EVER heard of loans with no interest? Yes and no, but not so common in Zambia’s commercial banking circles but this is what Islamic banking is just about to introduce.

Islamic banking, a new concept that is most likely to be introduced in Zambia, has fascinated most players in the financial sector.

Islamic banking is based on the principles of Islamic law (also known as shariah) and is guided by Islamic economics.

It is designed to meet specific religious requirements of Muslim and there is no interest charged. This concept is already a significant factor around the world and is now making substantial in-roads into Africa.

The origin and basis of Islamic banking is the shariah Law, sometimes referred to as Islamic jurisprudence.

According to Amlasmic Bank Group (Ambank) of Malaysia chief executive officer Ahmad Zain Bin Othman, Islamic finance was founded on the shariah principles known as ‘figh muamalat’(Islamic rules of transactions), which express an explicit attention to meet the financial needs of people with integrity and in a manner that is just, fair, trustworthy and honest while ensuring more equitable wealth distribution.

Mr Othman said it upholds the principles of integrity, transparency, fairness and good corporate governance in financial dealings thereby prohibiting payment and receipt of interest. It is also free from excessive uncertainty and beneficiaries must not engage in gambling.

Although the concept has been backed by most players in the financial sector, it would come with its own challenges including that of strengthening the supervisory capacity.

Participants who attended a conference last week said the concept was an innovative model and an interesting way of looking at how the sector could package financial instruments to serve the market.

Executive Financial Services Limited chief executive officer Bwalya Ng’andu said the concept was an innovative model that should be adopted and be given a chance.

“Most of us who have been conventional bankers as opposed to non conventional finance, we may find it’s a little bit strange but what it requires is a paradigm shift. It is an interesting model and I think we need to look at it with open minds and see how it can be incorporated.” he said.

Dr Ng’andu said that Islamic banking was a model that was developing very fast and growing around the world not only in Islamic countries but in countries outside Islam.

“With its rapid growth, that tells us that there is something interesting about the concept,” he said.
Dr Ng’andu was hopeful BoZ would adopt and adapt some of the elements of Islamic Banking in the near future.

Nevertheless, he was quick to point out the need for BoZ to involve a new regime at supervisory and regulatory level. This is to ensure that Islamic banks also competed and were adequately supervised and regulated as financial institutions that would offer such products and services.

Since the concept is becoming popular in most African countries, Mr Othman urged the central bank to liberalise the regulatory and banking framework to allow Islamic finance to grow and take a cue from the developed countries such as Japan, Singapore, United Kingdom and Europe.

He said the country should allow conventional banking to operate Islamic finance or perhaps a dual banking system for a start. He said Zambia could also attract foreign direct investments via Government issuance of Islamic bonds (Sukuk) for instance in the mining industry.

BoZ agrees that a lot remains to be done to extend financial services to the majority of the people and foster ongoing sustainability of the financial institutions.

It was against this background that the central bank held the conference on Islamic finance to deliberate on the topical concept of Islamic banking under the theme ‘Building Partnerships for Development’
The main objectives of the conference was to get the general understanding of the operations of Islamic banking and to share views on promoting partnerships for development through Islamic banking, draw lessons and recommend strategies for implementing Islamic banking in Zambia to improve financial services.

With the rapid growth of Islamic banking across the world, a series of questions were raised, such as whether Islamic banking should be regulated differently from conventional banking since modern Islamic banking is relatively new to most countries and rules for financial accounting, bank governance and lending standards may differ as they are continually evolving as business practices are refined.

However, the major issue in introducing the concept of Islamic banking has been determining the basis for determining an appropriate regulatory framework.

With lending rates still very high in Zambia making borrowing for capital investments prohibitive, BoZ Governor Caleb Fundanga says this was one of the issues the bank has been grappling with for a long time.

Dr Fundanga said an arrangement where borrowers could access funds for investments without paying interest, offered by Islamic banking was worth exploring.

He said the introduction of the concept would come with its own challenges including that of strengthening the supervisory capacity.

Islamic banking is practiced in more than 50 countries worldwide. In some countries only Islamic banking is allowed while others have dual banking systems. Islamic banking is not limited to Islamic countries only.

For instance, in August 2004, the Islamic Bank of Britain became the first bank licensed by a non-Muslim country to engage in Islamic banking.

According to recent industry estimates, Islamic banking is set to grow at an annual rate of 15 per cent.

In supporting the concept, Islamic council of Zambia national coordinator Aadam Judas Phiri, said there was need for the country to introduce Islamic banking as it was about investments and does not allow paying of interest rates.

“We feel that if there is a system that will help and take care of Muslim needs to contribute to economic development, it should be introduced, people need to have an alternative and let them feel comfortable with the products, at the moment we don’t feel comfortable simply because of high cost of borrowing,’ he said.

Mr Phiri said banking with conventional banks was expensive because the cost of money was high. He said countries that had developed took on Islamic banking citing South Africa, Mauritius, and Malaysia.

The council commended BoZ for taking up the initiative of Islamic banking and let the people try the product.

But BoZ says formulating a legal and regulatory framework to take into account peculiar characteristics of Islamic banking was a challenge.

Assistant bank secretary, Leonard Kalinde, said designing and implementing financial regulations and supervision for Islamic banking needed to take into account characteristics that were peculiar to Islamic banking business.

Dr Kalinde said it was imperative that the regulatory requirements were consistent with the tenants of Shariah.

There was need for the legal formwork not to put Islamic financial institutions at a comparative disadvantage to affect their competitiveness and growth potential in the financial system.

The framework also needed to take into account the multi-faceted role performed by Islamic banking institutions.

In a dual financial system where Islamic financial institutions operated side by side with conventional banks, the regulatory approach adopted also needed to provide a level playing field.

Dr Kalinde said efforts towards achieving this objective should include elements of greater transparency and disclosure coupled with a strong legal and judicial system reinforced by strong Shariah governance.

Other notable recommendations from the Eastern Province Chamber of Commerce and Industry were to promote Islamic banking with supervision that accommodated its form while ensuring its unfamiliarity was not exploited to defraud clients or clients to defraud banks.

Association chairman, Timothy Nyirenda said unlike conventional banking, Islamic banking was about the viability of the project and the profitability of the operation and not size of the collateral. Mr Nyirenda said this would enable small and medium enterprises have access to finance.

He said good projects that might be turned down by conventional banks for lack of collateral could be financed by Islamic banks on a profit sharing basis.

He said Islamic financial products are developed by applying the appropriate Islamic financial contracts to suit the financial needs of the users.

The concept has evolved from basic consumers into a full range of products offering retail, corporate, project financing and long-term bond instruments.

As the country is grappling with high interest rates that prohibit capital investment, it is imperative that the central bank adopts the concept of Islamic banking by allowing Islamic banking in Zambia that would spur competition.

Source : http://www.daily-mail.co.zm/media/news/viewnews.cgi?category=19&id=1225272985