Hard-to-break practices may erode Zia's bank reforms

If Pakistan President Zia ul-Haq has his way, interest on bank deposits and loans will go the way of British-sytle wigs on judges, alcoholic beverages on the national carrier's international flights, and such alien phrases as "Mummy" and "Daddy" on Pakistan TV's programs.

All are on the way out as part of President Zia's drive to establish a model Islamic society and strip the colonial overlay from traditional Muslim culture. But while it took only official decrees to dewig the judges, remove the liquor from the Pakistan International Airlines galleys, and change the television scripts, the introduction of President Zia's most ambitious dream -- the introduction of a new Islamic economic order -- promises to be much tougher.

Underpinning the Zia plan to Islamicize the Pakistan economy is the Koranic injunction against usury. Theologians can and do argue whether the Koran forbids interest such, or only the giving and taking of exhorbitant rates of interest.

But opting for the broadest definition, Pakistan is now taking its first experimental steps to eliminate interest from banking transactions.

Since January savings depositors at nationalized commercial banks have had the choice of putting their money in regular interest-bearing accounts or opening special profit and loss sharing accounts. Under the new accounts, which the government says have captured 3 percent of all deposits, savers are to share in the profits (or losses) from investments funded by their deposits.

To the orthodox faithful, the distinction between interest and profit is critical. To skeptics, it's a meaningless semantic difference. The low 3 percent participation claimed by the government -- which some analysts suspect is an inflated number -- indicates that most Pakistan savers are waiting to see what the profit and loss sharing accounts will pay at the end of the first year.

"Pakistan's Muslims are good Muslims but they're still sufficiently men of this world to want some return on their money," comments an economist.

"In all probability, depositors will get a higher rate of return than they can from regular accounts," a government official predicts. If they do, a Western economist notes, it is because the nationalized banks are taking pains to invest the deposits in low-risk, sure-profit government and private sector operations such as commodity transactions and letters of credit. In lieu of interest for the credit they extend, the banks get back "markups," "commissions, " or shared "profits" or "dividends."

The crunch will come, economists predict, when deposits in the profit and loss sharing savings accounts are diverted into private commercial and industrial financing. Then, returns to the bank and its depositors will be dependent on a company's performance -- and the honesty of its bookkeepers.

It is not uncommon in Pakistan, as in the rest of the world, for businesses to keep two books -- one for the tax man, whic plays up losses, and another for the owners, which shows actual profits.

"There are many businesses that submit balance sheets showing losses when bankers know they're actually making 30 percent," says an analyst in Islamabad. "If you make the bank depend for its profits on how the company does, then you can no longer tolerate this phony bookkeeping."

One result, he predicts, is that "a lot of fat cats will go under the table. There's no way they're going to turn over their books to some bank that takes 10 percent. Under those conditions a lot of people are not going to go to banks. They will go to the bazaar for quick, easy loans."

Some public sector financing institutions, such as the government's house building financing corporation, have already switched to the principle of "profit participation" in their loans. In another move to Islamicize the economy last summer, the government arbitrarily deducted 2.5 percent from all savings accounts as "zakat," a Muslim wealth tax intended to benefit the poor.

That move provoked a government crisis when Pakistan's substantial Zhia minority protested that the tax should be voluntary, not mandatory, and should be distributed within its own community rather than lumped with nationwide aid to the poor. Angry Shias surrounded the government aid to the poor. Angry Shias surrounded the government secretariat in protests in which six people died , and President Zia backed down from deducting zakat from shias' accounts.

One immediate effect of the zakat levy was a rash of withdrawals as middle-class pakistanis closed out their accounts and sank their money in such traditional safe investments as property, gold, and jewels.

A major question hanging over the goal of an Islamicized pakistani economy is how it will mesh with a world economic order still based largely on free-wheeling Western-style capitalism.

Although Islamic financial institutions are increasing, they are based mainly in the Arab world -- and are still defining their with a secular international economy. As economists in Pakistan have noted, the international banks their country taps for loans are unlikely to settle for equity participation, or profit and loss sharing, when they can get flat interest elsewhere.