Islamic banking — need of the hour

As a global concept, Islamic banking has established itself on a sound and solid footing. Almost every country with a substantial financial base offers Islamic banking operations parallel to conventional financing. However, the situation in Pakistan is rather complex.

Pakistan’s constitutional structure makes it compulsory for the state to shift from conventional banking to Islamic banking after the unanimous decision of the Federal Shariat Court on April 28, 2022. Here, it is important to have a brief on the constitutionality of Islamic financing in Pakistan.

First, we need to acknowledge that the Objectives Resolution making Islam the very basis of the Constitution of the Islamic Republic of Pakistan is now a substantive part of the Constitution by virtue of Article 2A of the Constitution. Moreover, Article 38(f) obligates the state to eliminate Riba as early as possible.

Although both these provisions are not enforceable by the superior courts on the same footing as in the case of fundamental rights enshrined in Articles 8 to 28 of the Constitution, these principles are quite unique in global constitutional history.

A pragmatic path towards Sharia-compliant banking needs to be carved together with all relevant stakeholders

More so, the Islamic principles in Pakistan’s Constitution are also declared as “Salient features” of the Constitution by the Supreme Court of Pakistan in various landmark decisions.

Without regard to the aforesaid provisions and determinations of the superior courts, there is a separate judicial forum in Pakistan termed the Federal Shariat Court (FSC), and then there is the Shariat Appellate Bench of the Supreme Court of Pakistan.

The precise function of the FSC and Shariat Appellate Bench is to determine whether any law on the statute book operative in Pakistan is repugnant to the injunctions of the Quran and Sunnah. If yes, the FSC has every right to strike down the same under Article 203D(2) of the Constitution, hence the 2022 judgment of the FSC.

The FSC, after a very lengthy and scholarly debate, handed over a 318-page judgment declaring interest-based conventional banking as repugnant to the injunctions of Quran and Sunnah. The FSC has provided a deadline of December 31, 2027, for the complete elimination of interest-based banking in Pakistan.

Although the decision of FSC is ipso facto stayed till the finalisation of appeal by the Shariat Appellate Bench by virtue of the proviso to Article 203D(2) of the Constitution, yet the state has to make preemptive arrangements for tackling this phenomenon. Tomorrow, if not today, we have to adopt the Islamic banking mode.

For this to happen, the state has to engage all conventional banks to shift their banking model to an asset-backed Islamic banking model. Here, it must be noted that there are subtle interpretational differences between religious schools of thought within Islam.

Before investing any further time and expense on any particular school’s methodology, the state should come forward and place the matter before a collective forum comprising bankers, economists, accountants, ulemas, politicians and other academics/practitioners etc.

The same exercise was conducted back in the 1980s, whereby the Council of Islamic Ideology came forward with a roadmap on converting the entire conventional banking into Islamic banking.

However, that document, along with other such laborious works, including the decision of the FSC of 1991, the Supreme Court Shariat Appellate Larger Bench’s decision of 1999 and the Supreme Court’s review judgement of 2002, must be put under thorough discussion. The models followed by Malaysia, Saudi Arabia and Iran may also be considered for undertaking this holistic exercise.

The situation at hand, therefore, demands a pragmatic approach with due regard to the legal as well as international financial obligations. Islam prescribes a balanced and pragmatic approach to the solution of intricate problems. Conversion of conventional banking is one of them. The question of Islamic banking must not be left to the corner as was done in the last 30 years.

Factually speaking, Pakistan, in the present global scenario and because of its financial compulsions, cannot divorce itself from the International Monetary Fund (IMF). We are currently in an IMF support programme, and the next government will likely continue with the IMF.

The issue with the IMF is that it doesn’t accept the difference between the state of Pakistan and the government of Pakistan. The argument that the judiciary and its decisions (be they of the Federal Shariat Court) are independent of the government’s influence is not considered by the IMF in any discussion.

The IMF treats Pakistan as a borrower entity, and no further constitutional limitations on the government of Pakistan are accepted by the IMF. In this scenario, Pakistan, as a sovereign state, has to take a collective stand and carve out a pragmatic path towards Islamic banking.

The federal and provincial governments, along with the State Bank of Pakistan (SBP) and the judiciary’s concurrence, have to devise a practical way forward so that the investment climate in cash-starved Pakistan doesn’t get hampered.

The SBP’s initiative of establishing Islamic banking windows by commercial banks deserves appreciation. The successful operation of Islamic banking windows by commercial banks is surely an achievement worth capitalising on. However, much reformation in legal and fiscal domains is still awaited.