INTRODUCTIO

N TO BANKING
BY :
SYED WAQAR AHMED

OUTLINE OF LECTURE # 2
Introduction to Banking: Introduction
to Islamic Banking;
Growth of Islamic Banking in
Pakistan;
Issues and Challenges;
key Players and Industry Landscape.

INTRODUCTION TO BANKING: INTRODUCTION TO ISLAMIC BANKING;

Introduction to Islamic Banking

The term Islamic banking refers to a banking activity
or a system of banking that is in consonance with the
basic principles of Islamic Shraiah(rules and values
set by Islam). Islamic banking is also known as
interest free banking system as the Shariah disallows
the acceptance of Riba or interest rate for the
accepting and lending of money. In Islamic banking
system, a business that offers good interest rates or
services is strictly prohibited and it is in fact
considered Haraam(forbidden). Islamic banking offers
the same facilities as conventional banking system
except that it strictly follows the rules of Shariah or
Fiqh al- Muamlat.

INTRODUCTION TO BANKING: INTRODUCTION TO ISLAMIC BANKING;

The Origin, History and Evolution of

Islamic Banking
The origin of Islamic banking system can be
traced back to the advent of Islam when the
Prophet himself carried out trading operations
for his wife. The Mudarbah or Islamic
partnerships has been widely appreciated by
the Muslim business community for centuries
but the concept of Riba or interest has
gained very little diligence in regular or dayto-day transactions.

INTRODUCTION TO BANKING: INTRODUCTION TO ISLAMIC BANKING;

The first model of Islamic banking system came

into picture in 1963 in Egypt. Ahmad Al Najjar was
the chief founder of this bank and the key
features are profit sharing on the non interest
based philosophy of the Islamic Shariah. These
banks were actually more than financial
institutions rather than commercial banks as they
pay or charge interest on transactions. In 1974,
the Organization of Islamic Countries (OIC) had
established the first Islamic bank called the
Islamic Development Bank or IDB. The basic
business model of this bank was to provide
financial assistance and support on profit sharing.

INTRODUCTION TO BANKING: INTRODUCTION TO ISLAMIC BANKING;

By the end of 1970, several Islamic

banking systems have been
established through out the Muslim
world, including the first private
commercial bank in Dubai(1975), the
Bahrain Islamic bank(1979) and the
Faisal Islamic bank of Sudan (1977).

INTRODUCTION TO BANKING: INTRODUCTION TO ISLAMIC BANKING;

Major Models of Islamic Banking and Finance

System
The main and important models of Islamic banking
system are as follows:
MURABAHA
Murabaha is the sale on the profit which is mutually
agreed by both parties. Islamic banking system has
adopted this term as a primary mode or technique
of financing. Murabaha is actually a request which
is set by the client to the Islamic bank to leverage
certain services or goods for him and in return, the
bank provides a definite profit to the client over the
cost of the services or goods.

INTRODUCTION TO BANKING: INTRODUCTION TO ISLAMIC BANKING;

IJARAH
It is the contract or the legal right against a
lawful or a specified return for the effort or
work which is proposed to be expended
and for the benefits that are proposed to
be taken.
MUSAWAMAH
It is the regular or general sales of goods in
which the price of the goods or commodity
is bargained between the buyer and the
seller.

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
Growth of Islamic Banking in
Pakistan

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
By Guest Blogger May 17th, 2013
Category: Misc No Responses Pakistan is
standing as the second largest Islamic nation
in the world where Islam is the predominant
religion, the population of second largest
Islamic nation is over 180 million people and it
is growing rapidly but on the other hand the
banking sector has only been able to grab only
20 million customers. Couple of years back
Pakistan had only one Islamic bank but today
five Islamic banks are doing its operation in
the country.

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
According to an analysis, there is still the
capacity of 40 million more people in the
market for the banking sector which they can
grab. Islam is the predominant religion in
Pakistan and Shariah compliant Banking as of
today has a very small market share, thus
reflecting a huge potential for growth in this
sector. The interest-free Islamic banking has
gained a tremendous growth in the country in
previous years and also can further expand by
making effective policies and by introducing
more products.

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
According to the data from the State Bank of
Pakistan, between 2002 and 2011, deposits
grew at an average annual rate of 59.6% at
Islamic banks, compared to the banking sector
average of 16.1% per year in the same time
period. This shows a positive growth in the
deposits of Islamic banks and the interest of
people towards the Islamic banks.
According to the State Bank of Pakistan, in
2012, 35% growth is detected in the total
deposits of Islamic banks as compared to the
previous year.

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
On the other hand, when we talk about the
assets, during the past five years the
assets grew by 30% of Islamic banks
resulting the assets into 8.5 billion dollars.
In 2012 a growth of 14% is recorded in the
financing by Islamic banks in different
sectors.
Current holdings of Islamic banking in the
country are estimated at 7.8 trillion rupees,
which stands 10% of the total capital size
of the banking sector.

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
More than one thousand branches of Islamic banks shows
the growth of confidence of people on the Islamic banks
and thats why Islamic banking is getting fast growth in
every perspective including market share, deposits and
financing.
People are now more concern about the Riba free financing
because Riba is prohibited in Islam thats why the culture
of Islamic banking is expanding and growing faster than
the conventional banks because of speedy and better
returns.
If new products are focused to be introduce than Islamic
banking can grab 10% more share from the assets of all
the banks in the current year. The Islamic banks should
keep an eye on global strategies, find ways to improve rate
of returns and remain Shariah compliant.

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
According to Irfan Siddiqui, President and
CEO of Meezan, Islamic banking has a
share of 8% in the banking industry thus
it should grow to over 15% by 2016.
The market share of Islamic banking
assets grown to 8.6% by the end of
December 2012 and in overall banking
industry and deposits increased to 9.7%
by end of December 2012 in overall
industry.

GROWTH OF ISLAMIC
BANKING IN PAKISTAN
The assets of Islamic banking grew by 12.8%
and reached to 837 billion rupees from 742
billion rupees. It was 641 billion rupees in 2011,
so ultimately it is showing a huge growth in this
regard. In the case of investment and financing,
a growth of 17.5% is spotted in the financing
and 5.5% growth is seen in the investment of
Islamic banking. The deposits of Islamic banking
picks a growth of 12.5% from 627 to 706 billion
rupees while previously that growth rate was
just 4.2% which depicts that the Islamic banking
sector is growing day by day.

ISSUES AND
CHALLENGES
Some of the challenges that the Islamic banking
industry faces today includes:
Lack of awareness & skepticism at different levels
including investors, bankers, regulators,
researchers & customers.
Being a new industry, a major challenge in its
growth is the worldwide shortage of trained
Human Resource in Islamic banking & finance.
Limited number of Shariah Scholars that create
over reliance and raise questions about Shariah
compliance of the institutes involved.

ISSUES AND
CHALLENGES
Focus efforts needed for New Product
Development & Research.
Solutions for Liquidity Management &
creation of Islamic Inter-bank Market.
Absence of a separate Regulatory,
Legal & Risk Management framework to
cater the specific need of Islamic
banking Institutes.

KEY PLAYERS AND

INDUSTRY LANDSCAPE