Headlines: Bleak law & order state keeps market sluggish


Islamic banking and socio-economic justice

Regarding the objective of promoting social justice, all practices of the IBIs- taking deposits and financing and investments, may lead to the contrary, even worse than in the conventional banks. Islamic banks' return on equity and earnings per share (EPS) have increased visibly over past some years but the profit rates for depositors, particularly the general (savings) depositors have decreased drastically. While the conventional banks have to pay presently a minimum historically lowest profit of about 4 % per annum on savings deposits at the time when the benchmark interest rate in Pakistan is at 5.75 percent, IBIs are paying as low as 2 percent in many cases, simply because the SBP has not obliged them to pay a minimum due to the features of murhabah contract.
We shall give only one example each for deposits and financing sides to explain ineffective implementation of the regulatory instructions. SBP did a good job by prohibiting hibah to individual depositors (Nov. 19, 2012) and phased out the individuals hibah by July, 2015. But the IBIs circumvented the regulation and offered higher weightage based products to their 'priority' deposits at the cost of common depositors. Some banks have been giving over 5 % annual profit to priority Savings Account holders by offering special PLS deposits against 2-2.5 % annual profit to common PLS savings depositors. On financing side, accounting / financial reporting by banks in case of ij?rah financing needs regulatory over watch. Only 3 Islamic Financial Accounting Standards (IFAS-I, 2, and 3) could be notified by the SECP over the last 12 / 13 years.  IFAS 2 requires ij?rah income to be recognized on accrual basis - as and when the rental becomes due (clause 10.4) meaning that full amount of due rent has to be included in the installments for payment of rent and the principal. But, IBIs normally charge in the initial stage a much higher part as rent and smaller part from the principal that results in loss to the lessee in case of pre-mature termination due to theft, major accident or non-payment due to any problem with the lessee. As per IFAS-2, IBIs may be advised to recover the principal commensurate with the depreciation charge.
As regards the objective of facilitating the real sector through supply of sufficient purchasing power, the IBIs continue to be ignoring it having even better avenues to get risk free returns by using grey area products.  Replacing genuine murh?bah, ij?rah, salam, istisn?', etc with Running Mush?rakah, secured or unsecured lending to conventional banks by tawarruq simply means that IBIs are interested in maximizing their risk free earnings only without care for social contribution or even Shari’ah compliance in letter and spirit.