Experiences
in
Islamic Banking
A Case Study of
Islami Bank Bangladesh
An IPS Task Force Report
INSTITUTE OF POLICY STUDIES
Jnsuiute of Heiid 4iwflss Library, Islamabad
Acc. No…~
………………………………..
© 2000 AH Rights Reserved Institute of Policy Studies
Title:
Experiences in Islamic Banking – A Islami Bank Bangladesh
Case Study of
ISBN:
448-063-9
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Editors’ Note
The three constitutional documents produced in Pakistan’s 52 years history affirm that elimination of riba from the economy had always been an objective of the state policy. All the reports of Council of Islamic Ideology (CII) unanimously called for elimination of riba. By the end of the constitutional restriction of 10 years, the Federal Shariat Court examined the legality or otherwise of laws relating to monetary and fiscal issues. It pronounced in Dec. 1991 a historical decision that the provisions of interest in a number of fiscal laws came under the definition of riba and thus these legal provisions were repugnant to the Shari’ah. The Nawaz Sharif government [1991-3] went for appeal against the decision. The Shariat Appellate Bench of the Supreme Court, rejecting the appeals filed against the 1991 FSC judgement, finally declared on Dec. 24, 1999, all forms of interest un-Islamic. It decreed to bring the present financial system into conformity with Shari’ah. The Supreme Court suggested formation of a three-tier commission to guide and oversee the transition to an interest-free economy. Some laws relating to the interest-based system in vogue shall thus stand abolished on March 31, 2000, while some others will cease to have effect from June 30, 2001.
The verdict is historic and only needs for its implementation, the political commitment and policy initiative on the part of government and a firm resolve among the masses. The Commission suggested by the Court should examine all aspects attending the desired transition to an interest-free economy. The practical approach in this respect is to analyze various experiments that have been rendered at the domestic level as well as in other parts of the world for elimination of riba from the economy.
Fortunately, the ominous experiences in interest-free banking and the viability of Shari’ah-based modes of financing, have, over the past three decades, proved highly encouraging. Significant enough, these models have been tried and proved competitive modes in hostile
and non-conducive environments. Particularly, the legal framework in which these projects had to work, has been alien to Shari’ah modes and time and again constrained their smooth progress. Notwithstanding, the success in interest-free banking is an eye-opener and needs projection in various corporate circles, particularly among those who still ask for an alternative system. Such a communication would not only be helpful in removing any doubts about the viability of the Islamic system but shall also be useful in improving the whole exercise.
In this context, the Islamic Bank of Bangladesh (IBB), which was established in 1983, is a case worth consideration. It works in situation more or less resembling Pakistan and most other developing countries. It has committed itself to conduct all banking and investment activities wholly based on interest- free profit-loss sharing system, in conformity with Islamic Shari’ah.
The Institute of Policy Studies (IPS) invited the IBB officials and experts to present their micro-level case. In their respective presentations, the three experts explained different aspects of Bank’s working and impact of its 16- year long experience. A comprehensive review of the Pakistani experience of Islamization was also presented and discussed. This review helps in understanding the real problems behind the failure of Pakistan in achieving the goal of fully Islamizing the system after an initial success. Moreover, it highlights the difference and impact of the two approaches Macro and Micro.
The editors of this monograph have observed restraint while dealing with the substance of presentations. They have only used the right to remove discrepancy or repetition, make it one whole presentation and have added notes and annexures that may make this reading more useful.
It is hoped that the proceedings of the seminar as compiled and presented in the following pages will be of use to all concerned, more particularly the decision-makers, bankers, legislators and persons and institutions forming public opinion.
Introduction
Ever since the emergence of Muslim liberation movements against the colonial rule, particularly after the First World War, there has been in progress a powerful and many-dimensional effort on the part of the Muslim thinkers, ulema, fuqaha and social reformers to articulate major economic teachings of the Qur’an and Sunnah. The literature so produced threw lurid light on the major contours of the Islamic economic system and institutions. Basic value framework of Islam was spelled out along with its fundamental principles and policy parameters.
Last 30 years have witnessed yet another major development in the field. Building on what the ulema, fuqaha and social thinkers had contributed, professional economists, bankers and economic managers have tried to develop, which can be described as the emerging discipline of Islamic economics.
Islamic economics is coming up as a social science dealing with the whole gamut of economics and its concerns from an Islamic perspective. In the first phase, emphasis was on the exposition of the economic teachings of Islam, drawing upon the sources of the Qur’an, the Sunnah, the fiqh literature and traditions and institution as developed in Muslim history. This literature continues to remain the foundations on which Islamic economics is being developed. Constant recourse to these foundations is the indispensable source of Islamic economics. But Islamic economics is more than a simple compendium of economic values and principles of Islam. It is not a branch of theology or fiqh. Its domain is the whole landscape of economics, and even more. It is not confined to the vital area of vision of economy, man and society; it also represents an effort to undertake rigorous analysis based on the one hand, on the value framework of Islam and on the other, the ground realities of economic life. It deals not merely with theory but also with application and experimentation, feedback from actual experiences taking in view the human, physical and financial constraints and spelling out of policy implications. Its scope
and methodology, while covering all major areas of economic analysis, experimentation and policy formation, go beyond the traditional parameters of mainstream economics. It represents a fresh blend of value-orientation and scientific analysis based on real factor situations, in order to achieve the socio- moral objectives of Islam.
The role of the ulema and the guidance from the sources remain an important input. Yet the main contributions are now coming from the professionals – economists, bankers and financial practitioners – who are engaged in the heroic task of building a new model of economy and developing such economic instruments, financial structures, policy frameworks and networks of economic inter-relations that could lead to the establishment and working of a just economic order with high degree of efficiency and competitiveness. It is a creative effort, which has the potential to become a milestone on the road to search for a new paradigm of economy. These efforts may look preliminary and somewhat rudimentary, yet as elements of a new experiment they bear great promise for the future. Mudaraba and Musharaka operations at the micro-level, development of riba-free banking and investment institutions, emergence of Islamic takaful organizations, institutionalization of zakat operations through voluntary or state agencies, reshaping of planning and development strategies on the basis of national and collective self-reliance, however humble and exploratory, do represent elements of a new approach to economics. They are stepping stones towards the establishment of a just, equitable, efficient and humane economic order based on the premise that human beings and their wellbeing – and not merely amassing of the wealth – must be the center-piece of all economic activity.
This approach to economics is a distinct contribution of the global movement of Islamic resurgence. Recent developments in the field of Islamic banking are to be seen in the context of this historic process. Banking and finance contribute one of the development areas of Islamic economics. During the last 25 years, Islamic banking and finance has become an emerging and expanding reality.
According to the latest issue of the Directory of Islamic Banks and Institutions (1997), published by the International Association of Islamic Banks at the end of 1997, there were in operation 176 banks
Conducting all their dealings on riba-free basis. These banks are no longer region specific: they are working successfully in some 40 countries of the world – South Asia 51, Africa 35, South East Asia 31, Middle East 26, ECC 21, Europe and America 9, rest of Asia 2. and Australia 1. They have shown sustained growth over the years, with 1 in 1972 to 176 by 1997. Their capital and assets in 1997 were US$7,333 billion and US$147,685 billion, respectively. At the same point in time, funds under their management stood at $112.89 billion and net profit for the year 1997 was $1.238 billion.
So, there is sustained increase in their numbers and operations and continuity and profitability in performance. Thirty years is a reasonable period to give confidence about their viability, security, profitability and distinct character. All this can be seen by eyes under our brows, and not merely by flights of imagination.
There are certainly problems, imperfections, unrealized dreams and challenges from within and without, as they must be, because of difficult, volatile and even uncongenial context, and because these efforts represent adventures to swim against the stream. Acknowledgment of these dimensions is essential to avoid complacency and insensitivity to real difficulties and problems that afe to be faced squarely and creatively. The most serious challenge however, lies in the need to move towards more equity-based operations, so as to shift the focus from debt-based economy to an equity-based and staking-taking one.
Although continuous reflection and development of theoretical dimensions of Islamic banking and finance remain extremely important, there is also an increasing need for careful analysis of Islamic banking experiences and on the basis of comprehensive empirical research, continuous evaluation of the performance of these institutions. The present monograph is an attempt in this direction. It discusses the case of a leading Islamic bank operating successfully in the sister country of Bangladesh, a country faced with problems very similar to those with which we are trying to grapple in Pakistan. Here, I would like to place on record my appreciation for the Islami Bank Bangladesh for providing us an opportunity to discuss their case in one of IPS seminars. I specially
thank the bank officials for sparing time to come to Islamabad and for allowing us access to the valuable bank data and information. I also acknowledge the effort undertaken by the IPS Task Force members; Khalid Rahman, Sahibzada Muhibul Haq and Mushfiq Ahmed, who adapted and realized the seminar proceedings in monograph form. Our thanks are also due to Saudi-Pak Industrial and Agricultural Investment Co. (Pvt.) Ltd., Pak-Libya Holding Co. (Pvt.) Ltd., Al-Mizan Bank Ltd. and Al-Baraka Islamic Bank, for extending collaboration for holding the seminar.
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I have no reservation in submitting – and this submission is based on 50 years of study, reflection and dialogue – that interest in whatever form, is a major source of exploitation and constitutes a threat to stability in human life and economy. I also submit that in the last analysis, the debt-based economy has become a major menace to individuals, nations and the world economy. In fact, debt is becoming a major source for a modem version of slavery.
It is not denied that there may always be a limited role for credit in the lives and activities of individuals, firms and national economies. But an economy in which interest and debt are the kingpin, is bound to be exploitative, wasteful, unstable, anti-people, particularly against the poor, and is destined to produce concentration of wealth and power in the hands of a minority. It also leads to transfer of resources from the poorer sectors to the richer sectors within an economy and from the poorer countries to the richer countries at the global level. Inflation is also a natural product of an interest-based system. The real challenge therefore, lies in developing an alternate model of economy which is based on equity participation, risk-sharing, stake-taking, self- reliance and equitable distribution of wealth and resources, along with maintaining a limited space for credit dealings for genuine purposes via humanitarian and just arrangements.
Such a model of an economy is the real need of mankind and current experiments in Islamic banking and finance have the potential to be the stepping stones towards this new paradigm. Whatever be the achievements of the global movement for Islamic banking so far – and they are many – we have a long way to go to approach that destination. That is why our task is great and challenging and calls for continuous
Reflection, sustained effort, innovative and creative experimentation, honest self- criticism and rigorous evaluation of our achievements, failures and challenges.
Let us also acknowledge what constitutes the real obstacle in the ummah’s march towards an Islamic economy and a truly riba-free banking system. It is no longer the absence of any theoretical models and alternatives that hold the way. Enough work has been done in those directions, and more is in progress. The real deficiencies lie at the level of communication, education and manpower training on one hand, and absence or shortfall of real and effective political will and commitment on the part of the political and economic leaderships, on the other.
Focus on real experiences in the field of Islamic banking would be helpful in caring for both of these deficiencies, although that would not be enough or sufficient to meet these gaps. The contributions made by Islamic banks in Bangladesh and elsewhere are path breaking and deserve to be so acknowledged. But the real need can be met only through powerful, sustained and multi- dimensional efforts to create a new climate, in fact, a politico-economic movement for the establishment of the Islamic socio-economic order. This is the mission that beckons us all. So, help us our Lord!
Khurshid Ahmad
Jan. 12,2000
Leicester, UK
