and coordination holds key.   

Disclaimer: The views shared by the interviewee in this forum are personal opinions and judgements and do not represent the official representation of the principal institution with which they are affiliated.

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