Making financial system of Pakistan Shariah Compliant
Article 227 of the Constitution of Pakistan stipulates that "All existing laws shall be brought in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah, in this Part referred to as the Injunctions of Islam, and no law shall be enacted which is repugnant to such Injunctions"
Existing situation of Pakistan's financial system (only referring to banks) is far away from the constitutional requirement and related guidelines. As per the list issued by the State Bank of Pakistan (SBP), there are 25 banks operating in Pakistan and out of them only 5 banks are what we generally refer to as "Islamic Banks". This renders majority of our financial institution as conventional or Non-Islamic.
There is an ongoing argument amongst the financial professionals regarding the pace at which the Islamic Financial System is being implemented. Initially, I was in favor of the argument that the existing pace of establishing an Islamic financial system is adequate. However, after an interesting debate and conversation with my colleague Mr. Emad Bin Saleem, I have come to realize that pace of change is very slow and accelerated efforts are required to ensure that our Islamic financial system is in line with the constitution and Shariah guidelines.
This article primarily focuses on one option and/or suggestion which could accelerate the pace of change for implementation of Islamic financial institution in Pakistan. The option and/or suggestion which I have set out explores the possibility of government-backed direction to the State Bank of Pakistan (SBP) to roll out a 3 to 5 years transformation program to be followed by all banks (conventional) to convert their operations from the conventional to Islamic banking. This program should include adequate milestones, timelines, and support required to assist the banks in executing this change. Faysal Bank is currently going through the process of converting into a full-fledged Islamic financial institution. The experience of Faysal Bank can be used as a case study in this regard.
On the face of it, this option may seem too radical and fundamentalist, however, considering the progress made by our financial system so far, these sort of efforts and changes are required if we are to truly establish a shariah-compliant financial system and adhere to the constitutional requirements.
However, there are certain commercial and operational implications for this option which I have discussed in the below paragraphs.
Increase in deposits and advances: It is a well-known and established fact that the majority of the population in Pakistan is unbanked and they often avoid dealing with the financial institutions primarily due to access and their religious beliefs. If all the banks in Pakistan start offering shariah-compliant deposit and advances products, it would certainly increase the number of customers as they won't be concerned about their transactions being inIslamic. As a result, banks shall have higher deposits available to support their lending and investment activities.
Pakistan as a country shall become a hub of Islamic banking. Once all the financial institutions are converted from the conventional model to the Islamic model, all the banks shall try to introduce new products, schemes, structures that follow the shariah guidelines and hence we as a country shall start leading the Islamic Banking industry in this regard. In addition, this shall also result in an increase in the number of experts for Islamic financial services within the country which could positively impact the job market.
The religious beliefs curtail investments in the stock market within Pakistan. A KME Meezan Index (KMI-30) is established for those investors who wish to invest in companies that are screened for shariah compliant criteria.