Islamic banking aims to close poverty gap
''If we implemented fully Islamic principles in banking and economics in this country, I am convinced we could change the face of Pakistan within 10 years,'' says Dr. Khurshid Ahmad, former deputy minister for planning in the Zia ul-Haq administration and now head of a private research institute in Islamabad.
In the past three years, initially under Khurshid Ahmad's guidance, the government has reintroduced several traditional Islamic taxes and extended the concept of interest-free banking to a large section of the country's commercial banking and investment sector.
In 1980 tax laws were amended to allow for the levying of ''zakat,'' a 2.5 percent levy on an individual's current assets to benefit the ''mustahaqueen,'' or deserving, as prescribed by the Prophet Muhammad over 1,400 years ago.
Previously, zakat had always been voluntary and private. Islam required as one of its five pillars of belief that any Muslim who could should give zakat to the needy. For the first time, the government's legislation made zakat compulsory and deductible at the source of income.
To distribute zakat, the government has set up an elaborate voluntary system of zakat committees at federal, state, and village levels who in turn channel the money collected to those living below Pakistan's poverty line.
According to Finance Minister Ghulam Ishaq 1.59 billion rupees ($159 million) had been collected up to March 1982, while 1.2 million Pakistanis had received about $100 a head in 1981, with a further 1.5 million expected to benefit this past fiscal year. Over 17,000 Pakistanis have been given capital to start their own businesses as a result of zakat.
In June this year Ghulam Ishaq announced the introduction of zakat's agricultural counterpart - ''ushr'' - a 5 percent levy on all agricultural produce above a certain level. Khrushid Ahmad believes ushr could raise enough revenue to allow abolition of income tax and to reduce the corporate tax, thereby releasing pent-up entrepreneurial energies to the benefit of the country's economic development.
The other main measure adopted since 1980 has been the creation of an ''interest-free'' economic sphere within the national economy, partly to placate the conservative ''ulema,'' or religious and legal authorities, partly in an attempt to tap privately hoarded wealth that pious peasants have kept from banks and investment firms.
In July 1979 four major banks - the National Investment Trust, the Investment Corporation of Pakistan, the Housing Finance Corporation, and the Small Business Corporation - adopted interest-free banking. In 1980 ''profit and loss'' counters were opened in all of the 7,000 branches of the country's domestic banks. However, interest-bearing operations have been maintained and there is no public commitment for their eventual elimination.
Most Muslim scholars feel Islam does not tolerate the payment of interest on money. ''Look at where interest has taken the West's economy,'' says Muazzim Ali , vice-chairman of Dar al-Maal al-Islami, the leading Muslim investment bank, which aims to become to the Islamic world what the World Bank is to the rest of the developing world.
Profit-and-loss banking means that an investor is not guaranteed a fixed return on his investment. The lending institution chooses a productive business that promises a high return or profit. If the investment is profitable then all will share in the proceeds. If it posts a loss, the investor's original deposit is guaranteed but he receives no return.
Critics argue that such a system requires every rural bank to have the expertise of a merchant bank and that in practice the government will end up making those investment decisions.
Most Pakistanis this correspondent spoke to welcomed zakat, ushr, and interest-free banking, not because they anticipate they will eliminate poverty but because they are Islamic and in accordance with their dignity.
Critics, however, point out that many wealthy Pakistanis escape zakat by transferring their savings accounts to branches of foreign banks inside the country. Indeed, total zakat collection is only 2 percent of all government revenues and therefore totally inadequate to alleviate the real needs of the poor.
Khurshid Ahmad argues that the government has lacked the necessary will to fully implement his proposals. ''If zakat and ushr were levied wholeheartedly . . . we could defeat poverty in less than 10 years,'' he declared.
Critics warn that ushr is unlikely to bring in as much as hoped because it is to be self-assessed.
''I don't see how you can carry on an economy without interest banking. You can always call it by some other name such as 'shared profit,' but that's just for show.''