Pakistan balks Islamic banking riddle

By Raja Asghar

ISLAMABAD (Reuters): More than seven years after judges ordered it to adopt Islamic banking, Pakistan has yet to solve the riddle of how to mix modern finance with a Moslem ban on charging interest.

Since the country's top Islamic court ordered Islamabad in 1991 to enforce interest-free finance, sending shudders through local bankers and foreign creditors, successive governments have bulked at implementing the ruling.

Fearing the loss of much-needed foreign credit, they appealed to the Supreme Court but did not press for a decision.

Now Prime Minister Nawaz Sharif, who wants to make the Islamic Sharia code Pakistan's "supreme law", has decided to withdraw the appeal and ask the Islamic judges to outline a workable system which could be enshrined in law.

The move has renewed bankers' fears.

In 1991, the Federal Shariat Court rejected 32 financial laws as insufficiently Islamic, including one that provided for "mark- up" -- an Islamic alternative to interest payments that has proved compatible with Western banking.

In an appeal in 1992, Sharif's first government said the court had wrongly interpreted Islam's holy scriptures, the Koran, and said the changes sought would wreak chaos and confusion.

Citing its internal and external fiscal obligations, the government pleaded that the present system should continue until a workable alternative was found.

Bankers were alarmed by the ruling against mark-up, which the court said was still too close to riba, or interest, which some Moslems equate with the sin of usury.

Haroon Muzaffar, portfolio manager at brokerage Shaz International, said interest underpinned the entire banking system.

"There is no replacement of interest in the banking sector. If you do away with interest, the whole banking system will collapse," he said.

Ammar Ali Qureshi, senior financial analyst at HSBC Securities in Islamabad, also warned of grave dangers.

"In my opinion interest-free system is not workable... there is no solution for the time being," he said.

Justice Minister Khalid Anwar told Reuters the government now wanted the Shariat Court to come up with a workable solution.

The court rules on matters related to Islamic Sharia code.

"We would expect... essentially from the Federal Shariat Court today to give us the outlines of a viable system and clarify how exactly the law should be framed," he said.

The government plans to petition the court to conduct a comprehensive review of Islam's injunctions on usury.

"It is sometimes overlooked that laws against usury exist in almost every civilized country in the world," Anwar said.

"We have got laws against usury in our own statute books going back 70 years or more."

Existing Pakistani law only outlaws usury in its conventional sense -- the charging of excessive interest -- but many orthodox Islamic scholars believe usury encompasses bank interest as well.

Anwar said the court would be asked to consider the economy, the banking system and relations between depositors and banks and between banks and borrowers within Islamic parameters.

The court should then lay down guidelines that would satisfy Islamic injunctions yet enable banks to perform efficiently and productively and meet the needs of a modern economy, he added.

Under mark-up, introduced when Pakistan pioneered Islamic banking in the mid-1980s, the bank buys whatever the lender requires. The lender then gradually buys the goods from the bank, paying mark-up charges for administration.

On the other side of the ledger, depositors effectively buy equity in a bank's investments and are paid a share of the profits twice a year. Clerics have not challenged this practice.

Anwar said foreign donors and governments should not be alarmed by the government's move, which coincides with a row over a constitutional amendment to make Sharia Pakistan's supreme law.

The amendment has been passed by the lower House of parliament but faces an uncertain fate in the upper House.

"They should accept the fact that this is a realistic and pragmatic approach and they should not have any sense of fear and insecurity," Anwar said.

Lawyers foresee a long debate before the Shariat Court, with bankers and economists also expected to make submissions.

Anwar said the government was studying interest-free banking systems offshore and cited Iran and Saudi Arabia as countries where banks still operated efficiently.

"This does not mean that banks in Iran give loans free. No, they have charges: service charges or whatever they choose to call them. Similarly Saudi Arabia is another Islamic country -- there, also, banking systems are functioning perfectly normally."