Islamic banking its products, history and analysis with conventional banks.Along with competitive advantages, barriers and suggestions for improvement in Pakistan.

1. Lubna Mueen Arbi (M.Com)
The Islamia University of Bahawalpur
Growth prospects of Islamic Banking in
Pakistan

2. Freedom of Muslim world from colonial powers was almost
accomplished in the second half of 20th century and widespread
revitalization of Islamic ideology took its path in Muslim societies.
Whereby the people started looking at the existing social systems
through Islamic perspective and recommended modifications and
improvements. The Muslim scholars and philosophers challenged
the world’s ruling economic and social systems and revealed their
weaknesses. Capitalism system was scrutinized and criticized in
depth due to its magnitude and general acceptability in majority of
leading societies of the world.
Evolution of Islamic Banking
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3. QISMUT — Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey
—six regional global markets along with Bahrain, which are important
to the forthcoming internationalization of the Islamic banking
industry. They grip a large pool of financial and intellectual capital of
the industry that will drive the next wave of development across
existing and new markets. Islamic banks are already serving 38 million
customers globally, two-thirds of whom are located in QISMUT.
QISMUT Islamic banking assets have reached US$662b in 2013.And
expect a CAGR of 19.7% through 2013–18, with total assets reaching
US$1.6t across these six important markets. Globally, Islamic banking
assets are expected to grow to US$3.4t by 2018.
Evolution of Islamic Banking (continued)
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4. SBP Internship Project 4

5. • 1970s Some efforts started with no conspicuous results.
• 1980s Bold and comprehensive initiatives were undertaken.
Pakistan was ranked amongst the three countries of the world for
commencing non-interest based banking. Various legislations (Companies
Ordinance, 1984, Negotiable Instruments Act, 1882, State Bank Act and
Recovery of Loans Laws etc. were reviewed to bring these in line with the
tenants of Islam. A new interest free Instrument namely; PTC (Participation
Term Certificate) for Corporate Financing was introduced and was later
replaced with TFC(Term Finance Certificate). Non-Interest Based Instruments
(NIB) were announced. In the Conventional Banks separate interest free
counters were opened on January 01, 1981. For meeting working capital
needs of trade and industry, Musharakah was introduced on July 01, 1982.
Profit and loss sharing basis was introduced in Conventional Banks on April
01, 1985.
Islamic Banking History in Pakistan
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6. • 1990s In November 1991, Federal Shariah Court was established.
An announcement was made on December 23, 1991 that
transactions involving interest in banks would cease to have effect finally by
June 30, 2001.
• 21st Century Commission for Transformation of Financial System
Bank of Pakistan. Task Force was set up in SBP to
suggest ways and means to eliminate interest from Government financial
transactions. However, parallel banking system namely; Conventional and
Islamic Banking has continued till today.
Islamic Banking History in Pakistan (continued..)
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7. Current status (In Pakistan)
Figure 1: Table 1 is taken from IBB March 2014 report presented by BBP
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8.  Money is not a commodity though it is used as a medium of exchange and store of value.
 Profit on trade of goods or charging on providing service is the basis for earning profit.
 Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the
bank will share these losses based on the mode of finance used (Mudarabah, Musharakah).
 The execution of agreements for the exchange of goods & services is a must, while disbursing funds under
Murabaha, Salam & Istisna contracts.
Difference between Islamic and conventional banking
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9.  Islamic banking tends to create link with the real sectors of the economic system by using trade related
activities.
 The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and
seller
 Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-
wadiah, thus the depositors are guaranteed repayment of their funds,
 The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount
of compensation is being charged and these proceeds are given to charity.
Difference between Islamic and conventional banking
(continued)
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10. Islamic mode of
financing
• Sharia Based financing
• Sharia Compliance
Modes of financing
Range of Islamic products
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11. •Mudarabah is a renowned type of Islamic
partnership form whereby skill and
money are brought together to conduct
business. Profit is distributed according
to agreement while loss is borne by
capital provider (Rab ul maaL) only.
Mudarabah
• Musharakah is a joint enterprise formed
conducting some business in which all partners
share the profit according to pre decided ratio
while loss is shared according to the ratio of
contribution.
Musharakah
Sharia Based financing
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12. 1. Murabaha
•Murabaha is used as
successful substitute
product for short
term loans and
overdraft under
conventional
banking.
2. Ijara
•Ijara has substituted
successfully the
facility of leasing
under conventional
financial system.
3. Diminishing
Musharakah
•Diminishing
Musharakah is used
for house financing
by IFIs and has
supplanted
successfully
conventional
mortgages.
4. Bai Salam
•Essentially Bai e Salam
is used to fulfill
financing of agricultural
needs of farmers.
Farmers in this
contract sell their crops
prior to harvesting to
IFIs in order to get
money for acquiring
seeds and fertilizers.
5. Bai Muajjal
•Literal meaning of Bai
Muajjal is deferred /
credit sales. Islamic
financial Institutions
(IFIs) are using this
approach to finance the
customers’ needs by
supply of anticipated
commodities. The
modification between
Murabaha and Bai
Muajjal lies in cost
disclosure.
6. Istasna
•This tool of financing is useful
for infrastructure projects.
Parallel Istasna contract is
allowed however performance
of second Istasna contract
must not be conditional on
the fulfillment of first
contract.
Range of Islamic products
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13. • Meezan Bank
• Al Baraka Pakistan
• Bank Islami
• Burj Bank
• Dubai Islamic Bank Pakistan
Pakistan Islamic banking financial institutions
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14. • "And whatever riba you give so that it may increase in the wealth
of the people, it does not increase with Allah." [Surah Ar-Rum
30:39]
• "And because of their charging riba while they were prohibited
from it." [Surah An-Nisaa 4-161]
• "O those who believe do not eat up riba doubled and redoubled."
[Surah Al-e-Imran 3- 130]
Concept of Riba in Islam
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15. • "Those who take interest will not stand but as stands whom the demon
has driven crazy by his touch. That is because they have said: 'Trading is
but like riba'. And Allah has permitted trading and prohibited riba. So,
whoever receives an advice from his Lord and stops, he is allowed what
has passed, and his matter is up to Allah. And the ones who revert back,
those are the people of Fire. There they remain forever. Allah destroys riba
and nourishes charities. And Allah does not like any sinful disbeliever.
Surely those who believe and do good deeds, establish Salah and pay
Zakah, have their reward with their Lord, and there is no fear for them, nor
shall they grieve. O those who believe, fear Allah and give up what still
remains of the riba if you are believers. But if you do not, then listen to the
declaration of war from Allah and His Messenger. And if you repent, yours
is your principal. Neither you wrong, nor be wronged. And if there be one
in misery, then deferment till ease. And that you leave it as alms is far
better for you, if you really know. And be fearful of a day when you shall
be returned to Allah, then everybody shall be paid, in full, what he has
earned. And they shall not be wronged." [Surah Al-Baqarah 2:275-281]
Concept of Riba (continued)
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16. • From Hazrat Jabir (May Allah be pleased with him): The Prophet,
cursed the receiver and the payer of interest, the one who
records it and the two witnesses to the transaction and said:
"They are all alike [in guilt]
• Jabir ibn Abdallah (May Allah be pleased with him), giving a
report on the Prophets Farewell Pilgrimage, said: The Prophet
addressed the people and said "All of the riba of Jahiliyyah is
annulled. The first riba that I annul is our riba, that accruing to
Abbas ibn Abd al-Muttalib (the Prophet’s uncle); it is being
cancelled completely.
Hadith on riba and its exclusion from Holy Prophet
(peace be upon him)
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17. • Bayhaqi has also reported the above hadith in Shuab al-iman
with the addition that "Hell befits him whose flesh has been
nourished by the unlawful."
• From Hazrat Abu Hurayrah (May Allah be pleased with him): The
Prophet said: "God would be justified in not allowing four
persons to enter paradise or to taste its blessings: he who drinks
habitually, he who takes riba, he who usurps an orphans
property without right, and he who is undutiful to his parents."
Hadith Holy Prophet (peace be upon him) continued
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18. 100 107
132
186
199
100
125
162
225
266
0
50
100
150
200
250
300
2009 2010 2011 2012 2013
HBL MBL
Financial Analysis
(Growth in assets)
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19. 100 109
137
178
205
100
131
169
230
289
0
50
100
150
200
250
300
350
2009 2010 2011 2012 2013
HBL MBL
Deposit Accounts Growth
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20. 78.30%
80.50% 80.51%
82.08%
83.07%
84.73%
81.25%
86.22%
88.24%
86.94%
70.00%
75.00%
80.00%
85.00%
90.00%
2009 2010 2011 2012 2013
Chart Title
HBL MBL
Earning asset ratio
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21. 8.69%
9.39%
8.78%
7.39% 7.61%7.32%
6.94% 6.64%
5.55% 5.43%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
2009 2010 2011 2012 2013
HBL MBL
Equity Capital to Total Assets
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22. 9.087 8.606
9.323
10.208 10.72611.038
12.204 12.762
14.872
16.183
0
5
10
15
20
2009 2012 2011 2012 2013
HBL MBL
Deposits Times Capital
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23. 67.40% 65.60%
53.40%
43.20% 42.70%
81.20%
54%
43.80% 40.70%
46.60%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
2009 2010 2011 2012 2013
HBL MBL
Loans to Deposits
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24. 2.475
2.924
3.012
2.208
2.107
1.401 1.374
2.322
1.875
1.713
0
0.5
1
1.5
2
2.5
3
3.5
2009 2010 2011 2012 2013HBL MBL
Basic earning power
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25. 90.20%
89.60%
90.40%
91.70% 91.80%
92.80% 92.80%
93.10%
92.40%
94.30%
86.00%
88.00%
90.00%
92.00%
94.00%
96.00%
2009 2010 2011 2012 2013HBL MBL
Debt ratio
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26. 1.55%
1.84%
1.96%
1.42%
1.34%
0.83%
1.07%
1.69%
1.26% 1.20%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
2009 2010 2011 2012 2013HBL MBL
Return on assets (ROA)
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27. 17.80%
19.60%
22.30%
19.10%
17.10%
11.20%
15.30%
25.40%
22.60%
18.90%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2009 2010 2011 2012 2013
HBL MBL
Return on Common Equity
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28. Vision Statement
To evolve a stable and distinct Islamic Banking System based on
Shariah principles that creates value for all stakeholders
particularly the users and providers of Islamic financial services.
Role of state bank of Pakistan in Islamisation
of banks
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29. • Focal point for all Islamic banking functions, initiatives at SBP
• Strengthen the legal, regulatory and Shariah compliance framework for Islamic
banking Institution (IBIs)
• Adopt/adapt prudential standards issued by international organizations such as
IFSB, AAOIFI to harmonize the Shariah practices in Pakistan
• Steer/facilitate the SBP Shariah Board meetings, and Shariah Advisors’ Forum
• Shariah review of IBIs products
• Coordination with other departments for IBIs’ licensing and branch licensing
Departmental Objectives
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30. • Collaborate with ICAP for adoption of AAOIFI accounting standards
• Industry capacity building initiatives, Awareness and promotion
program
• Focused research initiatives-both empirical and theoretical
• To leverage support from international infrastructure
institutions dealing with Islamic finance i.e. IFSB, IDB, AAOIFI
and IIFM for promotion of Islamic banking in Pakistan.
• Issuance of Periodic Islamic banking bulletin and News Watch
Departmental Objectives contd..
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31. IBD Organogram Director
Policy Division
Regulations Unit
Prudential
Standard
Adoption Unit
Licensing and
Coordination
Unit
Product Dev. and
Review Unit
Shariah Division
Shariah Board
Secretariat Unit
Shariah Standard
Unit
Shariah
Compliance Unit
Promotion & Dev.
Division
Awareness Creation
Unit
International
Affairs Unit
Capacity Building
Unit
Market Analysis and
Research Division
Research Unit
Market Analysis
Unit
Data Unit
Business
Support Unit
Shariah Board Director's Staff
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32. • Issuance of Shariah Governance Framework
• Issuance of Five year Strategic Plan for Islamic Banking Industry of
Pakistan (2014-18)
• Completion of Knowledge, Attitude and Practices Study
• Awareness Creation
• Constitution of Steering Committee for Promotion of Islamic
Banking
• Profit Distribution and Pool Management Framework
• Liquidity Management Framework
Recent Initiatives for Promoting Islamic Banking
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33. • Justice and Objectivity: (equitable distribution of income and wealth)
• Liquidity Ease: (because Islamic banks don’t ensure fixed return to be paid even if bank itself
suffered loss)
• Improved Customer Relations: (The banks are prospective to know their fund users
better in order to ensure that the funds are used for productive commitments)
• No Fixed Commitments: (any prearranged fixed obligations such as interest payments
on deposits)
• Transparency: (profit is distributed in the pre-agreed ratio)
• Ethical and Moral Scopes: (strong ethical and moral magnitudes of doing business and
choosing business activities to be financed)
• Destabilizing Speculation:
• Banking for All:
Advantages of Islamic banking over conventional banks
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34. • Shariah Elucidations (difference of opinions given by different shariah committee which
create doubt in the mind of people.)
• Shariah Experts and Specialists: (availability to Islamic banking customers.)
• Product development and execution: . (Till now Islamic banks have altered
products from conventional banking which creates doubts in the mind of a common user)
• Competition from conventional banking: (History and volume of conventional
banks is much more then Islamic banks so it’s not easy to compare both in same scenario.)
Problems faced by Islamic institutions
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35. • The major problem what I feel in Islamic banking is difference in
international Islamic standard. And they must be synchronized
throughout the globe.
• Difference of opinion in religious groups should also be
dissolved by having common research platforms.
• Government should promote Islamic banking and give Islamic
banks the relief for further promotion.
• Awareness among general public about the differences between
Islamic and Conventional Banking.
Suggestions
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36. • Research and development in the field of Islamic Finance for the
development of new Islamic Banking Products.
• Training facilities for HR in Islamic Banking is needed because
only Islamic system cannot be implemented if the employees are
not equipped with the required Islamic banking training.
• University level courses in Islamic Banking and Finance should
be introduced because there no specialized degree is yet been
offered by any educational institution in Pakistan.
• Islamic banking research system.
Suggestions
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