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Shariah compliant ethics need to be integral part of all Islamic banking transactions

In compliance of constitutional requirement, that limitation of Riba will be state policy of Pakistan, It has been ambitious program of all succeeding governments since late seventies to Islamise all banking transaction to get rid of Riba from the economy as a whole.

At earlier stage, efforts were made to eliminate interest by shifting to non-interest based modes of financing mostly relying on those which are trade related and involve deferred payments like Morahaba, Muajjala (mark up), leasing and hire purchase etc, and to some extent, real Islamic modes of financing were made use of, which are investment related like Musharakah, Mudaraba and participation term certificates etc, but due to non-availability of basic infrastructure and non-adherence to ethics forming integral part of the system rendered all alternates of interest applicable to both deposit taking and financing, ineffective in getting rid of injustice, unbridled widening gap between rich and poor and all exploitation’s relating to interest-based system.

Lack of sincere efforts to cover foreign exchange transactions, money market operations and government and government finance both internal and external, within the scope of Islamisation process by developing new instruments and irregularities committed in the system in vogue attracted note of dissatisfaction from all quarters and became basis of verdict of Supreme Court, forbidding use of interest based and non interest-based modes of financing in the entire financial system after 30th June 2001 (later on relaxation allowed for sometime). Accordingly State Bank of Pakistan came up to set modalities to enable banking sector to make use of all permissible modes of financing according to requirement of Shariah in each case and to remove anomalies from the system. At the same time all out efforts were made to put in place necessary infrastructure and legal frame work in order to eliminate chances of all risks and losses vehemently advocated by banks in the absence of required number of banking courts, shortage of judges and delayed execution of decreed cases.

Further to ensure moral and economic justice both for financial institutions and their clients, reforms envisaged for Islamic banking transactions need to be implemented in letter and spirit. Banks while doing financing to clients project under any authorised mode of financing doing financing must treat the role of client of participative nature. In case of financing done through Morahaba agreement where client enters into sale and purchase agreement with bank, their role is of participative nature hence Banking Company Ordinance of 1962, need to be amended to accommodate the new concept in relationship between bank and customer under various modes of financing introduced under Islamic banking.

Will full default cases are common in banks. Perhaps it is on the understanding of clients that in case of default they will encounter civil suit only, which they in connivance with lawyer engaged delay the process in the court to gain time. For such cases there should be room in law to file criminal case against such borrowers from the very outset on the charges of manipulating their assets and financial accounts in order to dodge the bank as well as national exchequer.


Wilful default cases are common in Musharakah financing. It is essential that an exclusive law be framed to regulate the conduct of contracting parties. Among the banks who have undertaken a project to finance on the basis of Musharakah financing their emphasis is on only such clauses of the agreement, which safeguard only their interest, which in fact is against the ethics of business. The client being partner in project by virtue of investment of his funds also deserves cover against losses on equal footings. Further profit sharing arrangements and treatment of losses are against Shariah as payment of provisional profit on quarterly basis and its adjustment through participation reserve and also condition of issue of ordinary shares against apportioned loss of the bank and above all asking for collaterals to secure the finance, creates the scenario of debtor and creditor relationship between the bank and the client. It is therefore imperative that a comprehensive and just Musharakah law be framed to do away with all ambiguities, chances of manipulation and unjust stipulations of Musharakah agreements and also to ensure uniformity and clarity regarding terms and conditions of Musharakah agreements.

It is matter of concern that conventional banks doing Islamic banking side by side, particularly in case of money market operations where they invest their excess funds in government securities and inter-bank placement of funds whether they transparently segregate earnings from investment in Sukuk prescribed by SBP for surplus Islamic banking funds and also earnings from other prescribed placement of Islamic banking funds according to State Bank of Pakistan’s guidelines from time to time, from their total earnings on investments depicted in their financial statements.

For having a financial system in conformity with Islamic teachings focus should be on desired moral and ethical values. Striving for economic well being is upheld in Islam, but at the same time Muslims have been warned that while pursuing economic objectives, do not acquire love for wealth accumulation leading to creation of wide gap between rich and poor. Total neglect of basic teachings of Islam is mainly the reason for fast growing poverty country is experiencing presently. The moral values fibre does not fit in Islamic framework. The onslaught of secular influence, which considers human beings as social animal has emphasis on personal liberties for maximising materialistic gains.

In order to ensure success of Islamic banking based on concept of profit and loss sharing, moral values will have to be recognised at individual as well as state level. Each one of us must make it a point to live independently, honestly and of course honourably relying on one’s on capability to earn livelihood. Only then we can hope for success of individuals as well as state efforts to Islamise the entire economy, reduce country’s debt burden and alleviate poverty.

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