DURING the golden Islamic period, there were neither banks nor any role of interest in economic activity. The allocation of savings/investment and conversion of investment into production and distribution took place without the institution of interest.
All sorts of real and financial services like the sale/purchase of goods and services and the provision of funds for starting an economic activity used to come entirely from the business sector.
In the absence of any financial intermediaries like banks, there was direct contact between savers (surplus units) and investors (deficit units), generally known as P2P (person to person) finance in todays’ terminology. For the sale/purchase of different goods in the market, two Islamic modes, Murabha (by telling the cost of goods) and Musawamah (without indicating the cost) were used.
There is no role for the business sector — the once mega player of Islamic finance — in the whole policy package
Savers used to take part in business under Musharika and Mudarba — two distinct profit and loss sharing Islamic modes of finance. The business sector was also the wholesale outlet for funds to farmers under Salam. Dr Murat Cizakca has mentioned in his book, ‘Islamic Capitalism and Finance’ that during the Ottoman Empire, the business sector used to cater the bulk of expenditure incurred on education and health in the shape of scholarships, donations and research grants — a phenomenon currently in vogue in the advanced western countries.
There was no tax on local trade. Zakat was the only tax on business, and it was levied on total wealth rather than on income. Maurice Lombard has mentioned in his book, ‘Golden Age of Islam’ that Islamic economics and civilisation remained dominant from the 7th century to the 11th century, where trade was conducted under one currency — dinar — with Arabic as the international trade language.
The above economic system practically demonstrated the concept of ‘Honest Trader’ which makes trade and business a vehicle for spreading welfare and prosperity in the society.
However, nowadays the process of Islamisation of the economy is almost entirely restricted to putting in place Islamic banks offering financial services by making existing interest-based banking products Shariah compliant. There is no role for the business sector — the once mega player of Islamic finance — in the whole policy package.
Although a distorted form of Salam is being used by the informal business sector (commission agents, shop keepers and money lenders etc.) under which billions of rupees are provided to farmers before the cultivation of various crops, yet no effort is being made to introduce the ‘real’ form of Salam financing from the business sector.
Same is the case with Mudarba (venture capital) which could be used by the business sector for working towards the elimination of unemployment and promotion of entrepreneurship in the country.
The entire burden of Islamisation — both theory and practice — rests on the shoulders of the State Bank of Pakistan with little involvement of religious and educational institutions. As a result, Islamic banks are providing financial services almost identical to their conventional counterparts. This is the main reason behind the general public’s belief that Islamic banks do not operate under real Islamic injunctions.
For successful implementation, Islamic finance needs to be taken as a shared product of four strategic players: (1) the SBP (2) the business sector (3) religious schools and (4) educational institutions; with a clearly defined division of work.
A comprehensive framework of the historical Islamic economic system, which operated with Zakat as the main revenue generating tax, should come from religious scholars well conversant with ground realities of modern economics.
Thematic research on main areas of Islamic economics and its compatibility with modern economics should be a major responsibility of leading universities and research institutions; and known business houses in agriculture and industry should start financial services under Mudarba, Musharika and Salam on selective basis so as to create some success stories of Islamic finance.
Along with regulating Islamic banks, the SBP should also work as a coordinator/ facilitator among the other strategic players.
The writer teaches Islamic banking at a university in Lahore.
Published in Dawn, Business & Finance weekly, August 15th, 2016
