- Faysal Bank is all set for a historic transformation into Islamic banking
“(Prophet) Muhammad PBUH was right about debt.” Roger Scruton
“The envisaged target of 30 percent share in terms of both assets and deposits of this plan requires to capitalize on the potential of Islamic banking to cater to diversified needs of varying sectors while ensuring its stability through sound legal and regulatory footings.” State Bank Pakistan
A substantial portion of the population remained unbanked in Pakistan of the will to not engage in interest model financing. Many banks opened Islamic windows. A good example is that of Faysal Bank, as it is all set to announce its complete transformation to Islamic instruments as the largest conversion of a conventional bank in history by early 2023. FBL’s conversion comes as an outstanding piece of news, reaffirming the faith in the growing Islamic banking industry in Pakistan. Most of the Pakistani banks maintain Islamic windows already and with FBL’s transformation the State Bank will now have a ready footprint for other banks to follow on a large scale.
The reasons for the growing trust in Islamic instruments are many, and one of the strong features of Islamic banking is the handling of debt. Debt is a product that can be offered to create a functional structure for an idea. Debt can also be a condition due to low solvency. The debt burden, however, is neither desirable nor functional. Especially, in a conventional financial setup where a time-bound interest rate makes it unmanageable. Pakistan’s recent economic chaos, as we can see, is very much connected to servicing of interest-based debt.
Banking is essentially loans and investments and thereby maintaining a debt relationship between lenders and borrowers is part and parcel. Islamic tools moderate it well enough by conforming to the Riba-free model of equity participation systems, which is like profit sharing. Equity participation means, if a bank loans money to a business, the business will pay back the loan without interest, but instead gives the bank a share in its profits. Contrastingly, servicing debt in a conventional setup is strongly rooted in financial gain for the lender, irrespective of the apathy or issues facing the borrower. ‘Time Value’ recognizes no relationship when it comes to rising interest. This may lead to a fault or prolonged re-payment schedules at the cost of a nation or institution’s prosperity.
Historically and philosophically, the Islamic concept is rooted in the trading principle of investment for profit and loss.
Investments were made in trading caravans on profit-loss sharing. This was an economy without interest. Built on healthy moral grounds, this was the economy of righteous conduct, driven by values and supported by character. And this was the economy that led Islam from the state of Medina to the Islamic empire that ruled the world till as late as the early 20th century. Waqf foundations provided for societal and individual needs in many areas including religion, education, finance, health, and infrastructure in the Ottoman setup.
Pakistan’s founder, Quaid-e-Azam Muhammad Ali Jinnah, while inaugurating the State Bank of Pakistan in 1947, said: “The Western world, despite its advantages of mechanization and industrial efficiency, is today in a worse mess than ever before in history. The adoption of Western economic theory and practice will not help us in achieving our goal of creating happy and contended people. We must work our destiny in our way and present to the world an economic system based on the true Islamic concept of equality of manhood and social justice. We will thereby be fulfilling our mission as Muslims and giving to humanity the message of peace which alone can save it and secure the welfare, happiness, and prosperity of mankind.”
In the wake of the 2008 recession, when economies in the West, took massive hits, the Islamic banks, and financial institutions, with their limited footprints, mainly in Muslim countries, resisted the negative impact. This went greatly in favor of the upcoming Islamic stream of banking. It came out as a system that could not only withstand economic recession but if applied on a macro scale could prevent it too.
An interesting IMF study in 2010 compared the performance of Islamic banks and conventional banks during the financial crisis and found that Islamic banks, on average, showed stronger resilience during the global financial crisis.
Islamic banks contributed to financial and economic stability during the crisis, given that their credit and asset growth was at least twice as high as that of conventional banks.
The credit for this growth is to their higher solvency and to the fact that many Islamic banks lent a larger part of their portfolio to the consumer sector, which was less affected by the crisis than other sectors.
While the impact of the recession upset the conventional banking industry and its customers, the Islamic banking and financial sector strengthened and expanded its base. This helped in the acknowledgment of the value-driven economy being superior to an interest-driven economy.
Pakistan has an emerging market for Islamic Finance. Faysal Bank Ltd. is now the second-largest Islamic bank in the country. A few years ago recognizing the ethical and long-term financial advantages of being ‘Value Driven’, the Bank decided to transform into a full-fledged Islamic Bank. Its journey from conventional to Islamic Bank is unique for being the largest conversion in the world. The Bank has practically shown to the world that a conversion of this scale is possible and presented itself as a successful case study for others to emulate. We hope to see other financial institutions will take learnings from them and follow in their footprint.
Global financial institutions such International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) have recognized core principles of Shariah compliance in their operations in Muslim and non-Muslim member countries.
By 2021-end, the footprint of Islamic Banking has surged to nearly 80 countries with its market size nearing $2.2 trillion across the world and is predicted to reach $3 trillion. There are more than 520 banks and 1,700 mutual funds around the world that comply with Islamic principles.
The Author is a journalist with a keen interest in Finance and Fintech.