Pakistan struggles with Islamic banking
By Amir Zia
ISLAMABAD: Pakistan is ready to impose an Islamic interest-free banking
system in keeping with a court order, but financial experts are uncertain of
how to marry this to a modern banking system, State Bank Governor Ishrat
Hussain said Wednesday.
"There are lot of fears and apprehensions about interest-free banking,"
Hussain told a seminar on Islamic banking held in the capital.
Last December, Pakistan's Supreme Court ordered the government to do away
with interest in keeping with Islamic teachings, which forbids charging
The court ordered eight laws, which govern interest payments, revoked by
March 30. Other laws will have to be changed by June 30 and still others by
June 30, 2001, the court said. The entire process should be completed within
That court ruling has presented Pakistan's financial experts with a dilemma
of implementing it without frightening off foreign investors. Pakistan's
military-led government has promised as a priority to revive the economy,
something several analysts say could be made more difficult as a result of
the court ruling.
Hussain said the government will abide by the court ruling, but it won't be
"There are lot of difficult and arduous questions which need to be answered
first," he said. "As the governor of State Bank, I don't know what will
happen to the bank's open market operations or how the flow of credit will
be regulated under interest-free system."
Also it's not known how this new system will affect government borrowing
from both the State Bank and commercial banks. The government has now set up
a commission to come up with some answers, he said.
Hussain said switching to an Islamic banking system also requires reforms in
the judicial and legal system in line with Islamic teachings.
Pakistani laws are a mix of Islamic and British Common laws which the
country inherited when it gained its independence from Britain in 1947.
A former military ruler Gen. Mohammed Zia-ul Haq introduced several Islamic
laws in the economy which included deduction of zakat, an annual Islamic tax
of 2.5 percent on savings on all the bank accounts. He also introduced
profit and loss sharing accounts in banks replacing the fixed interest,
which was paid by the bank to depositors.
Hussain said a problem of Islamic banking is that the rate of return is
lower than non-Islamic banks. The ratio of loan defaults also increases in
an Islamic banking system because of the profit and loss sharing concept of
Islam, he said.
To minimize their risks, Islamic banks' portfolios are loaded with
investments in trade and services, while industry and agriculture share is
only 24 percent, he said.
"We have to find solutions to these questions if we don't want to
destabilize the system," he said. (Associated Press)
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