ISLAMABAD: Amid reports that foreign banks, including those from China, may find it difficult to operate in Pakistan after the financial system becomes fully compliant with Sharia, the central bank has conceded challenges related to public debt, foreign banks, external debt commitments and monetary policy that would need to be addressed by a steering committee of all stakeholders under a five-year transformation plan.
Presiding over a meeting of the Senate Standing Committee on Finance and Revenue, former finance minister and PPP senator Saleem Mandviwalla said he had received letters from foreign banks, including the Bank of China, that they would be unable to operate if interest-free banking was implemented in Pakistan. Though an overwhelming majority of the senators supported a shift to the Islamic financial system, they advised a cautious tread to avoid disruptions while maximising the outreach to integrate into the global system with cooperation from Malaysia, Bahrain and London.
The committee asked the State Bank of Pakistan (SBP) and the finance ministry to engage with the Bank of China and the Industrial and Commercial Bank of China, who entered Pakistan after much effort.
Minister of State for Finance and Revenue Aisha Ghaus Pasha said the government stood committed to implementing the Federal Shariat Court’s (FSC) decision to eliminate the country’s banking system based on riba (interest) in five years.
SBP concedes challenges in some areas; upper house bemoans tax evasion notices under anti-money laundering law
She said it was clear that everything would not be converted to 100pc Islamic system in five years because the country and its financial system were internationally integrated, but good signs were that there was a lot of appetite for the Islamic system among most citizens and now some multilateral institutions were also using such products.
The SBP’s executive director for banking policy and regulations, Arshad Mahmood Bhatti, explained that the FSC’s April decision on a riba-free banking system was binding and that it would mean Sharia-compliant financial system that was riba-free but not necessarily interest-free.
Senator Mohsin Aziz pointed out that if the objective was eliminating extortion, as required by Sharia, that had been done away with a long time ago by limiting the compounding interest period, but the banks later reverted to extortionist practices like penalties and fines, etc. Former finance minister Shaukat Tarin said the problem with basic riba-free banking was that there was no time value for money unless innovative products and services were introduced and pointed out that products like musharaka — the sharing of risks and profits by banks and investors — in goods and services were misused in the past.
He said an aggressive strategy would be required to increase the share of Islamic banking from 20pc at present to 50pc in 10 years and to 75pc in the next 10 years “because it was impossible to live isolated from the world”.
“We need to be pragmatic instead of politicising the matter. There can’t be switch on and switch off,” he said, adding that this was particularly important because 20pc population now wanted Islamic banking, another 20pc were interested in benefits and didn’t care about Islamic or conventional system, while the remaining 60pc needed alternate Islamic products for financial inclusion.
‘Death warrant’ for businesses
The members of the panel also expressed concern over notices to businessmen from the Federal Board of Revenue over tax evasion under the Anti-Monetary Laundering Act (AMLA) that they described as a misuse of law and a “death warrant” for businesses.
The FBR team assured the members that while there was a comprehensive mechanism starting from suspicious transaction reports from banks, the financial monitoring unit (FMU), third-party inquiries and so on, it insisted that tax evasion beyond Rs10 million was also a predicated offence under the AMLA, passed by parliament in 2016.
The FBR team told the committee that the FMU referred 767 reports in two years to FBR’s inland revenue wing and only 169 call-up notices were issued for an explanation.
Over the six-year period since the AMLA was enacted, 254 investigations were carried out into Rs358 billion proceeds and only 180 cases reached the prosecution stage, where courts take over the cases.
Published in Dawn, December 8th, 2022