SAFIA RAFIQUE MB06106

An Overview of Impediments Faced by Islamic Banks in Asia

Insufficient legal protection;
lack of unified shariah rulings; shortage of supportive and link institutions Shortage of skilled and trained manpower in Islamic shariah banking. lack of shariah manual or guidelines; lack of linkages with other Islamic banks and lack of linkages with training institutes and shariah supervisory bodies; and lack of managements commitment in strictly following the shariah Guidelines.

RESEARCH WORK
TO MAKE STRATEGIC DIRECTIONS FOR DEVELOPING
ISLAMIC BANKING SYSTEM IN PAKISTAN

SECTIONS OF RESEARCH WORK

Environmental analysis Factors affecting Islamic banking in Pakistan Explores the strategic directions and presents the views of the bankers related to the obstacles in the execution of Islamic principles in the banking sector. Tabulated results along with graphical sketches are discussed in detail. Conclusion and policy implication

(I)ENVIORNMRNTAL ANALYSIS
ISLAMIC BANKING SYSTEM IN PAKISTAN
1977-1978 Steps for Islamization of banking and financial system of Pakistan were started in 1977-78. Pakistan was among the three countries in the world that had been trying to implement interest free banking at comprehensive/national level 1981 Separate Interest-free counters started operating in all the nationalized commercial banks, and one foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis 1985 As from April 1, 1985 all finances to all entities including individuals began to be made in one of the specified interest-free modes. From July 1, 1985, all commercial banking in Pak Rupees was made interest-free. 1991-92 The procedure adopted by banks in Pakistan since July 1, 1985 was, however, declared un-Islamic by the Federal Shariat Court (FSC) in November 1991.

1999-2001 The SAB delivered its judgment on December 23, 1999 rejecting the appeals and directing that laws involving interest would cease to have effect finally by June 30, 2001.3
"The SBP is itself committed to promoting Islamic banking in Pakistan on a parallel basis.

A detailed set of criteria for establishment of Islamic commercial banks A new fully dedicated Islamic bank, Meezan Bank Limited amendments in Section 23 of Banking Companies Ordinance, 1962 Department for regulation and promotion of Islamic banking. International Islamic University, Islamabad, has conducted a training course for trainers on Islamic Financial System in April 2002 SBP has reviewed its Forms of Financial Statements for banks in the light of newly developed accounting standards

(ii)Factors Affecting Islamic Banking in Pakistan

A number of factors have been taken into consideration in the questionnaire to analyze in depth the challenges and problems faced by the Islamic banking system

Legal Framework Knowledge Sharing Research and Development (R&D) Public Awareness Political Resolve.

(iii)DETERMINING STRATEGIC DIRECTIONS

The critical success factors identified are: the Islamic spirit in present Islamic banking system and its importance in developing a true Islamic banking system; competitiveness of the present Islamic banking system and its importance in developing a future system

QUESTIONS FROM BANKERS REGARDING KEY FACTORS & RESULTS

Table 01 Key Factors Regarding the Present Islamic Banking System in Pakistan
Very low If we compare Islamic Banking System With interest based banking within Pakistan Competitive is Islamic Banking? low medium high very high decline answer

19.4% 25.8% 16.1% 29%

9.7% 0%

To what extent the present Islamic System In Pakistan has Islamic Spirit?

29.0% 32.3% 16.1%

6.5% 6.5% 9.7% 6.5%

To what extent the present Supervisory and 41.9% 19.4% 22.6% 9.7% 0% regulatory mechanism developed/ effective to support Islamic banking in Pakistan

IMPORTANCE ATTACHED TO THE KEY FACTORS

Table 02 Importance that Must be Attached to Key Factors
Very low Do you think that a true Islamic Banking system would be competitive in open market 6.5% low medium high very answer high decline 29% 0%

9.7%

29%

25%

To what extent a system that is to be 9.7% labeled as Islamic Banking System should be true in Islamic spirit What importance do you give to Supervisory and regulatory mechanism for I.B in Pakistan. 9.7%

6.5%

22.6% 19.4% 38.7% 3.2%

9.7%

6.5%

32.3%

41.9%

0%

Graphical representation

FACTORS S AFFECTING ISLAMIC BANKING SYSTEM IN PAKISTAN

Factors Affecting the Development of Islamic Banking System in Pakistan
Column A Present Status (%age )*
Very low medium high very decline Low answer high answer Low high decline Very

Column B Importance that must be given to these Factors (%age)

low medium high very

Legal framework 36 39 (at Government level) for supporting Islamic banks A system for Shariah audit 55 29 in financial institutions Shariah compliant govt. 55 32 Economic laws Research and development 36 32 in the field of Islamic finance and economics Sharing of Knowledge 45 32 between Islamic Banks national and international level Public awareness about 52 Islamic economic system Social and Cultural factors 16 of the public Political resolve of successive 55 governments for Islamisation of economy 36

13

10

16

68

7 0 29

0 0 0

0 3 0

10 10 3

10 7 10

7 7 3

3 23 7

42 13 16

39 52 65

0 0 0

16

23

61

7 13

36

45

16

23

19

23

3 13

13

36

39

32

3 19

26

52

GRAPHICAL REPRESENTATION

iv)CONCLUSION AND POLICY IMPLICATIONS

The study proposes two recommendations at the Strategic level. There is an urgent need for Knowledge Sharing on Islamic Banking System within the countries working to develop the system. Secondly, the R&D effort; for developing new services, compliant with Islamic teachings, needs to be improved

Initiatives needed to achieve the above strategic objectives are:

International Conferences on Islamic Banking Networking of Scholars and Bankers Knowledge Portal R&D to Develop Better Services Socially Responsible Investments Community-oriented Projects Educating Bank Personnel and Society Enhancing Annual Reports of the Islamic Banks

Islamic Banks in Pakistan

MODES OF FINANCING USED IN PAKISTAN

Islamic Banking in Pakistan

Percentage Change in Mode of Financing in Pakistan