An article about the new, as of yet undefined, strategic plan for Islamic banking in Pakistan interested me with a few statistics about Islamic banking in the country: "Islamic banks held 644 billion rupees ($6.8 billion) or 7.7 per cent of total banking assets in March this year, central bank data shows. [...] Financing by Islamic banks is currently dominated by the mainstream corporate sector at 73.9 per cent of total financing, with agricultural financing representing just 0.1 per cent and SMEs 5.1 per cent, central bank data shows."
The article then went on to describe: "A campaign will also be launched to increase awareness of Islamic banking and boost growth momentum in Pakistan." This is an important thing for Islamic finance to do; it must appeal to not only the segment of the Muslim population that will not interact with any interest-based financial institution.
I am not intending to suggest that the plan in Pakistan is to 'increase awareness' among only those Muslims who avoid interest (they are going to search out alternatives on their own), but often efforts to increase awareness of Islamic finance focus on the religious aspects of riba and gharar, which are undoubtedly important, but the pitch seems to be one of 'Islam prohibits interest and Islamic financial institutions offer a way to be in compliance with this prohibition' rather than a positive message that Islamic finance can offer benefits on its own, that it can compete head-to-head with conventional finance.
As I am sure the readers of this blog understand, there is a specific reason why Islamic finance has trouble making the positive argument. The trajectory of Islamic finance has been one focused on recreating interest-based products that can be certified as being Shari'ah-compliant, by changing from a loan to a lease or a sale with a markup. I read back to a blog post I wrote on the struggle between pragmatism and idealism in how Islamic finance operates (which comes down on the side of pragmatism) and I agree with the arguments I made in the post.
However, it is not a satisfying answer for me to see Islamic finance replace interest-based financing with murabaha or tawarruq and say it can save the world. There are difficult issues to be sure in adapting Islamic financial products to the regulatory environments that were built around interest-based financing, and this provides a real reason for why Islamic finance operates the way it does. But from my own non-Muslim perspective, it is unsatisfying that Islamic finance must be constrained to trying to reach out across the diverse population of Muslims in the world with such an undifferentiated product. Not to mention trying to reach non-Muslims who in many cases would be open to an alternative to the conventional mega-banks that have a large share of the financial services industry.
The push for Islamic finance on its current path will proceed regardless of whether it is intellectually and personally satisfying for me in its current form, but it will always be relegated to 'niche market' status unless it can find a more compelling story to tell than just an appeal to consumers' piety, which is where most Islamic finance resides. There are, of course, very pragmatic reasons for it to be sold as such, but this makes it much harder to get excited about than if the practice of Islamic finance were more unique and could elicit the same emotional enthusiasm as I have seen talking to people over the years (6 years at this point) about idea of an 'Islamic' financial system detached from the actual way it works in practice.
For the most part, these discussions (mostly but not exclusively) with Muslims have relied much less on appeals to piety (although many of the people I have spoken with are motivated themselves by their faith) than conventional Islamic finance. They are more often start with an appeal to a problem that the current financial system has created (for example, excessive indebtedness leading to debtors losing power over their own future because of an unexpected event). The discussions search for a way to change the power dynamic between debtors and creditors by relaxing the assumption that the creditor should be the last to take losses due to the unexpected event.
These types of discussions don't have the simple conclusions of Islamic banking as it operates now. Where Islamic banks have reached a consensus that instead of interest-based financing, let's have the bank buy an asset and resell it to the customer with deferred repayment, the discussions I described above want a more sweeping change from Islamic finance than just replacing a loan with a murabaha. However, more sweeping change is difficult and will be more slow to grow than the way Islamic finance works today, which is why the latter became the way Islamic finance operates.
As I mentioned in the post linked earlier about the pragmatism versus idealism debate, I often tend to side on the pragmatic solution because if the industry is to grow in the near-term, it will have to develop in a way that is uncomfortable for the idealists about how Islamic finance should work. At this point, you are probably wondering what this has to do with the statistics about Islamic banking in Pakistan that I began the post with.
If Islamic finance is likely to continue its current trajectory of product development that it has in the last 35 years, it needs to have a source of differentiation to create excitement and to serve an underserved area of the economy. A paper (pdf) by the CEO of the Small and Medium-sized Enterprise Development Authority (SMEDA) in Pakistan described: "The Economic Census of Pakistan-2005 lists 3.2 million business enterprises nation-wide and SMEs constitute over 99 percent of all. Their share in industrial employment according to an estimate is 78 percent and in value addition approximately 35 percent." Additionally 45% of Pakistani workers are employed in agriculture generating 20.9% of GDP.
These are clearly areas where Islamic finance should focus just because of the size of the population involved in agriculture or SMEs and their contribution to the economy. Yet, Pakistan's Islamic banks focus on the corporate sector with "agricultural financing representing just 0.1 per cent and SMEs 5.1 per cent". That is not an indictment of Islamic banking in Pakistan. I would not be surprised to see the same disparity between contribution to GDP from agriculture and SME and the amount of financing from Islamic banks in many other majority Muslim countries.
However, it is a place that Islamic banks can focus their efforts to provide financing in proportion to the share of the labor force and the GDP that is generated in agriculture and SMEs. If the products that are used are not quite as easy to generate excitement about Islamic finance, then at least its impact on the real economy should be. Doing that will require far fewer 'awareness' campaigns than the current course.