EFFECTIVE POLICIES, MORAL VALUES: PRE-REQUISITES OF ISLAMIC BANKING
ANWAR AHMED MEENAI INTERVIEWS JURIST JUSTICE MUFTI MOHAMMED TAQI USMANI
Are Islamic banks in Malaysia organized in a fashion similar to the banks in Pakistan, or are they different from their Pakistani counterparts?
There is a difference in approach as far as Malaysia and Pakistan are concerned. In Pakistan, same rules and regulations apply to all banks, local or foreign. In Malaysia, banking is predominantly being carried out in the conventional manner.
To begin with, only one Islamic bank was established. Presently, the majority of the banks have set up a window for Islamic banking, though it is difficult to determine whether all the transactions carried out by these institutions fully conform to the principles of the Sharia.
Another distinguishing feature is that in Pakistan, every bank has its own separate Sharia Board, which advises the bank in matters of Islamic banking. The Securities Commission also has a Religious Board.
Although the Central Bank (Bank Negara Malaysia) does not have a Sharia Board of its own as yet, it takes an active interest in Islamic banking activities. Efforts are also made by the Central Bank to resolve the problems faced by the Islamic banks through non-traditional methods. The Central Bank is trying to form a Sharia Board.
In Pakistan, the mark-up system works in conjunction with sale and buy-back. Malaysian banks have employed the system of murabaha, in which the rate of profit is agreed and known in advance. They have also resorted to sale on a deferred payment basis at a price that can be negotiated between the parties.
Malaysian banks have adopted the PLS system for the distribution of income to depositors. Islamic banks also engage in the discounting of Bills of Exchange under the garb of “purchase of loan”. This is a major departure from the well recognised principles of the Sharia, for which some Sharia scholars in Malaysia present some justification. However, it is not sound in my view.
This matter has been discussed with religious scholars in Malaysia. They seem to have been convinced that discounting of Bills of Exchange in the traditional manner cannot be considered Islamic, and there is a search for alternatives.
Are Islamic banks in Malaysia capable of providing all usual banking facilities, such as the conventional banks and financial institutions provide, to the general public, as well as businessmen and investors, while still conforming to the principles and requirements of the Sharia?
Even though it is claimed that they do, in effect they do not. For instance, these banks do not engage in the forward sale/purchase of foreign exchange.
Is Taboong Haji working like a bank or does it engage only in the investment of surplus funds available to intending Hajis?
To my knowledge, it works like an Investment Company. It owns a number of companies and is a major shareholder in some others.
Have any different or new laws been enacted in Malaysia for the establishment of, or to facilitate the business of, Islamic banks?
The Government of Malaysia has enacted an Islamic Banking Act to govern the establishment and operation of Islamic banks in Malaysia. Permission needs to be obtained under the said Act for the establishment of an Islamic bank. This Act provides certain concessions to Islamic banks in their operations or methodology, as against that of conventional banks.
It is often said in the context of Pakistan that the moral scruples of the masses in general, and businessmen in particular, make very difficult, if not impossible, the practising of mudaraba and musharaka. Do Islamic banks in Malaysia face similar problems and have they found any solutions?
Islamic banks in Malaysia are facing more or less similar problems. Corruption in Malaysia is perhaps less than it is in Pakistan, but in my opinion, no significant progress has been made in Malaysia in implementing musharaka as a mode of financing. A possible exception is Taboong Haji which makes investments in different ventures on the basis of musharaka.
What is your opinion about the progress made so far to Islamise the business of banking in Pakistan, and what essential changes are required to bring the banking system close to the requirements of Sharia?
The pace of any such progress is quite unsatisfactory. An economy free from interest was one of the priorities of the late President Zia-ul-Haq. At his behest, the Council of Islamic Ideology (CII) came up with a forum to deliberate the issue. Besides religious scholars, the forum included bankers and economists, and a detailed report was submitted to the Government.
The late president issued a final order for the implementation of the recommendations made in this report. To this end, the then Minister of Finance formed groups.
However, CII was not represented in any of these groups, nor was it consulted in the making of a strategy for the implementation of its recommendations. There are many distortions in the way things have been actually implemented. The new system principally revolves around murabaha, but in this case too, the basic requirements of the Sharia are not being met.
The State Bank of Pakistan (SEP) proposed a total of 12 modes of financing. But it is felt that there has been no change in the asset side of the balance sheet of the Pakistani banks. The liabilities side, however, does conform to Sharia.
An essential requirement is the formation of a Sharia Board in SBP as well as all other banks. These may either be separate or one Board may supervise the operations of every bank.
A Religious Board is being set up in Bank Negara Malaysia – the central bank of the country, and the Securities Commission in Malaysia has a Religious Board. In Malaysia and Bahrain, the decisions of Sharia Boards are binding on the relevant Islamic banks.
The Board in some banks can take part in the bank’s AGM, and the annual reports of the banks contain a separate report from the Religious Board. These boards can stop a transaction they are not satisfied with, or can even nullify a transaction if it does not conform to the Sharia.
“Allah does not change a lot of people unless they change what is in their hearts”. In the light of this declaration by Allah, when we look at the moral condition of the people in Pakistan, it becomes obvious that businessmen who are always in need of money seldom maintain the accounts of their businesses honestly or are willing to share the actual profit of their businesses with those who provide funds.
On the other hand, the general public has also become accustomed to a fixed return without assuming any risk and are not willing to share in the profit or loss of the business. Probably due to the foregoing factors, Islamic banking in Pakistan has not been able to make any significant progress in terms of business or operations. What is your opinion regarding this?
While agreeing with you, let me point out that two basic tasks need to be performed by the Government. One is the correction of the taxation system, especially the abolishment of powers given to ITOs; and second is the need to expand the system of transparent audit at every level, i.e., internal as well as external.
This will help in the purging of dishonest and corrupt people. Businessmen who are found guilty of cheating the financiers, acting fraudulently, and indulging in dishonest practices should be blacklisted for a certain period.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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