With an overwhelmingly Muslim majority, there’s largely a distaste towards interest which is usually equated with exploitation, and often for good reason. Yet, the financial system unsurprisingly remains entrenched in it, irking the religious factions and parties who want to rid the country from the evils of riba. For years, the issue had been under legal scrutiny with the government of Pakistan as an appellant to the Federal Shariah Court’s decision (FSC).

However, that changed last November when the government gave its backing to the FSC decision, with the finance minister promising to end the interest-based system by 2027. The news was quite well received among bankers who have long been trying to convert their conventional customers towards Islamic banking.

Islamic banking is a somewhat polarising issue, with evangelists on one side and critics on the other. In between, you have reluctant customers who don’t really believe in any of the claims but still go for it just to be safe and do their part. Islamic banks have worked this to their advantage skilfully. After all, nothing sells more than religion.

As a result, the Islamic deposit base reached Rs5 trillion as of September 2022 — more than one-fifth of overall banking. Whether the whole system is truly Shariah-compliant or not is honestly immaterial here though there are some solid arguments for the opposition — starting from the very use of conventional benchmarks like the Karachi Interbank Offer Rate.

Should the government or the Federal Shariah Court decide people’s banking preferences?

Not to invalidate the many genuine voices against interest and the underlying usury, the argument is quite hypocritical and downright hilarious, coming from banks. After all, many of these same institutions are also ripping off customers by selling bancassurance policies and making billions in the process. Hardly the flag bearers of Islam.

Of course, for them, it makes perfect business sense since Islamic banks don’t have a mandated floor for the minimum payout on non-current accounts. To give a sense of their potential benefit, Pakistani scheduled banks had over 19 million savings accounts with deposits of more than Rs9.1 trillion as of June 2022.

Assuming no further increase in them despite the monetary tightening and using the prevailing minimum deposit rates of 19.5 per cent, it roughly translates into an annualized Rs1.8tr. Going Islamic helps banks avoid that bare minimum too, and lead to potential savings of Rs300 billion or more.

Pakistani banks had a substantially high CASA ratio of 77pc as of June 2022 — meaning current and savings accounts account for more than three-fourths of all deposits. For those not familiar, these are considered low-cost sources of funds, or in the case of the former, practically free barring any operational expenses. This is well above the level prevailing in other regional markets, such as the mid-40s in India and Bangladesh.

The Shariah-complaint deposit base reached Rs5 trillion as of September 2022 — more than one-fifth of overall banking

That means local banks already have a cost of funds advantage. But why waste a perfectly good opportunity to further shove down religiosity, which comes with a healthy dose of discriminatory hiring practices against minorities and moral policing for women?

There’s no denying that Islamic has made banking more acceptable in Pakistan, bringing in customers to the net that previously preferred to stay out of the formal system. And initially, these institutions were also somewhat better than their conventional counterparts as they actively lent instead of being just a frontend for treasury operations.

However, that has started to fizzle out as their lobbying efforts for more Shariah-compliant risk-free government securities began bearing fruit. As more Sukuks and other similar instruments became available, the investment-to-deposits ratio of full-fledged Islamic banks has increased to 61.2pc as of September 2022, compared to the same period in 2017.

By the way, this doesn’t include indirect investments into government securities either as banks — conventional and Islamic alike — have a tendency to ‘lend’ to other entities, such as the non-bank financial institutions, who then invest the money into fixed-income instruments. This masks the true exposure of treasury papers and inflates the advances-to-deposit ratio, thus helping them avoid penalties. The practice hit its peak in December 2022 when “loans” to non-banking finance institutions jumped by more than Rs318bn in just a month.

The bigger and more pressing issue here is that the move takes away the choice of customers on what they can do with their money. Why should the government or the Federal Shariah Court decide people’s banking preferences?

Given our extremely low penetration of capital markets, conventional savings accounts at least offer partial protection from the high inflationary environment. But shush, throwing common people under the bus is part of the Islamisation project — both at the state and banking level.

The writer is the co-founder of Data Darbar. He can be reached at mutaher@datadarbar.io

Published in Dawn, The Business and Finance Weekly, May 5th, 2023

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