KARACHI: Islamic banking professionals have vowed to live up to the challenge of replacing interest-based banking with a Shariah-compliant system before the end of 2027 in line with the April 28 verdict by the Federal Shariat Court (FSC).

“We find solutions only when we look for them. Who could’ve thought Islamic banking would grow at such an astonishing pace when we started from scratch 20 years ago?” said Ahmed Ali Siddiqui, head of product development and Shariah compliance at Meezan Bank Ltd, the largest Pakistani bank in terms of the market value of shares.

The FSC has directed the government to make regulatory changes to ensure that the banking system becomes free of interest within five years.

The market share of assets and deposits of Islamic banking in the overall banking industry was 18.6 per cent and 19.4pc, respectively, at the end of 2021. Net financing by Islamic banking institutions rose 38.1pc last year, highest growth rate recorded in Islamic financing in a year.

Bankers say govt’s commitment to enforcing FSC directive will dictate success of transition

Speaking to Dawn, the head of Islamic banking at a conventional bank that’s gradually transiting into a full-fledged Islamic lender said his institution has almost finished its “branch-by-branch” conversion. “We’ve successfully drawn and implemented a blueprint for transition. Many conventional banks are already following our cue,” he said, requesting anonymity because he needed prior approval for speaking to the press.

The chief of Shariah compliance for Pakistan operations at an international Islamic bank said the industry-wide transition can be achieved in three years instead of the five-year grace period allowed by the FSC.

“The success of this transition depends on how committed and motivated the federal and provincial governments are to this cause. Pakistan has the entire Islamic banking infrastructure already in place,” he said.

While conversion of individual banks from conventional to Islamic form has many precedents, the transition of the entire banking system into the Shariah-compliant mode is unparalleled. No globally integrated economy has abolished interest-based banking altogether to replace it with an asset-based financing system.

For example, sceptics say converting the entire stock of government debt is going to be a Herculean task.

“That doesn’t mean Pakistan can’t take the first steps towards an economy built on purely Islamic principles,” said Mr Siddiqui of Meezan Bank Ltd.

As an example of the usefulness of Shariah-compliant borrowing by government, Mr Siddiqui cited the successful settlement of the first tranche of a new series of Ijarah Sukuk worth Rs137 billion just one day before the FSC verdict last month.

Sukuk are the Islamic equivalent of bonds that the government can use instead of Pakistan Investment Bond (PIBs) for its long-term borrowing. Unlike interest-bearing PIBs in which Islamic financial institutions can’t invest, Sukuk allow the government to transfer the ownership of an “underlying asset” to investors against a rental. In other words, investors buy these assets for a certain period — airports of Lahore and Multan in the case of the latest Sukuk — and let the government use the same on rent.

The government raised Rs119.4bn through a variable-rate Sukuk and Rs17.7bn via a fixed-rate Sukuk in the April 27 transaction. The former was issued at the last cut off rate of treasury bills (13.5pc) while the latter was issued at 12.49pc.

The Sukuk issue that preceded the April 27 transaction was worth as much as Rs1.11 trillion. “That issue provided not only a Shariah-compliant alternative to interest-based borrowing but also helped the government reduce its cost compared to conventional instruments like treasury bills and PIBs,” Mr Siddiqui said.

“This proves the domestic government borrowing can be successfully converted from interest-based to Shariah-compliant modes if we have willingness at the top,” he added.

Published in Dawn,May 3rd, 2022