There does not exist a blueprint or a working model of the Islamic system. The process of Islamisation of the economy will, therefore, necessarily have to proceed gradually and reshaped within the hard reality of the present socio-economic set up.

The economic philosophy of Islam is based on the Quranic injunctions of Al-Adl Wal-Ahsan, which is epitomised in the verse "Lo! Allah enjoineth Justice and Kindness". (16:90). The Islamisation of the economy has to be seen as an integral part of establishment of an ideal Islamic society. An Islamic society is based on the principles of social justice, economic growth, universal education and full employment of men and materials.

It is obligatory on each Muslim in a Islamic society to produce more goods and services. In production of goods Muslims have to give priority to those things which are good and wholesome and help to improve the quality of life. Goods for mere display or for artificially created wants would have very low social priority. Such type of goods whose use is unlawful or prohibited may not be produced at all.

Excessive production and consumption of any type of goods is not recommended as it gives rise to wastage of factors of production and of produced goods. Resources endowed by the Almighty are a trust and must, therefore, be used judiciously to obtain optimal production.

In the absence of interest, the decision to invest within the framework of Islamic fields of investment will depend entirely on the expected return on investment and the cost, of investment, after making allowance for differences in risk and management. The expected return is a function of aggregate demand, the life of the machine and the volume of output which in turn is influenced by the level of technology and the co-related skills of labour.

Basically, the task of Islamising the financial system revolves around creating institutional arrangements which, oh the one hand, reconcile the freedom of the individual with the optimum use of total resources, and on the other, do not conflict with Islamic tenets of equity .and fairness. The basis of relationship between capital and enterprise in the Islamic context is equitable sharing of the risks and gains between the provider and user of capital. Therefore, a system based on the principle of profit and loss sharing appears to be in harmony with the Islamic Economic system based on the elimination of interest.

Since interest is deeply embedded in the mores and fibres of every type of financial relationship, its wholesale elimination at one go will not be advisable. A certain period of time is needed to pass through the process of trial and error to develop and refine the techniques and instruments based on the principle of profit and loss sharing. The following instruments have been identified for this purpose:-

i. Leasing

It is relatively a new method of long-term financing under which the lessor retains the ownership of the asset and lessee has possession and use of assets on payment of specified rentals over a specified period. The use of leasing would enable banks and other financial institutions to provide medium and long-term finance, either directly or through their leasing subsidiaries, without having to look in to the accounts of the firms concerned.

ii. Hire-Purchase

In this system, banks and other financial institutions, can provide finance for the purchase of various fixed assets under a joint ownership arrangement. In addition to repayment of the principal, they would receive a share in the nature of net rental out of the profits earned on the assets.

iii. Mark-Up

It is a sale in which the margin of profit of mark-up to the seller is mutually agreed upon between the buyer and the seller in advance. The payment of sale price may be either in lumpsum or in installments. The technique of mark-up can find general application in financing input requirements of industry and agriculture as well as in the financing of domestic and import trade.

iv. Modaraba

Modaraba means a business in which a subscriber participates with his money, and the manager, or a 'modarib,' participates with his efforts, and skill, and profits on investments made out of the Modaraba Funds are distributed among the subscribers. The Modaraba can be of two types:

a) Multipurpose Modaraba, that is to say, a Modaraba having more than one specific purpose or objective. A company, for instance, may float a multipurpose Modaraba for doing diverse business such as finding a transport service, operating an automobile workshop and providing services as packers.

b) Specific purpose Modaraba that is to say, a Modaraba for a specific purpose such as setting up a cement plant, or building and selling houses, or commercial buildings, or industrial structures etc.

v. Participation Term Certificates (PTCs) /Musharika:

The Participation Term Certificates (PTCs) are transferable corporate instruments based on the principle of profit and loss sharing and are intended to replace debentures for providing medium and long-term local currency loans for industrial and other financing. Instead of receiving interest, as in case of debentures, the holders of PTCs share in the profit and losses of companies.

From July 1, 1979, ICP transformed the operations of its mutual funds into an investment media free from the element of interest. On January 7, 1980, ICP launches the State Enterprises Mutual Fund with a capital of Rs.280 million. The Corporation declared total dividend of 25% on SEMF Certificates for the period December 1979 to June, 1981 and l5Wo for the second year, and 18% for the third year.

The Investors' Scheme of ICP has also been converted into a profit and loss sharing scheme with effect from October 1, 1980.

The Small Business Finance Corporation has introduced a new scheme of financial assistance to cottage industries, small scale industries, workshops, small businessmen and artisans on profit and loss sharing basis with effect from 1st July, 1980.

House Building Finance Corporation is extending loans on profits sharing basis since August, 1979.

Bankers' Equity was established in 1979 to meet diverse requirements of industrial financing in the private sector. It commenced its operations on January 10, 1980. The Bankers' Equity has replaced interest from capital financing of industrial projects through the introduction of a system of investments financing on profit and loss sharing basis.

As a pioneering effort, Bankers Equity launched the first ever Modaraba in Pakistan style as the Twin Tower Modaraba. The total amount of Rs. 15 million offered for public subscription was over-subscribed.

The Budget for 1984-85 has given a new thrust to the efforts towards Islamisation of the financial system. A complete and comprehensive programme has been outlined for complete elimination of Riba from the financial transactions. The salient features of the programme which will apply to all banks and financial institutions, including foreign banks in, Pakistan, are as under:

i) From January 1, 1985 all finances provided by banking system to the Government, public sector corporations, as well as private and public sector joint stock companies will be on basis of Islamic modes of financing.

 ii) During the transitional period, between July 1, 1984 and December 31, 1984, banks will continue interest-based operation along with interest-free banking, but will not renew any existing limit or give new limits on an interest basis for a period exceeding six months.

 iii) From-April 1,1985, all finance provided to any person or firm by banks and financial institution will be according to the Islamic Shariah, and from that date all dealings by the banks will be converted to conform to Islamic principles. Thus the entire assets side of the banks and financial institutions will have been transformed into accepted Islamic modes of financing, except for past commitments carried over.

 iv) From July 1, 1985, banks will not accept any deposits based on interest Saving Accounts will be accepted on profit/loss basis, and in the case of Current accounts no profit will be given to the depositors as these will be treated as “Amanat".

 v) Islamic modes of financing will also be extended to agricultural sector including the co-operative credit system.

 vi) State Bank's transactions with commercial banks and the Government would also be converted to new modes of financing prior to July 1, 1985. State Bank of Pakistan is also being given powers to regulate maximum or minimum rate of profit or return chargeable by the banks and financing institutions, in trade related and investment type transactions. Trade-related modes of financing include purchase of goods by banks and their sale to clients with an appropriate mark-up, leasing and hire purchase, financing of development of property on the basis of development charge.

 vii) The mark-up on mark-up earlier included in the system has now been eliminated.

 viii) The investment type of modes of financing will be Musharika and profit and loss sharing, purchase of shares, participation term certificates, modaraba certificates, and rent sharing. These modes of financing have already been used on selective basis. Their use will be extended over a wider field. In the case of PTC and Musharika, the practice of issuing PTCs in respect of loss debitable to the financing agency will be discontinued.

 ix) Where profit participation is not possible, banks will provide interest-free loans and be entitled to recover a small service charge which would be determine strictly in line with the proportionate actual cost of the operation of the banks or the financial institutions. In the case of Qard-e-Hasna, however, which would be provided on compassionate grounds in genuine cases, the service charges will not be levied and the principal would be recovered if and when the borrower is able to pay. A special fund would be constituted for this purpose out of the profits of the banks, which would be supported by a matching grant from the Government.

 Although the above package will eliminate interest from the transactions of banks and financial institutions, a number of conceptual issues remain to be resolved, particularly in the matter of government borrowing, which go into a general pool and their use cannot always be specifically identified. Again, how should the rate of return be determined in the case of loans from the Federal Government to the Provincial governments. Also, it is imperative that with the elimination of interest from the banking system, concerted efforts are made to develop more sophisticated techniques of appraisal and monitoring of projects. This would be necessary to ensure adherence to the agreed schedules and plans.

*Mr. D.M. Qureshi was the Managing Director, Bankers' Equity Ltd., at the time of writing thin article. Views expressed in this article are his personal views and not of his organization.