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Implementation of Shariat Bench ruling to be useful for market

RECORDER REPORT

KARACHI: The judgment of Supreme Courts Sharia Bench, ruling interest as un-Islamic, when implemented, would restrict government to borrow funds only for productive projects from both external and internal sources. This would help in reducing borrowing for non-development expenditures.

The Sharia Bench has set June 2001 as deadline for the implementation of its decision by the entire financial system should be brought into conformity with its judgment. Which by that time all laws that are deemed to be repugnant to Sharia will be repealed in a phased manner including federal and provincial money lenders ordinances and interest laws Banking Companies Ordinance, The Negotiable Instrument Act etc.

According to a paper prepared by the ABN AMRO Securities, the Islamic laws, if implemented can be very useful for the market. And if not, the things would not go worse.

The paper has highlighted that the Islamic laws of contract allow the parties to honour their words. This would mean that the government would keep honouring existing external debts. As far as negotiation of foreign debts is concerned, the government would pursue the relevant authorities to exempt the existing obligations as any dishonour would carry serious implications for the country.

In the case of new loans, if government goes by the Islamic laws, all future borrowings would be project-specific, where the lender and the government would evaluate the project feasibility and then decide about the capital structure and profit sharing.

Brokerage house believe that this can prove to be very beneficial for the country as, on the one hand all foreign fundings would be used for productive projects, while on of other hand, foreign lenders would make best efforts to ensure project profitability rather than pursuing other interests in the country.

The Supreme Court has directed the government to adopt strict austerity measures to curtail its running expenditures and has suggested that all future government borrowings should be project specific.

The implementation of Supreme Court order would also be very useful for the country as "project-specific" clause would inject self-discipline in the government borrowings. The government would offer returns only to the extent it can reasonably earn from the new development projects.

This measure could lead to the development of provincial papers that would be based on profit and loss sharing where the public of one region would be using their money for the uplift of that region and would be responsible for their combine efforts.

Contrary to the general perception, brokerage houses are of the opinion that Islamic banking laws are more tilted towards an efficient banking system. Banks at present try to act as intermediary between the depositor and borrower and, beside their intermediation cost, ensure higher returns for the depositors and lower costs for the borrowers.

Now under the Islamic system, the banks would keep working on mediatory commission basis where they would just perform the treasury function. The court's orders in respect of specific deposit and lending pools are exactly in line with maturity matching process. However, to perform better in the Islamic system, the banks would have to focus more on value-added services rather than their commodity operations of mobilising and allocating money.

According to Taurus Securities, the SC has recommended a number of reforms that are perfectly consistent with the financial sector reform conditions laid down by the international financial institutions and bear the hallmark of any efficient and progressive financial institution. They include fiscal discipline, transparency, effective supervision, improved financial reporting, mandatory credit rating, and promotion of equity market.

The government has been asked to convert all its domestic borrowings from the SBP, commercial banks and the public through its fixed income securities and saving schemes into profit and loss sharing schemes, through the issuance of 'musharika' certificates and establishing mutual funds.

Thus, all finance raised by the government to meet both current and development expenditures, would have to be backed by real productive assets that would generate a return from which finance providers would be paid a return. This implicitly precludes the government from borrowing for consumption purposes. It would also require the government to list those assets on the stock exchanges in order to make its mutual fund units tradable.