Pakistan Islamic banks stick to KIBOR – interest based benchmark

Pakistan Islamic banks stick to KIBOR – interest based benchmark

KARACHI: Pakistan Islamic banks are stick to Karachi Interbank Offered Rate (KIBOR) – an interest based benchmark.

Islamic banks use KIBOR i.e. an interest-based benchmark to determine profit sharing ratios. In this context, how these banks can be said to be Islamic when they base conventional benchmark?

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However, the State Bank of Pakistan (SBP) replied to the query that Islamic banks should ideally have their own benchmark system for determination of profit.

“Since, the industry is in its initial stage of development, it is using the available benchmark for the banking industry. It is expected that once it is grown to a sizable level, it would have its own benchmark,” according to the central bank.

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The SBP further stated that using interest based benchmark for determining the profit of any permissible transaction does not render the transaction as invalid or haram. “It is the nature/mechanism of the transaction that determines its validity or otherwise,” the SBP explained.

For example Mr. A and Mr. B are two neighbors. Mr. A sells liquor which is totally prohibited in Islam whereas Mr. B, being a practicing Muslim dislikes the business of Mr. A and starts the business of soft drinks. Mr. A wants his business to earn as much profit as Mr. A earns through trading in liquor.

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Therefore he decides that he will charge the same rate of profit from his customers as Mr. A charges over the sale of liquor. Thus he has tied up his rate of profit with the rate used by Mr. A in his prohibited business.

One may say that Mr. B uses an undesirable benchmark in determining the rate of profit, but obviously no one can say that the profit charged by him is haram because he has used the rate of profit of the business of liquor only as a benchmark.

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“The same is true for Islamic banks, it is most desirable and preferable that Islamic banks develop their own benchmark however; in the absence of any such alternative, interest rate related benchmark can be used,” according to the SBP.