– File Photo

ISLAMABAD: Services export recorded an impressive growth of 50.64 per cent during the first seven months of this fiscal year.

In absolute terms, the export of services rose to $4.530 billion in July-January period of 2012-13 compared with $3bn in the corresponding period last year, suggested data compiled by Pakistan Bureau of Statistics.

The growth export was mainly driven by travel, construction, insurance, computer and information services, government and businesses services.

On a monthly basis, the export of services witnessed a marginal growth of 8.23pc in January 2013 over the corresponding month of last year.

Export proceeds from services sector stood at $4.949bn in 2011-12 as against $5.767 billion over the preceding year.

The services sector contributes over 53 per cent to GDP. Major sub-sectors are finance and insurance, transport and storage, wholesale and retail trade, public administration and defence.

Pakistan has opened up its market to foreign services providers particularly in banking, insurance, telecommunication, retail and some other sectors.

The import of services however dropped 4.61 per cent to $4.455bn in July-January period this fiscal year as against $4.67bn in the same period last year.

Even on a monthly basis, the import of services dipped by 14.12 per cent in January 2013 over the corresponding month last year.

The services import, which decreased includes transportation, travel, communication, insurance services, financial services, royalties and license, computer and information services and other business services during the months under review over the last year.

In 2011-12, the import of services was up by 3.30pc to $7.962bn as against $7.707bn over the previous year.

As a result of increase in exports and decline in imports, the trade deficit in services also narrowed down by 104.5pc to $74.86m in July-Jan period this fiscal year from $1.663bn in the corresponding period of last year.

– Telenor Logo

KARACHI: The Deputy Governor, State Bank of Pakistan (SBP), Kazi Abdul Muktadir, has disclosed that Mobile Phone and Smart Card banking accounts have surged to nearly 1.45 million in the country, which indicates that Pakistan’s financial sector is now going through a dynamic transition led by the latest technology solutions.

Speaking at the launching ceremony of a new product, ‘Easy Paisa Khushaal’ of Tameer Microfinance Bank (TMFB) and Telenor at a local hotel on Tuesday, he said: ‘The existing active players – the Tameer Microfinance Bank (Easypaisa) and UBL (Omni), have so far registered more than 1,447,381 mobile wallet accounts (mWallet accounts) of un-banked and under-banked population of the country.

mWallet accounts are opened under Branchless Banking (BB) and include both Mobile Phone and Smart Card accounts.

He said that nearly 30 million BB accounts worth Rs. 115 billion were processed during a single quarter (April-June, 2012) by only two players (TMFB and UBL Omni). Abdul Muktadir said that such type of innovations in product designing will not only attract small savings to generate internal funding for Microfinance Banks (MFBs) but also provide savers a feeling of safety and security of insurance embodied with the product.

‘Now the time is only of demand-driven innovative products, through which MFBs can easily handle the challenges like scarcity of funding and financial exclusion’, he added.

‘With the entry of new players and scaling-up of the existing institutions, the present growth momentum of BB accounts will rise further. Our Tele density also highlights the inherent potential for mobile banking in Pakistan’, he said and added that achievements in the BB services have put Pakistan at the global center stage of Financial Inclusion and innovation.

He said that the World Bank’s Consultative Group to Assist the Poor (CGAP), in its recent study has also recognized Pakistan as one of the fastest growing branchless banking market in the World.

He said that the Government and the SBP have been supporting the microfinance sector to reach out to the millions of un-served low-income people of the country.  This growth is facilitated by several factors, including an enabling policy framework, institutional reforms, technology initiatives, regulatory flexibility, tax incentives and technical support through different programs and projects, SBP Deputy Governor said.

State Bank of Pakistan has also issued a Strategic Framework for Sustainable Microfinance in Pakistan which mainly focuses promoting use of alternative delivery channels to enhance financial services to people without access to finance which is recognized as one of the fundamental constraints in achieving sustainable economic growth in many developing countries, he added.

Abdul Muktadir said that SBP has always been very encouraging in promoting innovations in products and delivery channels in order to promote financial inclusion and added that it (SBP) has also launched a ‘Financial Innovation Challenge Fund’ under its DFID-funded Financial Inclusion Program (FIP) to support innovation in products, and delivery channels in microfinance which will give further impetus to Branchless Banking.

He congratulated the Tameer Microfinance Bank and its key partner Telenor for designing another innovative product and said that it will go a long way in promoting deposit mobilization and motivating other micro finance sector players to move in this direction.

‘The State Bank looks forward to the success and positive outcomes of Easypaisa Khushaal and expects more innovative products from TMFB for promoting deposit mobilization and financial inclusion agenda’, SBP Deputy Governor added.

Traders work at the electronic trading bourse at the Khartoum Stock Exchange August 29, 2012. With Islamic bonds guaranteed by the central bank, almost 2 million sukuks were traded in the first five months, compared with 1.2 million in the same period a year ago – and around 20 percent of shahamas are held by foreign investors, according to bourse estimates. – Reuters photo

DUBAI: The global supply of sukuk is less than half investor demand and the gap may widen further unless the Islamic finance industry can quickly develop more institutions capable of organising new issues, according to consultancy Ernst & Young.

Current outstanding demand for Islamic bonds totals an estimated $300 billion, and this is expected to grow to $900 billion by 2017, Ashar Nazim, Islamic financial services leader at Ernst & Young, told Reuters this week.

Meanwhile, fresh issuance of sukuk this year is projected to surpass a record $100 billion, according to the corporate and markets division of Commerzbank – satisfying less than half of outstanding demand.

“Supply is less than half today – as a result Islamic banks are forced to rely on other synthetic solutions,” such as commodity murabaha and tawarruq investment structures, said Nazim.

Such structures tend to be shorter-term than sukuk and are often not as convenient for investors seeking liquid financial instruments.

Nazim said regulatory requirements or business reasons were causing investors to hold about 30 per cent of their Islamic assets, estimated at around $1.3 trillion globally, in the form of liquid instruments.

Sukuk, which pay returns on money invested instead of coupons to obey Islam’s ban on interest, are the main liquid instrument in Islamic finance.

Heavy demand for sukuk has over the past year largely eliminated the “sukuk premium”, the additional cost which borrowers paid to issue an Islamic bond instead of a conventional bond because of the smaller investor base for sukuk and the relative unfamiliarity of sukuk structures.

Many high-grade credits, such as Qatar in its record $4 billion Islamic bond issue in July, now pay less to sell sukuk than they would for conventional bonds.

APPETITE

The growing appetite for sukuk is coming largely from Islamic banks as well as conventional banks, high net worth individuals and Islamic endowments called awqaf.  The awqaf are increasing their allocations to sukuk as they reform their operations and become more organised in their investment decisions, Nazim said.

According to an Ernst & Young estimate, awqaf around the world had about $105 billion of assets in 2010, including roughly $40 billion parked in cash.

The Gulf’s sovereign wealth funds generally remain on the sidelines in sukuk investment, he added. “They are rather neutral to conventional or Islamic paper.”

But overall, suppliers of sukuk are are struggling to keep pace with demand and “there is a risk that the absolute gap could be exacerbated”, said Nazim. Factors limiting supply include a lack of intermediary institutions that have the necessary connections in the market, structuring expertise and balance-sheet strength.

Nazim said Ernst & Young had identified 14 Islamic banks with the financial muscle to operate in the international sukuk market – a tiny number compared to banks in the conventional bond market.

“Clearly there is a leadership vacuum that is up for grabs,” Nazim said, adding that as big conventional banks restructured and focused on their core markets because of the global financial crisis, Islamic institutions had a chance to develop their abilities.

But structural issues in the sukuk market also remain unaddressed, Nazim said; for example, the industry lacks a common global trading platform for sukuk and banks operate their own proprietary trading networks.

“Those inefficiencies are huge.”

According to the Review, the volume of overall e-banking transactions in the country during the fourth quarter surged by 5.6 per cent to reach at 74.6 million when compared with 70.6 million in the preceding quarter. – File photo

ISLAMABAD: About ninety-three per cent banks’ branches are now offering real-time online banking services in the country, according to State Bank of Pakistan’s Payment Systems Quarterly Review for the Fourth Quarter of FY12 released today.

The status of 192 more bank branches was upgraded to Real-Time Online Branches (RTOB) during the fourth quarter of last fiscal year (FY12) that ended on June 30, 2012, the Review said and added that currently, 9,291 bank’s branches or 92.8 per cent are offering RTOB services out of a total of 10,017 bank branches across country.

The payment systems infrastructure in Pakistan showed continuous upward growth trend as a total of 197 Automated Teller Machines (ATMs) were added during the 4th quarter raising the tally of ATMs in the country to 5,745, the Review added.

The value & volume of ATM transactions surged by 5.9 per cent and 7.4 per cent to reach Rs 438 billion and over 45 million respectively during the fourth quarter of last fiscal year, it said and added that the share of ATMs in overall e-banking transactions also increased to 60.6 per cent.

The average value per ATM transaction stood at Rs 9,693, it said, adding that the volume and value of transactions through Point of Sale (PoS) terminals stood at 4.7 million and Rs. 21.49 billion depicting 4.5 per cent and 2.1 per cent growth respectively as compared to the figures reported in the preceding quarter.

The number of plastic cards also witnessed an increase of 8.03 per cent compared to the numbers recorded in the preceding quarter, the Review said and added that by the end of 4th quarter, 17.95 million plastic cards were circulating in the country.

According to the Review, the volume of overall e-banking transactions in the country during the fourth quarter surged by 5.6 per cent to reach at 74.6 million when compared with 70.6 million in the preceding quarter.

However, the value of overall e-banking transactions declined by 4.4 per cent to Rs 6.6 trillion when compared with Rs 6.9 trillion in the preceding quarter due to a 5.4% decrease in the value of Real Time Online Branches (RTOB) transactions.

The volume of large-value payments through Real Time Gross Settlement (RTGS) transactions aggregated to over one lakh and in terms of the amount worked out to Rs.28.97 trillion.

This showed an increase of 4.8 per cent in volume and 3.6 per cent in the value as compared to figures reported during the previous quarter, the Review said, adding that the major portion of RTGS transactions continued to be in respect of settlements against securities followed by Interbank Funds Transfers and settlement of retail cheques through multilateral clearing contributing 53.6 per cent, 34.2 per cent and 12.1 per cent respectively.

A picture of the headquarters of Standard Chartered Bank in London. Hintz said JPMorgan and State Street each have extensive operating reliance on Standard Chartered as a sub-custodian in a number of markets, such as India, Hong Kong, Thailand, Ghana and Zambia. BNY Mellon has exposure in Bangladesh and Taiwan, said Brad Hintz.

BOSTON: Fallout from Standard Chartered PLC’s alleged transactions with Iran could quickly become a liability to top US custody banks, Bernstein Research analyst Brad Hintz said on Tuesday.

Hintz said British-based Standard Chartered is an important agent bank for US custody banks such as Bank of New York Mellon Corp, JPMorgan Chase Co Inc and State Street Corp. Standard Chartered provides the banks important access to central securities depositories in mainland Asia and Africa.

Hintz, in a research note, said the US custody banks relyon extensive sub-custodian networks to pass on economies of scale and scope to big institutional clients.

“If a sub-custodian were to be found guilty of an internal conspiracy to hide prohibited transactions from US regulators, US global custodial banks exposed to that sub-custodian may fall under increased scrutiny from their fiduciary clients,” Hintz said in his note.

“Among the more severe consequences, exposure to Standard Chartered could result in reputational damage and potentially negatively impact the ability of a US global custodian to win new mandates from public funds and other fiduciary clients.”

The New York State Department of Financial Services on Monday said Standard Chartered “schemed” with the Iranian government, which is subject to US sanctions over its nuclear program, and hid 60,000 secret transactions to generate hundreds of millions of dollars in fees over nearly 10 years.

The regulator has threatened to tear up Standard Chartered’s state banking license for allegedly hiding $250 billion in transactions tied to Iran.

Hintz said JPMorgan and State Street each have extensive operating reliance on Standard Chartered as a sub-custodian in a number of markets, such as India, Hong Kong, Thailand, Ghana and Zambia. BNY Mellon has exposure in Bangladesh and Taiwan, Hintz said.

JPMorgan declined to comment. BNY Mellon and State Street were not immediately available to comment.

President Nursultan Nazarbayev, in power since Soviet times, has said he wants Kazakhstan’s commercial capital, Almaty, to be a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics. – Reuters photo

ALMATY: A $75 million Islamic bond issue by the Development Bank of Kazakhstan, the first sukuk issued in the former Soviet Union, is likely to spur more issues in Central Asia’s largest economy, banking officials said on Thursday.

The 240 million five-year Malaysian ringgit ($75.5 million) issue on July 18, which generates an annual payment of 5.5 per cent, has set the benchmark for Islamic bond issuers in the former Soviet republic, the Development Bank of Kazakhstan said.

The issue is part of the bank’s 1.5 billion ringgit Islamic note programme under the sharia principle of murabaha, approved this year by the Malaysian central bank and the Sharia Advisory Council of the Securities Commission of Malaysia.

“The next sukuk issue will depend on market conditions and the bank’s borrowing requirements,” the state-owned Development Bank’s press office said in a written response to questions.

“The number of issues will depend on the size (of each issue),” it said, adding that it could issue a further 1.26 billion ringgit under its existing programme.

Two decades after the collapse of the Soviet Union, majority Muslim Kazakhstan is making a bid to become a regional centre of Islamic finance, which is based on religious principles such as bans on interest and pure monetary speculation.

About 70 per cent of Kazakhstan’s 16.7 million population is Muslim. Since the global financial crisis, investors are more receptive to alternative forms of banking and keen to tap pools of Islamic investment money in the Gulf and southeast Asia.

Malaysian investors took up 62 per cent of the Development Bank’s debut issue. The bank said the highly developed Islamic finance market in Malaysia was the ideal model for Kazakh issuers.

In the first 11 months of 2011, Malaysia accounted for 71.2 per cent of total global sukuk issuance, it said.

“Not only is this sukuk issue the first in the history of Islamic finance in Kazakhstan. It is the first in the countries of the CIS (Commonwealth of Independent States),” the Kazakh bank said.

Halyk Finance (Kazakhstan), AmInvestmentBank and Kuwait Finance House acted as joint lead managers of the issue, with HSBC and RBS as coordinating joint lead managers.

‘ICEBREAKER’

Yerlan Baidaulet, adviser to Kazakhstan’s Ministry of Industry and New Technologies, said he was working on potential sukuk issues with other institutions in the country.

“We could have two or three deals. For sure, there will be one more sukuk from Kazakhstan (this year),” he said.

“The window has been opened. (The Development Bank) is playing the role of icebreaker.”

President Nursultan Nazarbayev, in power since Soviet times, has said he wants Kazakhstan’s commercial capital, Almaty, to be a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics.

A sovereign sukuk issue mooted in 2010 did not materialise. Finance Minister Bolat Zhamishev told Reuters in June that Kazakhstan had no pressing need to borrow abroad. Its National Fund to collect windfall oil revenues contains $51.4 billion.

Nevertheless, the Development Bank said its issue would serve as a model for other quasi-sovereign companies and banks to tap Islamic finance markets.

“We are convinced that this deal will open the way for other issuers in the region looking to diversify their funding on Islamic markets,” Zhaslan Madiyev, deputy chairman of the bank’s management board, said in a statement accompanying the issue.

Baidaulet, who is also executive director for the CIS and Eastern Europe at the Islamic Development Bank, a Saudi Arabia-based multilateral lender, said interest in sukuk reflected a desire among investors to work closely with the real economy.

“The way we are promoting Islamic finance in Kazakhstan is different,” he said.

“It’s not just a religious matter. It’s about the needs of the economy.”

In this photo released by the official website of the Iranian supreme leader’s office and taken on Tuesday, July 24, 2012, Iranian supreme leader Ayatollah Ali Khamenei, center, leads prayer, in Tehran. -AP Photo

TEHRAN: Western-led sanctions and diplomatic pressure will not force Iran to halt its nuclear program, Iran’s Supreme Leader said Wednesday.    

Ayatollah Ali Khamenei, who has the final say on all state matters in Iran, voiced confidence that the Islamic Republic can beat the latest punitive measures aimed at blocking the country’s vital oil and banking industries over the disputed program.

”They (the West) explicitly say they need to increase pressures, tighten sanctions to force Iranian authorities to reconsider their calculations,” Khamenei said in comments broadcast on state television. ”But a look at the facts leads us not only to avoid reconsidering our calculations, but to move on our intended path with greater confidence.”

The latest European Union sanctions against Iran’s vital oil industry came into effect on July 1, three days after the U.S. tightened measures that prohibit international banks from completing oil transactions with Iranian banks. The moves, a response to Iran’s refusal to suspend uranium enrichment, further complicate the country’s ability to conduct trade abroad.

The West suspects Iran is pursuing a nuclear weapon. Iran says the program is for peaceful purposes such as power generation and medical treatment.    Israel has indicated it might attack Iran if sanctions fail to rein in the nuclear program.

On Wednesday, Israeli Defense Minister Ehud Barak said Israel might have to make ”tough and crucial decisions” about its security, warning that if Iran were allowed to obtain nuclear weapons, dealing with the matter then ”will be far more complicated, far more dangerous and far more costly in resources and human life.”

In his remarks, Khamenei said he felt some countries partaking in the US-led sanctions will not continue them over the long term because of economic drawbacks, calling the sanctions a challenge that could be overcome.

”Although there are challenges in the path of the Iranian nation, there is no dead-end,” he said. Khamenei said Iran has offered some concessions in the past, but claimed the West is unwilling to allow what Iran calls a peaceful nuclear program.

He was referring to a period between 2003 and 2005 when Iran agreed under former reformist president Mohammad Khatami to suspend uranium enrichment and all related activities as part of confidence building measures to dispel fears that Tehran was not seeking nuclear weapons.

”The West became so arrogant during that period that they opposed possession of three centrifuges which our officials had agreed. But now there are 11,000 centrifuges operating in the country,” he said.

Centrifuges are machines that spin at supersonic speed to purify uranium. Uranium enriched to low level is used to fuel a nuclear reactor but higher enrichment makes it suitable for use in building a nuclear weapon.

Iran’s suspension of nuclear advancements coincided with a period of small steps toward easing the diplomatic freeze between Tehran and Washington, but tensions quickly returned following the election in 2005 of President Mahmoud Ahmadinejad and moves to restart Iran’s nuclear efforts.

The US and its allies accuse Iran of using its civilian nuclear program as a cover to develop an atomic bomb, but Iran has denied the charges and says its nuclear program aims at producing electricity and radioisotopes used to treat cancer patients.

Khamenei also urged Iran’s politicians to show unity and avoid bickering in efforts to overcome the sanctions, which experts say have driven up the cost of imports by 20 to 30 per cent.    Ahmadinejad’s conservative rivals in parliament are openly criticizing the handling of the economy and failing to prevent a sharp rise in food prices in recent months.

”The reality is that there are problems but one should not blame this or that. It must be resolved through unity and wisdom,” Khamenei said. ”You should avoid useless disputes and publicizing these disputes in order to protect the nation’s unity.”

Iran’s parliament speaker has acknowledged that 20 per cent of Iran’s economic problems are due to sanctions, a rare public acknowledgment by a top official that sanctions are biting.

Raheel Ahmed will report to Steve Bertamini, group executive director and chief executive of consumer banking, and will be based in Dubai, the Asia-focused bank said in a statement on Monday.—AFP (File Photo)

DUBAI: Standard Chartered appointed Raheel Ahmed as its regional consumer banking head for the Middle East, Africa and Pakistan, replacing Vishu Ramachandran who has been named chief operating officer for global consumer banking, the lender said.

He will report to Steve Bertamini, group executive director and chief executive of consumer banking, and will be based in Dubai, the Asia-focused bank said in a statement on Monday.

Ahmed, who graduated with an MBA from Pakistan’s Institute of Business Administration (IBA) in 1991, joined Standard Chartered bank in 2004. He has worked for Citigroup as Regional Credit Risk Manager for Europe, Middle East & Africa prior to joining Standard Chartered.

In May, the UK-based lender named Morad Mahlouji as its regional head for origination and client coverage for Middle East and North Africa (MENA).

The State Bank has established a consultative group on branchless banking to foster market development under the chairmanship of Mohammad Ashraf Khan, Executive Director, Development Finance Group of SBP. – File photo

KARACHI: Branchless banking has been rising in Pakistan, and it grew by 23 per cent in the third quarter of the current fiscal year.

The State Bank on Thursday issued a newsletter on branchless banking which says that branchless banking continues to show a rising trend and surged by 23 per cent to 25.3 million as compared with 20.6 million in the preceding quarter.

The value of these transactions was recorded at Rs85 billion, showing a growth of 7 per cent as compared with Rs79 billion in the quarter ended on Dec 31.

The average daily branchless banking transactions increased to 280,798 in the third quarter, showing a growth of 23 per cent as compared to 228,858 transactions in the previous quarter.

The branchless banking deposits grew by 18 per cent to Rs594 million in January-March 2012 quarter as compared with Rs503 million in the preceding quarter.

The total number of branchless banking agents increased by 19 per cent to 26,792 in January-March FY12 quarter as compared with 22,512 in the quarter ended on Dec 31, 2011.

Similarly, the total number of branchless banking accounts surged by 14 per cent to surpass one million mark in the quarter under review as compared with 929,184 in the previous quarter.

The branchless banking agents now have the footprint in 89 pre cent of the total districts in Pakistan, out of which 52 per cent have more than 90 agents which are mainly located in low income urban or rural communities.

The number of registered m-wallet accounts (a popular branchless banking service in which cash value is stored on mobile phone of a customer which can be used for deposits, withdrawals, and money transfer through mobile phone) reached 1.03
million at the end of the quarter under review. The number of active m-wallets is about 53 per cent.

About 5,573 debit cards have also been provided to mobile account holders, indicating efforts to create value proposition in m-wallets.

Branchless banking service providers are trying to increase their linkages with microfinance institutions as loan repayments of Rs312 million were collected through branchless banking agents during the quarter under review.

The growth expectation in the area of branchless banking is fairly high as largest brand of the country is in process of technology upgradation for account opening, for which it would start registration of customers for level zero account (per
month transactions limit Rs25,000), which will bring the low income segment of society into financial services loop.

Moreover, few other banks are also likely to start their branchless banking operations soon.

The State Bank has established a consultative group on branchless banking to foster market development under the chairmanship of Mohammad Ashraf Khan, Executive Director, Development Finance Group of SBP.

The group comprises key stakeholders, such as Pakistan Telecommunication Authority (PTA), National Database and Registration Authority (NADRA), banks, microfinance banks (MFBs), Mobile network operators (MNOs) and technology
solution providers.

The group provides a common platform for branchless banking eco-system developers and an opportunity to develop collective policy recommendations on critical issues.

Are these financial instruments really riba-free (interest-free)?

Do these instruments conform to the juristic and ethical frameworks laid down by the Quran, the Holy Prophet (PBUH) and the imams of the leading schools of thought?

If the analysis shows otherwise, then why not do ‘modern’ banking instead of labelling riba-infested products as ‘Islamic’ and selling them as halal and riba-free?

The theoretical problem arises out of our inability to comprehend the meanings of two words ‘riba’ and ‘ba’ah’ used in the Quran to strictly prohibit the former and clearly permit the latter. There are two verses in the Quran which deal with the concepts of riba and ba’ah and adjudicate reasons for their subsequent prohibition and permission.

The Quran clearly refers to the inherent psychological nature of men, which ordinarily thrives on boundless greedy profiteering and moneymaking without personal labour and effort. So the Quran clearly describes in a verse this human weakness and declares that those who approve of riba are “possessed by Satan” (2:275). It is strictly forbidden and instead one should engage in ba’ah which requires personal labour and effort.

The second verse of the Quran explains the economic rationality of riba and declares that it is forbidden because it leads to profiteering and moneymaking in a multiplication mode of economic exchange (3:130) which does not involve labour and effort by the owner of the economic resources.

Therefore, one should engage in socially and ethically permissible economic activity of ba’ah. On the other hand, the practice of riba leads to unprecedented social and economic inequalities which create an unjust society, which the Quran and the Prophet disapprove of in manifest words.

Ba’ah is permitted because it is based on rational, ethical and mutually agreed contracts of economic exchange, sharing risks, benefits and liabilities and profit (land, labour, capital, commodity or intellect). The law of riba and ba’ah applies equally and universally to both tangible and intangible economic resources. In simple terms, riba is an irrational, exaggerated, labour-less and unethical accumulation of wealth in a multiplication mode, while ba’ah is a rational and socially and ethically agreed economic exchange of labour and money.

The actual labour and work done by a person is weightier and considered a sacred trust, for according to a hadith the worker is a friend of God.

Now let us illustrate by an example to show what it means to accomplish a riba-free economic exchange. I own one acre of land and I give it for cultivation to a peasant on mutually agreed terms. A riba-free land-tilling agreement between me and the peasant would be something like this: the owner of the land should provide the water, seed, fertiliser and protection in case of natural calamity hitting the crop and distribute ushr forthwith.

The peasant would cultivate the land with honest labour, take care of the field, protect the crop against dangerous animals, sell it at a fair market price and distribute the profit equally with the owner of the land. This land modaraba and the transaction thereof will be a completely riba-free economic activity. The peasant shall be duly compensated for his labour in case he opts out of the transaction before the maturity of the crop.

Let us now analyse a so-called Islamic financial product offered by Islamic banks in Pakistan. The product is known as ‘car modaraba’. The Islamic financial product is a nomenclature shift from the routine banking sector offering the same product as ‘car-leasing facility’. All terms and conditions of the modaraba contract are analogous to the car-leasing agreement, favouring the Islamic bank rather than the end-user. It is a misnomer to call it modaraba because the Islamic bank is not the first owner (in this case the car maker/manufacturer is the true owner).

The Islamic bank thus does not fulfil the qualification of ownership required to enter into a ba’ah with the buyer (in this case end-user of the car). The bank is not a seller in principle, rather a supplier of the car as a middleman and making profit in a multiplier exchange mode from a product which is produced by another party in the first place.Now this Islamic bank imposes all sorts of conditionalities to secure this so-called modaraba contract with the car buyer — in fact a consumer of the car, not a worker as per Islamic framework. This includes car price, car rent (another term for mark-up), takaful (name change for insurance), processing fee, binding contract and capping on further usage of the car. Is this modaraba transaction fair to the parties, free of multiplier mode of economic exchange, sharing liabilities and benefits? The answer would be an emphatic ‘no’.

An economic transaction would be considered riba-free if it avoids multiplier mode of moneymaking, profit-taking and capital-creation. According to Islamic economic rationality, labour is mightier than capital because it creates economic value. On the contrary, Anglo-Saxon liberal economics rests on the reverse proposition (adhered to by banks in Pakistan, both ‘Islamic’ and ‘modern’), which holds that capital creates value and therefore the worker must lay in bondage to capitalistic domination.

The vicious cycle of capital accumulation is perpetuated by multiplier mode of economic exchange. No sector of the economy is exempt from this multiplier effect and hence infested with all the attributes of riba.

The writer is a social scientist and teaches at the University of Management and Technology, Lahore.

ahmadelia@gmail.com