Haste in enforcing riba ruling to add to financial issues: experts

KARACHI: Bankers and analysts fear that any haste to make Pakistan’s banking and economic system riba-free to comply with the Federal Shariat Court's ruling might add to financial problems, though it could help the Islamic finance industry grow stronger.

The Federal Shariat Court’s (FST) ruling declaring the current interest-based banking system against Shariah and ordering the government to transition to an interest-free economy was challenged on Saturday in the Supreme Court by the State Bank of Pakistan and four other private banks.

However, according to Finance Minister Miftah Ismail, the National Bank of Pakistan has been told to withdraw its Supreme Court petition against the most-recent interest verdict from the FST.

“The honourable court has asked the government to make this transformation within five years, which is a very ambitious time-frame and we don’t know how the plan would be implemented,” said a conventional banker, refusing to be named because of the sensitivity of the issue.

“For the government to run the banking system fully on Islamic lines, it will have to stop conventional refinancing schemes and replace treasury bills and bonds with Sukuk. The structural and procedural changes would take a lot of time to be implemented,” the banker added.

The timing for the announcement of the financial system's change is poor considering the present economic crisis. “In my opinion, our economic prosperity depends entirely on being aligned with the global financial system. I think the socio-economic challenges we face as a nation today are far bigger and require immediate attention rather than such structural or should I say radical shifts,” said Mustafa Mustansir, the head of research at Taurus Securities.

“It is undoubtedly true that Islamic banking has been flourishing globally and not just in Pakistan. It is also the focus of every commercial bank in Pakistan. I think these efforts should be appreciated and a moderate approach should be followed,” Mustansir added.

Presently, 22 Islamic banking institutions (five full-fledged Islamic banks and 17 conventional banks having standalone Islamic banking branches) with a branch network of 3,983 brick and mortar buildings along with 1,418 Islamic banking windows (Islamic banking counters at conventional branches) are operational across the country, according to the figures from the SBP.

The industry now accounts for 19.4 percent of the country's overall banking system in terms of assets while in terms of deposits the share is 20 percent (as of March 31, 2022). “There are already Islamic banks operating and competing with conventional banks. One of the largest banks is Islamic and Islamic banks have shown robust growth,” said Saad Hashemy, the executive director at BMA Capital Management.

“It will be more of a procedural issue for the conventional banking system to transform to Islamic as already there are Islamic products and banking procedures,” Hashemy said. As the prime custodian and regulator of the financial and monetary framework of the Islamic Republic of Pakistan, the SBP is deeply committed to ensuring compliance with the injunctions of Islam, in particular those about riba, while protecting the stability and security of the financial sector of the country that functions as part of the global financial system, the SBP said in a statement on Saturday.

In this context, the SBP has always remained at the forefront in promoting Islamic banking in the country, it said. The SBP is among the few regulators across the globe where comprehensive legal, regulatory, and Shariah governance frameworks have been successfully developed and implemented, it added.

“After a detailed review of the judgment and based upon the advice of our chief legal adviser and external counsel, we have sought guidance from the honourable Shariat Appellate Bench of the Supreme Court in terms of its implementation and practicalities involved,” said the SBP.

The advocates of switching completely to the Islamic finance system said the government’s cost of borrowing will be reduced if it sells Shariah-compliant debt. However, the Islamic banks face challenges due to irregular issuance of Sukuk. Last month, the SBP said it is working with all stakeholders to ensure the regular availability of Sukuk.

Islamic banks, which follow principles such as bans on interest payments and riba-based transactions, have been growing rapidly in Pakistan, which can help enhance financial inclusion and increase the saving rate in the country.

On April 28, a three-member Federal Shariat Court declared that the prohibition of riba (interest) was absolute in all its forms and manifestations according to the injunctions of Islam and by the Holy Quran and Sunnah. Therefore, it should be eliminated from the country in five years.