He is applauded for his expertise in Islamic banking & finance world over.
His tenure as a Managing Director at Deutsche Bank (where he served as Chief Executive Officer (CEO) of its Islamic finance subsidiary) earned him name and fame in the field of faith-based structuring of financial products. He has worked as adviser in global financial institutions like Allianz, Societe Generale, MSCI Barra, Nasdaq and local banks like Hong Leong Bank in Malaysia.
We are thankful to Professor Dar for giving us some of his precious time during a recent visit to Lahore. Instead of going into the elementary details of Islamic banking & finance, we discussed with him some important aspects of Islamic banking & finance, which could bring financial and social reforms to the world in general and Pakistan in particular.
Jahangir’s World Times: How could Islamic banking & finance have helped in avoiding the global financial crises?
Humayon Dar: Many people think that Islamic banking & finance is a cure to all the financial woes. In fact that is not the case. Islamic banking & finance is as man-made as the conventional banking. The only difference is that Islamic banking & finance seeks basic guidance from Islamic sources like the Holy Quran, Sunnah, Ijma and Qiyas. Only because of this, Islamic banking & finance is free from some of the weaknesses and problems besetting conventional banking. There is a very strong theoretical evidence that the principles of Islamic banking & finance are superior to the principles of conventional banking. This is why I would be inclined to assert that had Islamic banking and financial principles been implemented in the financial markets the problems we are facing today in financial industry would have been avoided to a great extent.
JWT: What problems?
HD: Conventional banking is based on interest-rate mechanism, which encourages people and businesses to borrow and lend heavily. Of course, there is a motive behind borrowing in the cooperate sector. For instance if I am in a corporate business, I would borrow from a bank only if I can anticipate some business opportunities coming up. But many a times borrowing or landing takes place without any reference to economic activity. It could be purely speculative. For example, many of those who are involved in interest rate arbitrage and currency arbitrage may borrow money purely to benefit from interest or exchange rates differentials in different markets. This kind of opportunities allows the players in financial services markets to borrow without practically having any intention to invest in the real economy. If this type of speculation persists for some time, it may lead to a financial bubble. Such frequent and heavy borrowing and lending do not go into real economy; rather it simply puts further pressure on prices. When the bubble gets enlarged, it is bound to burst and bring a financial crisis. In the Islamic banking & finance, the possibility of this to happen is smaller. Islamic banking & finance restricts trading in debt and other financial papers. Furthermore, there is an Islamic economic principle that disallows selling something that someone does not own or rightfully possess. In the presence of such a restriction, financial bubbles cannot occur. This is why I say that if the Islamic principles had been followed in conventional financial system we could have avoided the current financial crisis.
JWT: Please explain interest free banking vis-a-vis interest-based banking.
HD: Interest plays a big role in the contemporary economic systems, and in the absence of an interest rate mechanism, the whole banking system changes. Islamic banks are required to be involved in trading, i.e., buying and selling of assets, of commodities, of other items, whereas conventional banks simply borrow and lend money. For example, a commercial bank would not like to be involved in trading in its normal routine business. Let us say I am a corporate I go to a commercial bank to borrow one million rupees. If the bank is satisfied with my credit worthiness, it would offer me the loan for a specific period and on a specific rate of interest. However, if I had gone to an Islamic bank, it would have first asked me why I need one million rupees. Had I told that I wanted to buy a few computers with one million rupees, the Islamic bank would decline to give me money but would instead buy the computers from the market amounting one million rupees to sell those to me for one million rupees plus profit. From that view point the whole transaction is very different. The bank is getting involved in trading’ buying and selling the assets. Islamic bonds, called Sukuk, are structured in the same way.
JWT: How is an Islamic bond issued to generate investment?
HD: An Islamic bond in many cases is an asset-backed security. If a corporate or government wants to issue an Islamic bond it must first identify an asset that it is willing to sell to the investors. In case of Pakistan,
Conventional banking is based on interest-rate mechanism, which encourages people and businesses to borrow and lend heavily. Of course, there is a motive behind borrowing in the cooperate sector.
JWT: Is intention important as well?
HD: Intentions are certainly important. If you go to an Islamic bank for transaction, then you certainly would be rewarded for conducting a religious act, because you opted for a Riba-free banking transaction. The point is that it is the process of carrying out the transaction that makes all the difference. One thing that we have to understand is that all the religions put heavy emphasis on nomenclature. A person enters into Islam by uttering a few words. Even in matters related to matrimony, it is utterance of a few words (ijab and qubool) that establish marriages. Nomenclature, i.e., the way you say a thing makes the real difference.
JWT: How do you relate nomenclature to Islamic banking & finance?
HD: First thing is that Islamic banking is Islamic because such banks call themselves Islamic. Why all the other banks would not like to call all their operations Islamic? Because the banks themselves know that whatever they do in the name of Islamic banking is different from conventional banking. Otherwise, if it were exactly the same thing then they would have said that from now onward all our operations are Islamic. Many banks shy away from becoming Islamic banks.
JWT: Why do they shy away?
HD: Because implementing Islamic banking requires much more effort, dedication and resources, especially in a country where laws are not entirely Islamic as is the case in Pakistan.
Interest plays a big role in the contemporary economic systems, and in the absence of an interest rate mechanism, the whole banking system changes.
HD: I am not surprised by it, as all the former British colonies have inherited their laws from their imperialistic power. This is the case everywhere in the world. An Islamic banking & finance is actually a phenomenon allowing different Muslim countries to Islamise their laws gradually starting from banking and finance then moving on to other areas. Islamic banking & finance is an excellent opportunity for the governments to Islamise their laws. In that case I say that Islamic banking & finance is bringing a social reform as well.
JWT: Social reforms? How?
HD: Islamic banking & finance is modernising Islamic communities. When we look at an average user of Islamic banking and financial services, we find them a young person, in their late twenties, educated and who has also lived for sometime somewhere in Europe or America. This person is exposed to multiculturalism. They believe in coexistence of cultures. This is a modern perspective on life held by those who use Islamic banking. This is a social reform. This social phenomenon is allowing the Muslims to recognise that there are other practices which are not necessarily Islamic but could be allowed to be part of a system they live in. In a country like Pakistan there is recognition at least at the government level of a dual banking system. In other words, the government is saying that ‘To those who like to have Islamic banking services we offer them an opportunity to do so. Those who still like to have conventional banking must also have a choice.’ This permission is the recognition of the fact that every person has the right to exist.
Today the government of Pakistan is promoting Islamic banking in a dual banking system. What does it mean? It means that it is ready to recognise the importance of those who would like to use Islamic banking. This is also an acknowledgement of their contribution to a modern Islamic society.
If tomorrow the President of Pakistan says that every year we are going to pick one Islamic bank to be given an award of excellence, there would suddenly be more Islamic banks and other banks too would start offering more and more Islamic financial services. With an increase in Islamic banking and financial services the demand for Islamic banking and financial services would rise as well. This means that those who have been so far averse to a conventional banking system could be engaged. They would start getting engaged in the market. Once someone starts getting engaged in the market their perspective changes. If someone is not disengaged from what is happening in the market he or she become a very different kind of person. A person who believes in doing and letting other people do. He is a person who believes in doing things, a person who believes in observing other people doing things. From that viewpoint I still emphasise that Islamic banking & finance has a role to play in bringing social reforms in a number of countries, including Pakistan.
JWT: Are you satisfied with the Islamic banking in Pakistan?
HD: As an advocate of Islamic banking & finance I am extremely happy with what Islamic banking has achieved all over the world, including Pakistan. Why I am happy in case of Pakistan? Because in 2002 when Islamic banking was recognised by the previous regime, the share of Islamic banking & finance was less than one per cent, today in 2011 the share of Islamic banking is over six per cent. And there are projections that in next five years this is going to double. From that view point I am very happy that there is a positive trend and a number of other banks, which previously were not offering Islamic banking have started offering Islamic banking and financial services. Once Islamic banking & finance achieves the figure of 20 per cent of the total banking and financial services, ‘which means one/fifth of banking and finance’ then the government will start taking it seriously.
JWT: Do you think by applying Islamic financial tools Pakistan can resolve its financial issues?
HD: That is like expecting too much from Islamic banking & finance. Islamic banking & finance is too small at this stage. However, Islamic banking & finance can be used by the government to attract investment from other Islamic countries. Malaysia, for example, has used Islamic banking & finance as a tool to generate investment, as a result of which they are receiving a lot of capital from the Middle East. They are receiving a lot of investment from non-Muslim countries as well. Malaysia has developed expertise in Islamic banking & finance, and there is a need for a country like Pakistan to study the Malaysian model to get implications for further development of Islamic banking in the country.
JWT: Please tell us more about Islamic banking in Malaysia.
HD: Malaysia is the number one player in Islamic banking & finance. Malaysian Islamic financial market has a number of Islamic banks, Takaful (Islamic insurance) companies, Islamic investment banks and fund management companies, and a very vibrant and highly developed Islamic capital market. The country has almost all the universities and other institutions of higher learning producing human resources for Islamic banking & finance industry. Many countries, for example in Africa, are looking into Islamic banking as well. For them Malaysia provides a good example to follow and emulate. Pakistan has also done wonders in developing comprehensive framework for Islamic banking & finance. It is important that Pakistan, like Malaysia, must start marketing its experience and expertise in Islamic banking & finance in Muslim and non-Muslim countries. This should bring some good revenue to the country.
JWT: What is keeping the government away from doing that?
HD: There is a lack of vision and of course a lack of political will. Government of Pakistan in a way has given the whole Islamic banking & finance to State Bank of Pakistan. The people in the Ministry of Finance, Planning Commission, etc. have no idea of Islamic banking & finance, which means that there is no ownership of Islamic finance and banking at the government level. Once the government decides to use Islamic banking & finance as a tool for bringing more foreign investment and capital, I think they can bring home a lot of Islamic capital. Having said that, there is already a lot of investment coming to Pakistan from the Islamic financial institutions. If the government comes up with a vision of 2020 for Islamic banking & finance and starts pitching Islamic Republic of Pakistan as a friendly state for Islamic banking & finance, a number of institutions, governments and countries would like to come here.
JWT: What is the attitude of West toward Islamic banking & finance?
HD: We have Islamic financial institutions in Canada, France, America and UK. In UK alone, we have got five Islamic banks. The UK government is very supportive of this movement because it believes that this is a tool to bring Muslims into the mainstream. Right now, if you take Islamic banking & finance out of the Muslim communities, a very narrow perception of a Muslim as an extremist or a terrorist is left behind. Islamic banking is giving a new identity to the Western Muslims. All the major banks are doing Islamic banking, which gives a lot of credibility to Islam. So, I would say that Islamic banking & finance has a role in bringing about change in the perception of our Western counterparts about us.
In UK, the government has come up with a very comprehensive package for issuing Islamic bonds. Why? because they think that there is a bright future and a lot of potential for growth in Islamic finance. In next five years the size of Islamic banking & finance industry would be one to two trillion dollars. Looking at this phenomenal size the western governments and countries would like to benefit from this by engaging themselves in Islamic banking & finance.