The Islamic Financial System 135
STATEWIDE IMPLEMENTATION: LESSONS LEARNT
The process of making the economic and fi nancial system compatible
with Islam was undertaken in the Islamic Republics of Iran, Pakistan
and Sudan (though under different political, economic, and cultural
circumstances). In each case, this process was not undertaken in a
carefully thought - out manner and with the understanding of Islamic
principles and jurisprudence but, rather, in an ad - hoc fashion. A thor-
ough examination and evaluation of the experience in each country
would take a separate volume but some of the reasons for the lack of
success are summarized below:■ (^) Implementing a banking system merely by removing interest from
the system without preparing the groundwork of fi nancial lib-
eralization and strengthening the necessary institutions required
by Islam (such as those that protect property rights and enforce
contracts) is not realistic. Modern banking and fi nancial systems
require a sound legal infrastructure to support the system. Full
implementation of the Islamic system demands conformity of the
legal environment with the rules of the Shari’ah. The task of intro-
ducing changes in the common and civil law, regulations and
investors’ rights is a massive task, which often does not get prior-
ity in countries where there is social and political instability.
■ (^) The institutional infrastructure for development of an effi cient
fi nancial system did not exist. Institutions designed to promote
transparency, to protect the rights of creditors and to encour-
age good governance were either non - existent or too weak to be
effective.
■ (^) The economies of these countries are still developing. There are
signifi cant budget defi cits and government involvement in bor-
rowing leads to ineffi ciencies in the economy, putting strain on the
banking and fi nancial sectors.
■ (^) In some cases, there was a lack of political will. Transforming the
fi nancial system is not an easy task and therefore requires com-
mitment and support from the political forces in the country. In
Pakistan, for example, the process of Islamization was started
by a military regime but was not taken seriously by subsequent
governments.
There is a great shortage of expertise and skills in the fi nancial
sector. These shortages hamper the development of new products. In
addition, it is hard to fi nd knowledgeable people trained in Shari’ah as
well as in the domains of economics and fi nance.