Mufti Irshad Ahmad Aijaz is the Chairman of the Shariah Supervisory Board of Bank Islami in Pakistan. He is also Chairman and Shari’ah Scholar of Shari’ah Advisory Committee of State Bank of Pakistan. He graduated from Jamiat-ul-Uloom Islamiyyah, Binnori Town, Karachi and obtained his Shahadat-ul-Aalamia (Masters in Arabic and Islamic Studies) from there. Afterwards, he completed his Takhassus fi al-Iftaa (Specialization in Islamic Jurisprudence and Fatwa) from Jamia Dar-ul-Uloom, Karachi. He has also completed his PhD in Islamic Sciences from Sheikh Zayed Islamic Centre. We got an opportunity to get his insights on Islamic economics and finance and hope that these insights will introduce new ways of thinking for young economists and social scientists aspiring to contribute in this field.
Q1: Some Muslim economists hold the view that Islamic banking has compromised the ideals of Islamic economics by not giving topmost priority to poverty alleviation, social mobility of deprived segments, contributing towards equitable distribution of income and providing wide access to credit facilities to everyone. Is this concern justified in your view?
The foundational literature from the 1940s till 1980s looked at Islamic finance in a visionary way. They focused on the final outcome and had the genuine aspiration to reach the final destination. The vision was indeed ideal and there is no denying that it should remain our aspiration to fulfill the vision. However, that requires efforts at all fronts and at all levels.
It was thought that when Islamic banking will start in practice, there will be enormous response from the consumer and corporate customers to switch towards Islamic banking from conventional banking.
It was also thought that once the operational and practicable system of Islamic banking will be implemented, the government will patronize it and start converting to Islamic banking and finance without any hurdles and delay.
However, as things unfolded, Islamic banking by and large was only allowed to exist at best without having any attempt by the policymakers to convert to Islamic banking and finance fully. Any system has to go through a lot of challenges in implementation when it takes shape in a particular social, economic and legal context.
Thus, there is a case of over expectation by disregarding the competitive, legal and market challenges of working in a dual banking system that is dominated by conventional banks and in which policymaking currently only allows space for Islamic banking to exist rather than looking for transformation of banking and finance towards Islamic finance.
Sometimes, critics point out the age of Islamic banking. But, merely passage of time does not make a system strong. In Indonesia and Pakistan, despite years of Islamic banking operations, the market share is still less than 20%. It is the size of the industry which matters more in determining whether it can disassociate from contemporary product structures without increasing the commercial displacement risk or not.
Q2: Conventional banking in marketing campaigns and social discourse is treated like evil. However, with similar cash flows and pricing, isn’t Islamic banking vindicating the essence of conventional banking?
Banking itself is not evil in absolute sense. The problem from Islamic point of view is with prohibited elements in the contracts used in conventional banking, such as Riba (interest), Qimar (gambling) and Gharar (uncertainty).
The needs which are served in banking are not illegitimate per se. They are permissible needs. For instance, buying a car, home or purchasing assets for business. Islamic banks serve those needs with right process, mechanism and product. So, comparison should be made with respect to the way of serving those needs, which are legitimate in the first place.
It is also not fair to expect Islamic banks to operate like office of public treasury. They are commercial institutions looking for earning Halal profits on the behalf of depositors and shareholders through sale, lease and equity contracts while avoiding interest-based, speculative and contingent contracts.
Q3: Equity financing is regarded as preferable mode of financing given its inclusive, egalitarian and genuine risk sharing nature and its effect on equitable distribution of income. But, it is hardly used. What are the reasons for the lack of use of equity financing?
It is true that equity financing is preferable mode of financing from the socio-economic and inclusive point of view. However, it is not possible that all types of short term financing can be structured on the basis of equity.
For the increased use of equity financing, it is important to have transparency, sound governance and rule of law to build the trust for long term equity investments. Islamic banks on their own cannot bring about the required changes in law and governance.
There is also need for strong governance framework to avoid collapse and failures of equity-financed businesses. Finally, there is also need for changes in risk regulations governing banks in order to make way for equity investments by banks.
Q4: There seems to be lack of mutual understanding between academics from economics and Islamic jurisprudential backgrounds. Is there a role of Muslim economists in product development and evaluation of their socio-economic impacts?
There is need for more synergy. In debates, often the viewpoints of the realists and the idealists are not well understood by their respective critics and hence, misunderstandings develop. Both Shari’ah compliance as well as commercial viability is important to have a successful product or innovation.
Academics from economics and finance background can be categorized into i) those who also have knowledge about Shari’ah and the market and industry norms, and ii) those who do not have much knowledge about Shari’ah and the market and industry norms.
Usually, academic economists are looking at the bigger picture and take a long-term horizon. The Shari’ah experts facing a practical and applied issue have to come up with solutions that resolve the problem at hand. Among the permissible contracts, the ones that are acceptable to both counterparties will result in the increased use of Islamic way of finance.
Academic economists usually take one party’s or society’s perspective in looking at contracts. On the other hand, as an intermediary, an Islamic bank has two clients, i.e. i) investors including shareholders and investment accountholders and ii) clients requiring finance. Therefore, cheaper financing will have to be traded-off with lower returns to the investors while higher returns will have to be traded off with higher cost of finance.
The idealistic view is also important to keep the aspiration towards fulfilling Maqasid-e-Shari’ah in a complete sense alive. However, the shortcoming on that front from the social viewpoint currently is not a discussion about Halal and Haram, but between Halal and Afzal.
Q5: What key steps are required in policymaking or laws to promote Islamic banking in Muslim majority countries?
There is need for policy direction. In many countries where the Islamic banking share is significant, the government’s use of Islamic finance options in public finance is yet very limited.
In developing countries, banks get a lot of business from the government’s projects and schemes too. If the government itself indulges in Riba without giving any consideration to the Islamic finance option which can be equally competitive, the industry will grow at a slower rate having to rely on organic growth alone in a policy-neutral environment.
In many countries, the government owns assets in the form of real estate, highways, motorways, ports and railway tracks, for instance. Governments can utilize those assets in mobilizing liquid funds through Islamic capital market instruments. Government’s own agency can become the custodian of such transactions to allay any apprehensions.
There is also need for out-of-box thinking and giving leverage to Islamic banks to operate as trading houses and to make pre-emptive investments in the real sector of the economy in agriculture and industry with the oversight of government’s own regulators.
Likewise, allowing or mandating investments in particular socially desired and impactful projects to a particular extent can anchor financing operations towards critical needs of the society.
Q6: What advice would you give to aspiring researchers who want to contribute in Islamic economics and finance? What are the key skills they need to master and learn to excel in this field?
There are lots of economic problems being faced by the Muslim world. Therefore, research should have problem-solving focus. There are lots of empirical questions which need answers. For instance, in a dual banking system, what is the threshold level of market share which Islamic banking needs to reach before it makes sense to have a paradigm shift in nature of products as well as making a case for distinct policy framework for Islamic banks, i.e. distinct Islamic interbank benchmark rate, statutory liquidity requirements and risk management guidelines. Therefore, instead of repeating ourselves with visionary statements, it is important to understand the ground realities with empirical research in order to guide practitioners as well as in developing practicable and workable solutions.