An effective conduct of monetary policy lies in pursuing well-defined long-term economic goals that are consistent with national objectives and priorities.
Thus, a central bank is bound to put in place a monetary policy for an economic system based on the Islamic concept of equality of mankind and social justice.
The SBP introduced riba-free banking system in the 1980s by eliminating interest from banking transactions. The SBP showed full ownership of the newly launched profit and loss- sharing banking system, which, in turn, provided it with legal mandate to promote and market it.
The second launch of Islamic banking, initiated at the behest of the Supreme Court in 2001, was different in that it allowed Islamic banking to work as an alternative banking system along with the interest-based banking system, leaving it up to the customers to adopt whichever system they deemed better.
It did not provide any ownership or weightage to Islamic banking over conventional banking. It neither gave any timeline for the parallel run of both systems, nor did it put in place a roadmap for gradual replacement of interest-based with Shariah-compliant banking. Both systems are working side by side in the country, where the choice of adoption remains with the users of financial services.
This not only violates the SBP’s commitment and constitutional mandate, but is also problematic in various aspects of Islamic banking.
The overall management of the entire banking system — Islamic as well conventional — is done under an interest-based monetary policy
The first problem is in the conducting of the monetary policy. On one hand, the SBP is promoting public awareness about Islamic banking, but, on the other, the overall management of the entire banking system — Islamic as well conventional — is done under an interest-based monetary policy. In conventional banking systems, monetary policy is broadly defined as ‘regulation of cost and volume of money supply’.
The SBP also takes into account these two variables in the formulation and transmission of its monetary policy. Before the monetary policy announcement, a likely increase or decrease in the discount rate is the most speculated indicator in the market.
Further, after 2001, it puts in place the Karachi Inter Bank Offered Rate (Kibor), which is essentially an interest benchmark. As a matter of fact, profit and loss-sharing banks should use a profit-based benchmark for their products. However, Islamic banks make full use of Kibor in pricing their products, along with their interest-based counterparts. This Islamic part of monetary policy is yet to be evolved.
The second confusion relates to the neutrality of the SBP as a regulator. Conceptually, a country’s central bank belongs equally to all its licensee banks (whether working under debt or equity). It may raise many eyebrows if the SBP opts for promoting or marketing one system without assigning it priority or superiority over the other.
The third problem, faced by the general public, is in respect of bankers who have the will and skill to work on both sides of the fence; mobilising deposits under Shariah rules while being in Islamic banks, and suddenly wearing an interest-based cap after switching over to conventional banks. The SBP’s permission to allow this free flow of bankers into the two systems like migratory birds is also not understandable.
The central bank needs to revisit its current policy stance by providing a clear roadmap for the promotion of Islamic banking. First of all, ownership/superiority of Islamic banking over conventional banking, along with a timeline for a gradual phasing out of interest-based transactions, should be made the ultimate objective of the monetary policy.
Secondly, the SBP and the academia need to pursue the task of fostering an Islamic economic system. This could be done by establishing Islamic banking industry-academia linkages under which leading universities and educational institutions of the country undertake research on practical issues being faced by Islamic banking practitioners.
Further, to provide promising careers to students currently chasing postgraduate degrees in economics, banking and Islamic studies, the SBP should recruit young and qualified boys and girls as Islamic bankers every year, and train them rigorously before posting them in different Islamic banks.
The SBP did this for conventional banks in the 1960s to cater to their human resource requirements. These dedicated and standalone Islamic bankers — free from the mindset of interest-based banking and bound to circulate within Islamic banks only — would be instrumental in deepening the Islamic banking sentiment.
The writer is president of the Institute of Banking and Business Learning, Lahore
Published in Dawn, Economic & Business, January 19th , 2015
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