Changing the economy to one based on Riba.
If the government is serious about its involvement, then it must demonstrate that it is making actual headway on the issue.
KARACHI:
The recent statement made by Finance Minister Ishaq Dar to steer the country’s economic and financial system away from the conventional interest (Riba)-based system has garnered some appreciation from his coalition partner, Jamiat Ulema-e-Islam-Fazl (JUI-F) chief Maulana Fazlur Rehman. This is the case at least.
The outward appearance was positive; however, besides providing a timeframe of five years, Dar failed to provide any detailed roadmap and execution plan. This is especially notable against the backdrop of the precarious economic and financial situation, in which the Q-block cannot even blink without a clear nod from the IMF.
The government currently holds a majority shareholding in both the State Bank of Pakistan (SBP) and the National Bank of Pakistan (NBP), which are the two institutions that have announced their intention to drop their appeals against the ruling of the Federal Shariah Court. On the other hand, it is unclear whether or not private banks, which are accountable for the vast majority of interest-based lending to both the public and private sectors, are on board with this plan or not.
The current financial system, which is built on riba, is categorically forbidden in Islam; despite this, there are still two distinct obstacles to overcome.
To begin, in a society that has to rely extensively on borrowing money both domestically and internationally in order to maintain its financial stability, is it even conceivable to establish an economic and financial model that is self-sufficient?
Second, even if such a system were to be put into place in this region or to have existed in another, would it still be considered a genuine Islamic system?
Let’s start our investigation of the first obstacle by taking a look at the official account of the total external public and publicly-guaranteed debt stock, which is over 97 billion dollars. Of this amount, approximately 66 billion dollars will be coming due between the fiscal years of 2023 and 2027.
Since the significant debt portion of approximately $74 billion cannot be rescheduled, the Ministry of Finance is looking for alternatives for further financial help. This, in a nutshell, requires more interest-based borrowing, such as floating bonds in international markets.
In addition to this, the nation has been struck by record flooding since June, which has resulted in a humanitarian disaster and is estimated to have caused damages in the amount of $30 billion.
In September, a draught paper presented by the United Nations Development Programme suggested that Pakistan negotiate debt relief with its creditors. The possibility of this happening caused havoc for the country’s bonds on the international market because investors assumed that Pakistan would not be able to pay interest on loans.
Later on, the finance minister gave reassurances to the foreign market that Pakistan will honour all of its debt obligations. This was done in an effort to soothe the anxious investors who were desperately selling Pakistan’s bonds, which caused the yield to skyrocket from 4.4% to 84.8%.
Now, let’s take a look at the genuine Islamic financial system principle, which mandates an equitable model of profit and loss sharing. This model mandates the circulation of capital in order to promote economic activities, as opposed to the accumulation of wealth in the hands of a few individuals who do not take any risks.
If we examine the current model of Islamic finance and banking in light of what has been said, then there are numerous problems regarding whether or not the concepts that have been discussed are being used in their intended manner.
If we take the example of the profit and loss sharing model, then we know that banks, regardless of whether they are Islamic or conventional, do not take any risks on their balance sheets. Instead, they strive to play it safe and remain in their comfort zone.
When one examines the balance sheets of Islamic banks, one will notice that the asset side of these banks is built primarily through the practise of lending money to the government for the purpose of financing the budget deficit. This is done rather than lending money to the businesses that are the driving force behind economic activity in society because these loans also carry the risk of losses.
Also, even if the lending is done to the businesses, it is only extended to the large blue-chip companies using the Musharakah model, which seeks return based on the “Karachi Inter-bank Offered Rate” (Kibor+) rather than the profit and loss sharing model. This is the case even if the lending is done to the businesses.
When the State Bank hiked the interest rate to a whopping 13.75%, which in turn caused a rise in Kibor, which is why during Covid, when the earnings of businesses dropped, the profits of banks remained unaffected and even climbed. This was because the State Bank upped the interest rate.
In spite of the fact that the Federal Shariah Court issued an order in 1991 prohibiting all types of transactions based on riba, no real efforts have been made by any government so far to develop a solution that is not only viable and acceptable on a global scale but also conforms to all of the Shariah requirements in both the true letter and spirit.
This time around, the administration must demonstrate not only the intention but also some actual progress on the ground in order to demonstrate that it is truly engaged in overhauling the economic and financial system. In that case, the statement made by the minister of finance will simply be interpreted as a piece of political jargon or a slogan that can be employed during the campaign for the upcoming elections.
