ISLAMIC BANKING PROBLEMS &SOLUTIONS

What Is Islamic Banking?

Islamic banking, also known as non-interest banking, is a banking system that is
based on the principles of Islamic or Sharia law and guided by Islamic
economics. Two fundamental principles of Islamic banking are the sharing of
profit and loss, and the prohibition of the collection and payment of interest by
lenders and investors. Islamic law prohibits collecting interest or "riba."

PROBLEMS IN ISLAMIC BANKING:Most of the Islamic Banks operate on Bai-

Murabaha, Bai Muazzal, Bai- Salam, Istisna, Hire Purchase/ Leasing mode of
Investment i.e. Islamic Banks always prefer to run on markup/ guaranteed profit basis
having Sharia coverage.

For this reason some times the conventional Economists and General people fail to
understand the real difference between Islamic Banking and conventional Banking.

Mudaraba and Musharaka modes of Investment are ideal but Islamic Banks are not going
in these two modes, the reasons for the above are as follows:

1. There is no systemic analysis and research and no real efforts to introduce above
mentioned two modes but the practitioners blame the following factors:-
2.There is lack of committed entrepreneur
3.There is lack of committed professional who can create new
4. There is lack of committed sponsors who can pressurize the professionals
5.There is shortage of skilled professionals.
The problem of forward contact/booking of foreign currency.

Inland Bill Purchase/Foreign Bill Purchase: This is another problem of Islamic Bank
where the exporters immediately after export of the goods approach to the bank for fund
before maturity of the bills to meet their daily needs. Here the Bank has to deploy billions
of PKR each year but how and on what mode of investment? In Pakistan export refinance
facility is available both to conventional and Islamic side but certain problems like risk
management and liquidity issues with difference in markups of Islamic banks and
conventional side exist.

Unfamiliarity with the Islamic Banking System :The first problem is that despite the
growth of Islamic banks over the last 30 years, many people in the Muslim and non-
Muslim world do not understand what Islamic banking actually is. The basic principle is
clear, that it is contrary to Islamic law to make money out of money and that wealth
should accumulate from trade and ownership of real assets. However, there does not
appear to be a single definition of what is or not an Islamic-banking product; or there is
not a single definition of Islamic banking.

The Regulatory environment: The relationship between Islamic banks and monetary
authorities is a delicate one. The central bank exercises authority over Islamic banks
under laws and regulations engineered to control and supervise both traditional banks.
Whatever the goals and functions are, Islamic banks came into existence in an
environment where the laws, institutions training and attitude are set to serve an
economy based on the principles of interest. The operations of Islamic banks are on a
profit and loss share basis (PLS), which actually does not come fully under the jurisdiction
of the existing laws. If there are disputes to be handled, courts are not sufficiently
acquainted with the rationale of the operations of Islamic Banking. Regarding the
protection of depositors, Islamic Banks are required to let the authorities know the
difference between money paid into current accounts and money paid into investment
accounts.

Absence of Liquidity Instruments: Many Islamic banks lack liquidity instruments such
as treasury bills and other marketable securities, which could be utilized either to cover
liquidity shortages or to manage excess liquidity. This problem is aggravated since many
Islamic banks work under operational procedures different from those of the central
banks; the resulting non-compatibility prevents the central banks from controlling or
giving support to Islamic banks if a liquidity gap should occur. So, the issue of liquidity
management must come under active discussion and scrutiny by the authorities involved
is Islamic banking.

Use of Advanced Technology and Media; Many Islamic banks do not have the
diversity of products essential to satisfy the growing need of their clients. The importance
of using proper advanced technology in upgrading the acceptability of a product and
diversifying its application cannot be over emphasized. Given the potentiality of advanced
technology, Islamic banks must have to come to terms with rapid changes in technology,
and redesign the management and decision-making structures and, above, all introduce
modern technology in its operations. Many Islamic banks also lack the necessary
expertise and institutional capacity for Research and Development (R & D) that is not
only necessary for the realization of their full potential, but also for its very survival in
this age of fierce competition, sophisticated markets and an informed public. Islamic
banking cannot but stagnate and wither without dynamic and ongoing programmes. In
addition, Islamic banks have so far not used the media appropriately.

Even the Muslims are not very much aware that the Islamic banking is being practiced in
the world. Islamic banks have not ever used an effective media to publicize their
activities. The authorities concerned in Islamic banks should address these issues on a
priority basis.

Use of Advanced Technology and Media:Many Islamic banks do not have the diversity
of products essential to satisfy the growing need of their clients. The importance of using
proper advanced technology in upgrading the acceptability of a product and diversifying
its application cannot be over emphasized. Given the potentiality of advanced technology,
Islamic banks must have to come to terms with rapid changes in technology, and redesign
the management and decision-making structures and, above, all introduce modern
technology in its operations. Many Islamic banks also lack the necessary expertise and
institutional capacity for Research and Development (R & D) that is not only necessary
for the realization of their full potential, but also for its very survival in this age of fierce
competition, sophisticated markets and an informed public. Islamic banking cannot but
stagnate and wither without dynamic and ongoing programmes. In addition, Islamic
banks have so far not used the media appropriately.
 Even the Muslims are not very much aware that the Islamic banking is being practiced in
the world. Islamic banks have not ever used an effective media to publicize their
activities. The authorities concerned in Islamic banks should address these issues on a
priority basis.

Solution

TCS BaNCS for Islamic Banking supports sophisticated and flexible product
manufacturing processes that allow banks to build new products rapidly and well ahead
of the competition. It offers full range of banking products and services.

Encompassing Islamic products such as Murabaha, Musharaka, Istisna, Mudaraba,

Ijara, as well as Takaful or insurance, the solution can help banks with:

 Complete transaction life cycle support

 Variety of deposits and financing arrangements
 A wide range of foreign exchange activities, remittances, payment as well as card
 360-degree views of the customer as well as of the bank
 Enterprise-wide information relating to regulatory reporting, risk management
 Compliance with the Shariah law, AAOIFI accounting standards, and IAS

Benefits
 Enables platform flexibility, cost efficiency and unmatched scalability
 Allows for rapid product development and process configuration
 Enables innovation and development of new instruments

We are listing below a few issues attached with current operations of Islamic
institutions and their possible solutions to bring about more clarity on subject.

1. Issue (i): Islamic finance transactions are being bench-marked with prevailing
interest rate in the country. Solution: Islamic finance deals should be benched-
marked with expected / future price of that specific commodity, in which deals are
being executed. Plus the deal must be made for real (sale / purchase of)
commodities. Conclusion: Yes, now it will be riskier, but it will not be forbidden.
2. Issue (ii): Deployment of Funds; it is easy for Islamic banks to solicit deposits, in
the name of Islam, but its profitable deployment is an issue. Solution: Islamic
banks should ensure that each penny, which is being solicited from depositors, must
be placed in; (a) productive ventures, (b) strictly as per Shariah.
3. Issue (iii): Islamic banks do not enter into ‘Musharika &
Modaraba’transactions, because of risk factor and instead resort to interest-bearing
deals. Solution:Islamic banks should halt the process of accepting fresh deposits, if
it cannot find adequate Shariah compliant avenues. Conclusion: This is how bad
inflation can be checked. Otherwise, it is only ‘greed of interest’, which continues
to motivate banks to solicit incremental deposits, in order to successfully deploy the
same through ‘interest based deals’ i.e. especially, in the interbank money markets.
4. Issue (iv): The loan contracts are religiously being signed between; banks and the
borrowers, but there are no properly executed agreements between the
banks and its depositors. All the latter signs-off is; the account opening form
(with fine details) and get deposit slips. Solution: There should be proper Shariah
compliment contracts between depositors and banks properly spelling-out terms &
conditions under which the funds are being solicited by banks and what would be
banks’ responsibilities. So that depositors may also safeguard their
interests. Conclusion: Now it will be a fair deal confirming principles of Islam based
on ‘equality & justice’.
5. Issue (v): Once, banks takeover money from depositors; they become its (unjust)
owners and thus do not include depositors in any; decision making and
shareholding. This is also against the basic principles of Islam. Allah SWT has also
referred; ‘wrongful appropriation of other peoples’ property’ in verse no. 4-
161. Solution:Depositors should be included in both; (a) decision making
and (b) they should be part owners (shareholders) of Islamic banks, as
otherwise there is no difference between an Islamic or a conventional
bank. Conclusion:Now it will be a fair business relationship between the two.
6. Issue (vi): Banks extend loans or similar credit facilities to borrowers. Whereas in
Islam; debt is not permissible, as money making option. In Islam the concept of
debt is only for financially weak people. Solution: Therefore, the banks’ contribution
towards a borrower should be in shape of equity or under fund management
scheme.
7. These are only a few basic issues, which must be addressed in the first phase on a
related forum comprising of; regulators, Shariah advisers, Islamic finance
professionals etc.

TOPIC # 2

What is Minimum Wage

It is general practice in Pakistan and unskilled workers are not paid the wage
which enable them to meet their basic needs. The workers are paid very low amount
of monthly salary and they are forced to work more than eight hours without paying
any extra financial benefits. The employers exploit the workers through low wage
due to high unemployment rate and lack of job opportunities.
The minimum wages are fixed by government to save the workers from the
exploitation of employers. The employer is made bound to pay above the fixed
minimum wage. For example, in the United States, minimum wage is $4 per hour and
all workers are assumed to received more than four dollars per hour. In case of high
demand of labor the workers can get higher wages but in case of recession they will
get at least fixed minimum wage. Similarly, in Pakistan, minimum monthly wage is
fixed by the Federal and Provincial Governments on the occasion of the announced
of budgets. In 2017-18 budge, the Federal Government fixed Rs. 15,000/- for
unskilled industrial workers keeping in view the inflation rate. So far, the following
enactment made to fix minimum wages: -
1. The Minimum Wages Ordinance, 1961 (applicable in ICT and Baluchistan)
2. Pakistan Minimum Wages for Unskilled Workers Ordinance, 1969 (no
longer in use after the 18th Amendment)
3. The Minimum Wages Ordinance, 1961 (adapted in Punjab by 2012
Amendment Act)
4. The Khyber Pakhtunkhwa Minimum Wages Act, 2013
5. Sindh Minimum Wages Act, 2015.
Thus, minimum wages are fixed by the Government after consultation with all
stakeholders and after its fixation it is illegal to pay the workers below fixed amount
of wage. International Labour Organization clause 131 suggests that when minimum
wage is going to fix the policy makers should consider both social components (needs
of workers and their families, average cost for basic items/ inflation, government
disability benefits) and financial variables (making of work, efficiency, intensity and
so on.). The lowest pay permitted by law has not to be set at such an abnormal state,
to the point that drives firms out of rivalry or smothers measures for employment
creation.
Poverty, defined as the inability to attain bare minimal living standards, is a multidimensional
phenomenon as reflected in the form of low income, lack of access to resources, few opportunities
for participation in the economic activities or political process, high vulnerability to risks and
shocks, etc. Therefore, tackling poverty requires a holistic approach that promotes such economic
growth, which creates opportunities for the poor, preparing them to be able to participate in the
economic growth process, providing them the access to essential services such as education,
health, clean drinking water and proper sanitation, etc. Maintaining macroeconomic stability,
improving governance, consolidating devolution to the grass-roots level and protecting vulnerable
segments of the society are the essential elements of any poverty alleviation programme.

Impacts can vary along the wage distribution

Understanding the impact of minimum wages on poverty requires understanding their impact at different
points in the wage distribution. For policymakers, that issue can affect how the minimum wage is set and
with what wage group in mind.

For example, when minimum wages are low relative to average wages (as in Brazil, China, and Mexico),
they tend to raise the wages of workers at the bottom of the wage distribution [2], [7]. But when minimum
wages are high relative to average wages (as in Colombia, Honduras, and sub-Saharan Africa), they will
increase the wages of workers in the middle but not at the bottom of the wage distribution. In this case,
higher minimum wages will only affect those whose wages are high relative to average wages (since
those earning less than the minimum wage are not directly affected by minimum wages).
While the benefits of higher minimum wages are distributed across the wage and skill distributions,
studies in developing countries suggest that employment losses tend to be concentrated among workers
with characteristics associated with low wages. Overall, women, young workers, and less-educated
workers, whose wages tend to be low, suffer the heaviest employment losses [2]. In Brazil, Colombia, and
Costa Rica, employment losses were largest at the bottom of the distribution of wages and skills, though
there were sometimes smaller employment losses even for workers earning well above the minimum
wage.
Do workers affected by minimum wages live in poor households?
Accounting for the wage distribution can increase understanding of how minimum wages might affect
poverty. But it is still necessary to know the household income of workers at different wage levels,
because poverty is defined in terms of household income, not individual earnings.

For example, a worker in the upper half of the wage distribution might live in a poor household, so a
higher minimum wage could help that worker’s household escape poverty. Or a worker at the bottom of
the wage distribution could be a secondary wage earner in a nonpoor household, so a higher minimum
wage would make this household better off but would not reduce poverty.
The impact of higher minimum wages on poverty also depends on whether the concern is solely with the
number of households with incomes below the poverty line (the incidence of poverty) or also with how far
the poor are below the poverty line (the poverty gap). In the second case, it will matter which poor
households benefit and which poor households lose when minimum wages rise. Raising the minimum
wage could raise the incomes of some poor households with incomes near the poverty line while reducing
the incomes of the poorest households at the bottom of the distribution

CONCLUSION:

we conclude that education, skill and experience are

three dominating factors for poverty alleviation while minimum wages alone cannot
be used as policy tool to reduce the poverty from the country. Thus, the government
of Pakistan should focus on the education and skill development of industrial workers
to decrease the poverty level from the society. As educated and skill workers will
fetch higher wages he automatically will come out of poverty trap. If the worker is
less education and low skill, he would be offered low wages and he can hardly come of
poverty trap.