December 18, 2006	Monday	Ziqa'ad 26, 1427

ISLAMIC banking has assumed a significant size. Some new Islamic banks have come up while local banks have established special windows for interest-free operations.

The total volume of their business so far is not very large, but it should be soon grow, judging by the trend and the fact that foreign banks are also trying to promote Islamic banking abroad as well as here.

As for the millions of small savers, they are getting very little, judging by the fact that the normal banks are offering them only an average return of 1.67 per cent on their deposits. The Islamic banks can only do better.

The Islamic banks should not be giving very small returns on their deposits while their officers collect huge salaries, fat allowances, numerous cars and a battery of domestic servants for themselves at the cost of their organisation. That is not Islamic banking or the spirit of Islam.

Now, the senior bankers in the conventional banks are getting not only fabulous pay, vast number of expensive perquisites including a small fleet of luxury cars and a battalion of domestic servants, but also millions of rupees as bonus on the basis of profits made by the banks which can be 70 to 100 per cent now.

At the same time, the old bank staff gets lower salaries and perquisites. There is a clear caste system in payments in banks now. Will that be repeated in the Islamic bank as well? That can’t be Islamic.

The banks are now making such large profits and offering poor returns to the depositors. Will the Islamic banks repeat this pattern of payments to the senior and junior officers? That will be a violation of the spirit of Islam.

The senior officers of the Islamic banks spend too much on themselves- that includes furnishing their offices and homes. They pay too little to the depositors and the junior staff on whose back the bank moves.

Even more relevant is the question; to whom will the Islamic banks lend? And for what all purposes. Will they make sure where the loans - they will provide - will be employed and how? Will they ensure their loans are not used for criminal purposes, for hoarding, adulteration and other anti-social purposes? Will the purpose of their lending be different from the conventional banks?

At the moment the profitability of local banks is very high. It is the third highest in the world, says the International Monetary Fund. And that stands in sharp contrast to the fervent pleas for more microfinance facilities in developing countries. Micro banking and macro profits don’t go together.

Now even the ulema who have been chairman of the religious boards of Islamic banks are demanding high payments and getting them.

Some time ago the Financial Times of London carried a news item saying that the western banks which want to enter Islamic banking are looking for religious scholars as advisors and are ready to pay five to six figure salaries. They are able to get a number of PhDs, but the banks are in search of ulema whose word will have the weight of a Fatwa in case of a dispute. They are not able to get such persons.

Our banks, however, are not in search of such persons. They prefer handy men who can be manipulated.

Meanwhile, the State Bank of Pakistan is coming across more and more malpractices in banks. It has now noticed that the non-executive chairman and directors of banks are given lavish payments for attending the meetings of the board of directors in violation of the prescribed rules. What is even worse is that the executive directors too are paid excessive sums to attend board meetings which are their normal duty.

Such payments are impermissible. But evidently by paying the non-executive directors of the banks too liberally, the management is able to get approved by the board whatever it wants including large bonus payments for the bank chiefs and senior officers.

Now SBP Governor Dr Shamshad Akhtar has given four to five weeks to come up with better returns on saving deposits. She was asked about the measly return on the savings at the standing committee meeting of the National Assembly for the ministry of finance. The low income depositors are looking for the announcements of the profits of banks for 2006 and what they earmark as return to the savings depositors.

It is not enough if the banks announce higher return on long-term deposits or on large amounts. They should give a fair deal to small savers who used to get 5.98 per cent in 2000, while the rate of inflation was only 3.58 per cent, giving them a net gain of 2.4 per cent. Now, they suffer a net loss of 6.25 per cent on their savings.

At a time when there is so much talk about the efficacy of microfinance to reduce poverty particularly in Bangladesh, the noble prize winner Mohammed Younis says “Micro credit asks not if the poor are credit worthy but if the banks are people worthy”. That question can’t be raised in Pakistan as the high profit banks are everything and the small borrower is nothing other than the collateral, if any he has to offer.

And that is not Islamic banking which has to be based more on trust and guarantees by colleagues.

The Islamic banks have to be very diligently managed and saved from the kind of affliction which undermined the failed conventional banks.