Interview with Syeda Saima Zaidi, — an analyst
Syeda Saima Zaidi is a renowned academician. PAKISTAN & GULF ECONOMIST had an exclusive conversation with Syeda Saima Zaidi vis-à-vis ISLAMIC FINANCE. Following are the excerpts of the conversation:
If we go through the last speech of Muhammad Ali Jinnah, he mentioned categorically that he wanted to see Islamic system of economy in Pakistan.
“I will look very closely at the work of your Research Organization in developing banking practices that are in line with Islamic socio-economic ideals. In this way we will be fulfilling our mission as Muslims and delivering to mankind the only message of peace that can save and protect human well-being, happiness and prosperity.”
He mentioned that the modern economic system gave two bloody wars to the world. He focused on social justice, prosperity of mankind, securing welfare and equality of mankind. In November 1991 the financing procedure based on ‘mark-up’ practiced by banks was declared un-Islamic by the Federal Shariat Court (FSC) but on the appeal to the Shariat Appellate Bench of Supreme Court the 1991 FSC ruling was suspended till orders of the court. The Supreme Court’s Shariat Appellate Bench delivered its judgment in December 1999 with the directions that laws involving interest would cease to have effect by June 30, 2001 and later the date was extended to June 30, 2002.
However, on a review petition filed by a bank, Shariat Bench of the Supreme Court set aside the previous verdicts on Riba in June 2002 and remanded back the case to Federal Shariat Court to hear the case from the beginning. In the meantime, the government decided to gradually promote Islamic banking as a coherent and cohesive system.
The initiative to re-introduce Islamic Banking in Pakistan was initiated in early 2000 to transform the barren economy into a market-driven and flexible, phased system without creating any disruption. Furthermore it aims at building a broad-based financial system in the country to enable all segments of the population to access financial services. In this context State Bank of Pakistan (SBP) adopted a three-pronged strategy for promotion of Islamic Banking. In addition it aims to build a comprehensive financial system in the country so that all classes of people have access to financial resources. The three-pronged strategy to promote Islamic Banking includes:
- Permission to establish new full-fledged Islamic banks in the private sector,
- Permission to the conventional banks to set up Islamic banking subsidiaries, and
- Permission to the existing conventional banks to open stand-alone Islamic banking branches.
A comprehensive regulatory framework, including the Shariah Administration Framework, has been introduced to develop the Islamic banking industry effectively. The SBP also collaborated with local and international financial regulators and infrastructure development institutions to promote the establishment and alignment of the regulatory framework with international best practices, to facilitate the development of the Islamic financial services industry locally and internationally.
When we open an account the Islamic bank opens it on the basis of Mudarba which means bank and I both become partners and the bank will use my funds for investment purposes. In case of loss I suffer all the loss and in case of profit the bank and I both share profit as peer agreed ratio.
Suppose I give Rs100,000 to a bank and the bank gives to an industry in case of profit. My deposit is secured and profit will be earned and I take my deposit along with profit. But I will not take all the profit as the bank is my partner so the bank also shares profit.
The second example suppose I give Rs100,000 to a bank and the bank gives to an industry in case of loss I lost my deposit and entire loss shared by me. Some banks instead of Mudarbah work on Mushraika principles. When we open an account the Islamic bank opens it on the basis of Mushrika which means the bank and I both become partners and the bank will use my funds along with its own funds for investment purposes. In case of loss we both suffer as per our capital ratio and in case of profit the bank and I both share profit as peer agreed ratio.
On asset side operations there is the option of Mudarbah and Mushraikah; but in Pakistan we hardly see Mudarbah and Mushraikah on asset side. It means the banks are unwilling to make partnership agreements by way of investment in the business of entrepreneurs. Banks are reluctant that in case of loss the depositors will be annoyed so banks extend finance to borrowers in the shape of selling, leasing but not in partnership. So it is difficult to obtain capital for business in Pakistan. The bank provides the facility of leasing and installment sales to entrepreneurs. In both the cases banks take collateral as security in the shape of mortgage or pledge and in case the client is unable to pay rental in case of leasing and installments in case of installment sale (Murabaha) the bank recovers its amount by selling mortgaged/pledged property. But I ask one thing: a new businessman needs funds and a partner; he does not need initially a machine, car, or other asset on leasing or products/ merchandise on installment sales.
I suggest banks should come forward to make agreements with clients on the basis of partnerships such as Mudarbah and Mushriakah. We have another product istisna and salam on the asset side again both are sales where the bank deposits collateral first then grants money.
In Istisna when we get the contract of Making, Producing, Manufacturing, and Construction for instance a contract of producing 10 machines. Suppose the cost of production will be Rs60 million so we need Rs60 million and interest on Rs60 million is for instance Rs5 million. So the total cost is Rs65 million and I have quoted Rs100 million to my client. What Islamic banks do here they say we will pay you Rs65 million on the basis of pledge or mortgage. You produce 10 machines and sell them to us. This way Islamic banks get Rs65 million the same as conventional banks get but the nature of the transaction is debt not sale. Now when Islamic bank buys us for Rs65 million the ownership goes to the bank now the bank will tell us to sell this machine to your client on our behalf.
In Murabaha, the bank asks why we need money; I say I need money to buy spare parts for a complete machine. Bank says we buy it for you and after buying the same we will sell the spare parts to you and you pay the amount on easy installments.
In Ijara, the bank says we will arrange a machine or furniture etc. for you and you security deposit now and further pay rentals on it. The machine remains in the name of the bank but when we pay all rentals monthly then the bank makes a gift contract or the bank sells the item by adjusting the security deposit, which I paid at the beginning of the leasing contract. As in Ijara the bank is the owner of the asset so the bank increases the rental amount on a need basis. There is no risk for the bank if we stop paying the bank repossess the asset which it has bought for us and also adjust the security deposit with rentals.
It is not conventional borrowing based on interest. Sukuks are Sharia-compliant financial certificates in which investors acquire partial ownership of the issuer’s assets until the date of maturity of Sukuk. Bonds are financial certificates in which investors borrow money from the issuer, indicating an obligation to repay on the maturity date. I will tell you with an example. You have a big plant (machine) the cost of the plant is Rs500,000; you make its certificates for instance 5000 with face value 10. You give 10,000 shares to five people; now the ownership of the machine goes to these five people; legally they are the owner and you make a contract with them that I will take the same machine, which is not my property on rentals from you and pay you rent. The issuance period of the certificate is five years. During five years you pay rentals to the owners of the machine. When five years complete you buy the machine from those five people and stop paying rentals. This way those five people earn good rentals during the five years and finally at the completion time they also get money as you have paid them money by buying the same machine. The certificates are transferable during these five years. Suppose you sold machine to A, B, C, D, E, F and D need money he can sell the same certificate to Mr. X and now Mr. X will be getting a rental and at the end of 5 years he will get the amount by surrendering the certificate to you. One more advantage is during five years the rent may be increased as the owner of the machine is not me but the holder of certificates. So these holders may get higher rent during the five years. Here years may be 5, 3, or more or less. Asset may be a machine of any tangible item.
But liquid assets are not allowed for Sukkuk as in case of liquid assets the rental cannot be changed. And in liquid assets the rent is called equal installments and any increase or decrease becomes interest. Explaining the liquid asset is beyond as it need a separate 5 to 15 paragraphs to understand its mechanism. But Sukkuk is the best tool for meeting liquidity crises or when we need huge investments. SBP also use this tool as important mode of financing.
Insurance is a best example where the risk is huge and the amount of uncertainty is high. We appreciate the Islamic scholars who worked on this concept and finally we get Takaful where the uncertainty and huge risk both are addressed. In Islam, uncertainty is allowed if the contract is not commercial. Suppose I say this to my student. I will give you Rs5000 if you pass CA exams. Here it is not certain who will pass but it is not a commercial contract so here uncertainty is allowed. The second is a huge risk; now we discuss the mechanism of Takaful. I concisely mention here the operations of Takaful. The policyholder pays the premium, which goes into different funds) if mudarba fund where the amount is invested and profit is earned and shared by Takaful company and the policy holder; the second fund is WAQF where the amount is transferred to WAQF under Almighty Allah (swt) ownership, under WAQF the business is carried out and all funds and profit remain the property of Almighty.
Obviously when funds are credited to WAQF account the management of the WAQF will invest the funds they will purchase properties, shops and earn rentals and they will do all lawful businesses with the funds and make millions of money and in case of any loss to the person who gave funds to WAQF fund the fund will help them. In case the policy holder is injured or face any causality then from WAQF fund he is paid. Suppose a car was insured by Aslam and he has paid just 20,000 in WAQF and 20,000 in Mudarba account. The cost of Car is 20 lakh; now from WAQF fund the Takaful company will pay 20 lakh; now the question arises is it not interest when 20 lakh is paid against the actual payment in WAQF by Aslam is 20,000.
So we mention here that when we pay to WAQF the ownership goes to Allah and from Allah swt fund we can compensate his creature with any amount. Now the question arises after giving funds to WAQF can we use the same or access money? The answer is yes. Suppose you made a WAQF by investing funds and made a school free for all; your children can also study there as the WAQF is property of Allah. You make a well on the basis of WAQF and when you have thrust you can drink water from the well. I hope the youth will understand and appreciate your initiative to conduct interviews on Islamic topics which will enhance their understanding on Islamic mode of financing.