Final Project

Course:

Analysis of Islamic Banking Sector

Submitted by: Ali Haider Salim 15543 Zaigham Saleem

Submitted to:
Sir Shakeel Awan

IQRA UNIVERSITY ISLAMABAD CAMPUS

ISLAMIC BANKING IN PAKISTAN 1

Table of Contents
1. Acknowledgement...3 2. What is Islamic Banking ........................ 4 3. Principles ..4 4. Terminologies ..5 5. Products offered by Islamic Banks ......7 6. History ..9 7. How it is Different ? ....10 8. Industry Overview ..............11 9. Key Challenges Facing Islamic Banks ....13 10. SWOT analysis....14 11. Problems ...18 12. Future ..18

ISLAMIC BANKING IN PAKISTAN

ACKNOWLEDGEMENT

I would like to thank ALLAH-RAB-UL-IZZAT who gave us such power,passion, knowledge blessings and ability to achieve our goals. Secondly we are grateful to our Islamic Finance Teacher Mr. Shakeel Awan for teaching us this course. His versatile and vast knowledge on this subject helped us that cleared many ambiguities.

MAY ALLAH, THE ALMIGHTY BLESS ALL THE PERSONALITIES WHO HAD DIRECTLY OR INDIRECTLY HELPED US TO ACHIEVE OUR GOALS

ISLAMIC BANKING IN PAKISTAN

What is Islamic Banking

A set of financial activities consistent with Shariah, based on Islamic laws that refuses collecting interest, transactions involving uncertainty(risk) and speculation.

Islamic Banking is based on the Islamic economic system. It is not only for Muslims but for everyone.
Principles:
It works on Islamic rules and regulation consisting of Risk Sharing, Transparencies & Fair Deals, Property Rights, Commitments, Purity of Contracts, and Individual Rights & Duties. Interest of any kind is prohibited.

Terminologies:
Takaful:
It is a form of Islamic Insurance. Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes.

Sukuk:
It is a form of Islamic Bonds the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond.

Murabaha:
It is a contract for purchase and resale and allows the customer to make purchases without having to take out a loan and pay interest. Bank purchases the goods on behalf of the customer, and re-sells them to the customer on an agreed profit margin and the customer pays the sale price for the goods over installments.

ISLAMIC BANKING IN PAKISTAN

Musharaka:
It means partnership. It involves you placing your capital with another person and both sharing the risk and reward with profit sharing ratio, but losses must be proportionate to the amount invested.

Mudaraba:
It refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise and who agrees to the division of any profits made in advance. The Bank would make Shariaa compliant investments and share the profits with the customer, in effect charging for the time and effort. If no profit is made, the loss is borne by the customer and Islamic Bank of Britain takes no fee.

Ijarah:
Ijara is a form of leasing. It involves a contract where the bank buys and then leases an item. For example auto ijarah is simply an agreement under which the vehicle shall be given to you on rent for a period, agreed at the time of the contract. Bank purchase the vehicle and it out to the consumer for a period upon completion of the ijarah period the consumer get owner ship of the vehicle through a separate sale agreement.

Products offered by Islamic Banks

Islamic Current Account:
Islamic current account provides a very convenient and flexible option to deposit holder. It offer ease of doing unlimited transaction. This is an ideal deposit product for business and individuals who require unrestricted access to their banking account. Islamic banking holds the same properties and features like a conventional account.

Islamic Mahana Account:

All funds raised by bank are invested in businesses which are in compliance with shariah. Importantly they are invested in the manner which is pre scribed by the shariah. All profit are pooled and distributed according to the per-agreed ratio between the Islamic bank and the depositor. While the transaction are reviewed by the shariah adviser to ensure compliance with shariah.

ISLAMIC BANKING IN PAKISTAN

Automobile:
Auto ijarah is simply a rent agreement under which the vehicle shall be given to you on rent for a period, agreed at the time of the contract. Islamic bank purchase the vehicle and rents it out to the consumer for a minimum period of 3 years and upon completion of the ijarah period the consumer get owner ship of the vehicle through a separate sale agreement (as per the requirement of shariah ) against an agreed price.

Home finance:
It is based on the concept of diminishing musharakah (shirkat- ul-malik) the bank rent its share in the property to the customer. The customer pay rent for the banks share and simultaneous busy share in the property from the bank the bank at the end of the tenure, the customer becomes the sole owner of the property.

PRODUCT TREE
Islamic Modes of Finance

Partnership Based Modes

Trade Based Modes

Rental Based Modes

Musharaka Mudaraba

Murabaha

Ijarah

ISLAMIC BANKING IN PAKISTAN

History
The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 by which time there were nine such banks in the country. In 1973, the Islamic Development Bank was set-up. The first Islamic bank in Malaysia was established in 1983. In 1993, commercial & merchant banks were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business. The Islamic Summit of Lahore, Pakistan held in 1974 recommended the creation of Islamic Banks and Islamic Development Bank. On 14 Ramadan 1420, the Shariah Bench of the Supreme Court of Pakistan gave its landmark decision banning interest in all its forms and by whatever name it may be called. The court also specified a step by step approach to rid the country of the evil of interest. (The Historic Judgment on Interest by the Supreme Court of Pakistan) After 55 years after its creation in the name of Islam, Pakistan became the first Muslim country to officially declare modern bank interest as ar-riba, declared haram by Qur'an

How it is Different?
Islamic Orders not to use Money as a commodity. They operate under the concept of lender-borrower relationship and the profits generated through this relationship are divided between the two parties as per agreement. How does it works ? The bank entirely depends upon the fixed deposits and does not borrows money from the central bank. Bank gives loan on basis of mutual agreement. Marjorly focuses on sales transaction.
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ISLAMIC BANKING IN PAKISTAN

Industry Overview:
Islamic Banking is growing rapidly in Pak it has been expected that by 2012 total share in Banking sector will be 12%. Present Islamic Banking share is 5% Growth rate is 50% Overview Assets Rs 276 Bn (asset base of entire Banking System Rs 5,653 Bn) Profit Rs 1.8 Bn dec-08 Deposits Rs 201.7 Bn (17.7%)

Performance of various Banks

Bank Name Profit (March 30, 2009) (Millions)

Allied Bank Bank Islami MCB National Bank Meezan Bank Standard Chartered UBL

4,157 (53) 15,375 15,459 621 630 8,333

ISLAMIC BANKING IN PAKISTAN

Islamic Banks in Pakistan: Dubai Islamic Bank Pakistan Limited Meezan Bank Dawood Islamic Bank Limited AlBaraka Islamic Bank Bank Islami Emirates Global Islamic Bank Limited Branch Network:
Dubai Islamic Bank Pakistan Limited branches 25 in 10 cities Meezan Bank 166 branches in 40 cities Dawood Islamic Bank Limited 19 branches in 9 cities BankIslam102 branches in 49 cites Emirates Global Islamic Bank Limited 41 branches in 24 cities Total branch network of combine Islamic banks is 353 Branches in almost all big cities of Pakistan.

Key Challenges Facing Islamic Banks: Shariah interpretations

It is the legal framework within which the public and private aspects of life are regulated for those living in a legal system based on fiqh for Muslims living outside the domain. Sharia deals with many aspects of day-to-day life, including politics, economics, banking and business. On the other hand, there are also those who believe that no form of banking can ever comply with the shariah. The current issue with Islamic banking is the difference of opinions given by different shariah commite which create doubt in the mind of people.

ISLAMIC BANKING IN PAKISTAN

 Shariah experts
Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish Shariah advisory committees / consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. Shariah experts in its broader sense that gives primacy to objectives over rules and regulations shares these concerns.There views may vary creating contradictions.

Product development and execution

The hasnt been any such Islamic product developed by the Islamic banks. Till now they have modified products from conventional banking which creates doubts in the mind of a general user. Shariah compliance leads to additional time, greater product complexity, higher skills requirements, and more onerous documentation relative to conventional banking.

Competition from conventional banking:

The above-mentioned obstacles already hamper Islamic banks ability to compete on an equal footing with conventional banks. Profit-loss sharing arrangements may also be viewed with caution by bank customers.

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SWOT Analysis
STRENGTHS WEAKNESSES

1. Advantages

of

religious

1. Lack of standardization across the Muftis /scholars of the country and among the scholars and

proposition in a country made on name of Islam i.e. Pakistan. 2. Competitive marketing is advantage: required Less than

bankers. 2. Disadvantage of proposition is that there would be a hesitant and new thing not fully accepted /

conventional banking and better cost control as a result. 3. Morale and commitment to

suited to World Bank, ADB, and other multinational donor agencies to invest through banking sector in country. 3. A lot of capital is needed to boost it in front of conventional banking, and also huge reserves have to be maintained, to meet

serve is higher among bankers and staff due to religious value. 4. Huge amount of savings can be mobilized and thus boosting the deposit base of banks using

charities and Zakat fund schemes, etc. 5. Less use of money for thus

any

loss

sharing finance

situation modes

in of

speculative

purposes

Islamic

chances of investment failure and much volatility in investment is reduced. 6. Innovative aspect is also found in it, using phone banking, ebanking, etc. a blend of tradition and modern life can be easily

investment. 4. Time/season factor becomes a major problem in case of Islamic banks, as people would like to shift their money from zakat

deductible accounts or they wish to pay their zakat from Halal

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served to customers. 7. Location wise & geographically, it is feasible and operational all across the country, as Pakistan is 98% Muslim population country scattered in all nooks of national territory. 8. Quality of services will not less than services conventional so a banking to

funds during Ramadan or on Eid festivals, etc. creating short term liquidity problems for the banks. 5. There are differences in theory and practice of Islamic banking in Pakistan to some extent creating an inherent weakness. 6. Management and staff need further training to serve Islamic financial services and relevant experience as well to done their job efficiently.

competitor

established

banking

(interest

based) in same market. 9. All Banks all over the world have opened a Islamic window offerinf wide range of Islamic products and to deal with Islamic

operations OPPORUNITIES THREATS

1. More opportunities now lie in Islamic banking as it has been accepted by BASEL, WB, ADB, international multinational agencies, corporations, non

1. A lot of legislation is required for Islamic banking world wide and especially in non-Muslim

countries; even in Pakistan some legal loopholes are present in its proper implementation. 2. Comprehensive Islamic

Muslim governments, etc. with creation of big sukuk and Islamic deposit base in Gulf and

economic and banking models have yet to develop or they are

Malaysian regions. 2. Traditional interest based

not in their maturity stage to provide a blueprint of economic development and prosperity.

banking will have to defend through heavy marketing and

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advertising in Muslim countries which off course reduce their profitability. 3. Islamic banking is a complete solution to economic and to some extent social needs of

3. IT developments and Research in latest Banking are in nonMuslim conventional banking have countries interest a very where based strong

position thus Islamic banking will enjoy latest tools of IT, but lesser than conventional banking. 4. Environment banking in for west has Islamic been

Muslims from House building to education in addition to

conventional help in commerce, business and industry. 4. Modern Islamic banking emerged in late 20th century with more or less advent of internet and

declined after 9/11 attacks on WTC, New York and later Prophet Mohammad (P.B.U.H.) protests in Muslim world, widening the gaps between the western investors and Islamic banking markets. 5. Market demand is good but very less as compared to conventional interest based banking through

information age, thus it is naturally blended with tools of internet, and computer based banking, and will witness a sharper growth than traditional banking growth of last 500 years. 5. New markets have been

out the world, i.e. beyond some countries. 6. Sustainable financial backing by large multinational banks, and firms, World

emerged with growth of Islamic banking as well: Islamic mortgage, Islamic insurance, new investment projects etc. 6. In non-Muslim where countries, Muslim are like in of

investment

major economic powers is lacking.

France minority

(around

10%)

population, Islamic banking will enjoy the benefit and if of niche properly

marketing

targeted will obtain better results.

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Problems:
The problem with these shariah boards is that they give conflicting opinions that result in confusion and doubts. They approve 1 product and the other may reject Jorban a Muslim scholar disapproved the penalty imposed on defaulting. Britain had rejected Islamic mortgage as it based on interest based structure. Malaysia has proposed to setup standards for both IB and IF. such standards would result in consensus instead of confusion or conflict.

Future:
Replace conventional Banking system with Islamic banking System. Expand their Branch Network. 2012 total share in banking sector will be 12%. This is evident not only from the growing number of banks established specifically for practicing shariah compliant finance, but also from the increasing number of conventional banks such as Citibank, HSBC, RBS, Standard Chartered, UBS, etc engaging in shariah compliant operations.

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