The operations of the Islamic banking industry is increasing at a rapid pace and has gained a considerable share of the financial market all over the world. Now, as Islamic banking has captured a significant share in the local and global financial markets, there is a need to think ahead and do more towards achieving the real objectives of Islamic banking i.e. to strive for product development while keeping in view to achieve the goal of implementation of Islamic economic system.
As the banking industry is the cornerstone of the present economic structure, there was a need to present the Islamic alternative to conventional interest-based banking practices and pave the way for the Islamic economic system. Hence, the concept of Islamic banking has emerged with the objective to eradicate the interest-based socio-economic system with the replacement of a socio-economic system based upon the principles of Islam.
Now, the question arises that if the Islamic banking system has gained momentum, it means that the industry is achieving its objectives then what objectives about which the Islamic banking industry must consider. The answer is that even though there is no doubt that the Islamic banking system has gained popularity and its products and services are becoming viable and successful throughout the world but it is also the fact that the end results of these practices are the same as conventional economic and banking system and these practices are not fulfilling the real objectives of the Islamic banking industry. There is no doubt that the prevalent Islamic financial products and services are Shariah compliant but unfortunately, these are unable to change the socio-economic conventional capitalist behavior of the society and unable to produce the positive change in the economy as Islam desires. Now, the Islamic financial industry requires Shariah-driven products based upon partnership rather than prevalent Shariah-compliant products.
The prevalent Islamic financial products and services, i.e. Murabaha, Ijarah etc. have been designed keeping in view to get the financial results the conventional products and services produce. This behavior was justified at the time of beginning and infancy stages of the Islamic banking industry where the immediate alternatives of conventional banking were necessary to cater to the banking and financial needs of society by offering Islamic modes which might protect people from the sin of interest. Those modes were transitory modes and not the real modes for Islamic economics and banking but now that the Islamic banking and finance industry has been established upon its own footing, the practice of those transitory modes is still going on and there is a lack of consideration towards the Shariah driven modes.
Now, there is a time to move forward with respect to product development keeping in view to move towards the goal of implementation of the Islamic economic system. For this purpose, the Shariah-driven modes of partnership i.e. Mudaraba and Musharaka must be considered. The partnership-based products and services are the real modes that can bring revolution in the economy and the interest-based economic system can be put back by the Islamic economic system. We observe that the Islamic banking industry is still following interest-based benchmarks like KIBOR, LIBOR etc. which are signs that the Islamic banking industry is still forced to follow the interest-based benchmarks. With the implementation of partnership modes, the issue of the following interest-based benchmarks can be eliminated and the Islamic banking industry can be freed from the compulsion of interest-based benchmarks. In this way, the Islamic banking industry would be freed to give impact on the economy in a different way.
This is the fact that there are a lot of hurdles and issues in the products and services based upon partnership modes but this is also the fact that without these modes, we cannot achieve the real goals of the Islamic banking and finance industry. The central bank and Islamic banks must consider jointly this direction and derive viable and possible solutions keeping in view the social and economic circumstances of the society. In this regard, there is a need to make prudent regulations and effective laws with respect to partnership modes as the banks and financial institutions can develop products and services and can do smooth and risk-free functions.
When the Islamic banks would develop partnership-based products which would be free from interest-based benchmarks and depend upon real market activities, this product development can pave the way for the replacement of the conventional interest-based economic system with the Islamic economic system. The partnership and equity-based products and services would give alternatives to the central bank and government against interest-based modes and instruments and consequently, the whole economic structure can be changed.
But for the product development of partnership modes, serious and continuous efforts from all the stakeholders are required and besides these efforts, the ambition and enthusiasm for the implementation of the Islamic economic system must exist which would be the fuel for effective efforts in this direction.
The author is a Team Leader-Training & Development Unit, Shariah Compliance Department, National Bank of Pakistan