What is Islamic Banking A system of financial activities consistent with Shariah, based on Islamic principles which at the core

refuses collecting interest, transactions involving uncertainty and speculation.

It is based on the Islamic economic system.

It is not restricted to Muslims only. Principles It works on Islamic set guidelines consisting of Risk Sharing, Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, Transparencies & Fair Deals. Any predetermined payment over & above the actual amount of principal is prohibited (interest) the only loan it allows is qard-ulhassna whereby lender does not charge any interest. The Islamic financial system employs concept of participation , utilizing funds on a profit-and- loss-sharing basis. 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. 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

ISLAMIC BANKING IN PAKISTAN

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 the 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. 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.

ISLAMIC BANKING IN PAKISTAN

PRODUCT TREE
Islamic Modes of Finance

Partnership Based Modes

Trade Based Modes

Rental Based Modes

Musharaka Mudaraba

Murabaha

Ijarah

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)

ISLAMIC BANKING IN 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 arriba, declared haram by Qur'an How it is Different ? 1. Islamic Orders not to use Money as a commodity. 2. 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. 3. How does it work? The bank entirely depends upon the fixed deposits and does not borrow money from the central bank. Bank gives loan on basis of mutual agreement. Marjory focuses on sales transaction. 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 Ban (asset base of entire Banking System Rs 5,653 Bn) Profit Rs 1.8 Bn dec-08 Deposits Rs 201.7 Bn (17.7 Branch Network Dubai Islamic Bank Pakistan Limited branches 25 in 10 citie 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. 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 Jordan 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.

ISLAMIC BANKING IN PAKISTAN