Growth and prospects of Islamic banking

Islamic banking which used to be a myth in this part of the world several years ago is not
only in vogue but is gaining rapid popularity theses days. Not only a number of foreign and
local banks are doing good business in Islamic banking but even the conventional banks have
been tempted to open special Islamic banking counters. In fact it was Dubai Islamic Bank
which took the lead as early as 1975. Thereafter, Islamic banking grew into a worldwide
industry exceeding handling amounts exceeding $900 billion. In Pakistan, Meezan Bank has
made rapid strides in this sector followed by Bank Islami.
Almost all the banks engaged in Islamic banking are working under the umbrella of shariah
board or shariah committee consisting of a panel of renowned religious scholars who are
the guiding stars. A few of these banks have a single shariah consultant or shariah advisor.
Most of these shariah scholars or advisors are engaged against hefty remunerations for their
expert-advice and guidance on Islamic finance. According to a rough estimate, the numbers
of the most outstanding experts are about 12, which is very meagre as compared to their
demand in the market. It is due to paucity of their numbers that they are serving on different
shariah boards and shariah committees. Some of them are even advising their competitors.
This system is working in Pakistan. In Malaysia, one such scholar cannot serve on more than
one board or committee at a time. It would be in the fitness of things if this restriction is
imposed in Pakistan also.
The problem with these shariah boards or shariah committees is that they may give
conflicting opinions or interpretations that may result in confusion or doubt. It may be
possible that one shariah board, shariah committee or shariah expert may approve a particular
product while the other one may reject the same with all earnestness. Take the case of Jordan,
a Muslim country where a leading Islamic scholar disapproved the penalty imposed on a
defaulting modarba client by declaring it a sort of riba. Likewise a religious scholar in
Britain had rejected an Islamic mortgage on the plea that its structure bore interest in
disguise. In Malaysia, Islamic financial restrictions are liberal than in the Middle East or in
Pakistan. Even Islamic banking rules and regulations lack uniformity or universality. It would
be better if a national shariah board is set up to sort out anomalies like in Indonesia, another
Muslim country.
Malaysia has rightly proposed to set up global standards for both Islamic banking and Islamic
finance. Such standards would result in a consensus instead of a confusion or conflicting
scenario.
Islamic banking faces another problem in the shape of shortage of qualified and skilled
professionals. Here again, the demand outstrips the supply. No doubt our business/ education
institutions have taken note of this situation but it would take some more time to grow a crop
of such professionals. Islamic banking institutions also have to play their role in this regard.
In Islamic finance, two things, riba and gharar are strictly prohibited in Islam. Riba, is a
comprehensive term, which in the opinion of some highly reputed Islamic scholars not only
includes interest but usury also. Since riba is forbidden in Islam, capital providers have to
become investors under Islamic banking. Moreover, the scope of investment is also restricted
to only permissible areas of investment. For instance, you cannot invest in the construction of
Cinema houses, nightclubs or even hotels where pork or alcohol would be served. Investment
is not allowed in the import or export of narcotics or liquor and such other products.

Difference of opinion exists among Islamic scholars on the validity of some transactions,
which may have some hidden elements of riba therein. What is still to some extent not clear
is the definition of interest as it stands today and how riba is defined to compare the same
with one another. Is todays interest the same as riba defined more than a century ago,
practiced under a completely different environment than that exist today. Today, money is
borrowed to run businesses (make more money) or to buy luxuries to make life more
comfortable - dire need is seldom the reason for borrowing.
Presently, Islamic banking is a very small sector compared to banking world-over thus while
western banks are faced with an unprecedented banking crisis, the prospects of Islamic
banking looks undisturbed. As the time goes by, more and more people are inclined to
Islamic banking.
The success story of Meezan Bank with Bank Islami following suit holds a promise for a
brighter future of Islamic banking in Pakistan. Islamic banking is now entering the agriculture
sector also, which is the backbone of our economy. The State Bank of Pakistan has very
recently issued some important guidelines on Islamic mode of financing in the field of
agriculture. These guidelines aim at helping the banks to develop specific Shariah compliant
products to meet the dire needs of the farmer community. These guidelines have been drawn
up in consultation with the stakeholders. The said guidelines broadly cover Islamic modes of
financing such as Murabaha, Ijara, Musawamah, Salam, Istisna, Musharaka, Mudaraba,
Muzaraa and Mugharasa etc that may be used to meet the financing requirements of farm and
non farm sector activities including livestock, poultry, fisheries and even orchards. Moreover,
these guidelines have also elaborated the application and procedures of Islamic mode of
financing. The State Bank has advised all the banks to make use of these guidelines for
developing their own Shariah compliant products for extending financing to agriculture
sector.
The growing popularity of Islamic banking, mainly with Muslims and especially in Muslim
countries has driven conventional banks like Citibank, HSBC, RBS, Standard Chartered, etc.
to turn to open an Islamic banking unit. However, Islamic banks need to be careful in
crossing their limits to attract affluent non-Muslim clients just for the sake of earning more
and more profits. Lust for wealth should not blur their path. For them piety and not profit
should be the key objective.