Development of Islamic Banking in Pakistan

Presented by:

Hameed ur Rehman MTO OG-II National Bank of Pakistan

Outline of Presentation
Introduction History of Islamic Banks Current Situation Conclusion

Islamic Banking

Islamic banking is banking or banking activity that is consistent with the principles of Islamic law (Sharia).

History of Islamic Financial Institutions

1963-1967 (Egypt) 1963 (Malaysia) 1971 (Egypt) Mit- Ghamr established by El- Naggar. Followed the model of German Savings Bank. Successful but later ended due to some political reasons. Pilgrims Fund Corporation ( Tabung Haji). Objectives: to enable Malay Muslims to save gardually to support their expenditure during Hajj and for other beneficial purposes. Nasser Social Bank was established as a social bank and not as profit oriented institutions. It was to serve the unbankable low income group. Dubai Islamic Bank was established as a first major Islamic commercial bank. Started the series of IFIs.

1975 (Dubai, UAE)

History of Islamic Financial Institutions

1975 (Jeddah, Saudi Arabia) 1977 (Sudan) 1977 ( Egypt) 1978 (Jeddah, SA) 1979 (Bahrain) 1983 (Malaysia) Islamic Development Bank (IDB) was established as an Intergovernmental institution to foster the economic and social development of its member countries. Faisal Islamic Bank of Sudan was established. Faisal Islamic Bank of Egypt was also established. Centre for Research in IE in KAU was established. The first institution specializing in IBF. Bahrain Islamic Bank was established. Bank Islam Malaysia Berhad was established.

History of Islamic Financial Institutions

1973 ( Philippines) 1978 ( Luxembourg) 1991 (Bahrain) Philipines Amanah Bank was established for Muslim community. Not strictly and Islamic Bank Islamic Finance House was established. Recognizing the need for standards. AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) was established. IF Services Board (IFSB) was established . Sets to and disseminates the prudential and supervisory standards and core principles that are in compliance of Shariah. There are now more than 300 Islamic financial institutions operating in around 75 countries. Several other IFIs were established to create, regulate and support the emerging IFIs. were established i.e- International Islamic Rating Agency (IIRA), etc. Citibank, Merill Lynch, HSBC, Barkleys offering Islamic Financial services. IBBritain, Lariba (America)

2002 (Malaysia)

Today (World)

Development of Islamic Banking and Finance Worldwide

Gulf Cooperation Council (GCC) States
Bahrain Bahrain Monetary Agency (BMA) is the first central bank to develop and issue prudential regulations for Islamic banks Bahrain has highest concentration of Islamic financial
institutions (28 Islamic banks, 16 Takaful operators)

Saudi Arabia- Saudi British Bank, Saudi American Bank, Saudi Hollandi
Bank, Citigroup, etc. UAE Kuwait Qatar Oman Dubai Islamic Bank (DIB) considered to be the first Islamic bank in the world Kuwait Finance House (KFH) Qatar Islamic Bank Bank Muscat

Development of Islamic Banking and Finance Worldwide

West Asia / Africa
Yemen Egypt Iraq Sudan Tadamon Islamic Bank Mit Ghamir Bank of Egypt, established in 1963, is sometimes cited as the first Islamic bank in the world Rafidain Bank and Iraqi Islamic Bank for Investment and Development In 1984, the whole banking system in Sudan was made totally Shariah-based The Sudanese Court of Appeal, in 1984, held that the charging of interest is subject to criminal prosecution Sudanese authorities have enforced Basel requirements,

Implemented AAOIFI disclosure standards

Faysal Islamic Bank Sudan, Sudanese Islamic Bank, Al Baraka Bank Sudan and Al Salam Bank

Development of Islamic Banking and Finance Worldwide

West Asia / Africa Jordan Turkey Iran Jordan Islamic Bank Special Financial Houses (SFHs) 1979 Islamic Revolution, Irans economy and financial system have been functioning in compliance with the Shariah

South and South-East Asia Malaysia Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, RHB Islamic Bank, Commerce Tijari Bank, Hong Leong Islamic Bank Indonesia Bank Muamalat Indonesia (BMI) and Bank Mandiri Syariah Bangladesh - Islami Bank Bangladesh Ltd (IBBL) Brunei Islamic Bank of Brunei Bhd (IBB) Thailand Government-run Islamic Bank of Thailand Philippines Al Amanah Islamic Investment Bank of the Philippines Singapore Monetary Authority of Singapore (MAS) awarding Islamic bond issuances India 11% Muslims,

Development of Islamic Banking and Finance Worldwide

Western Countries United Kingdom (UK)
Financial Services Authority (FSA) regulates Islamic banking in the UK Islamic Bank of Britain (IBB) Lloyds TSB, HSBC, Barclays Bank & ANZ Grindlays (London)

Development of Islamic Banking and Finance Worldwide

Western Countries
EUROPE
Bosnia Denmark France Germany Holland Luxembourg Russia Switzerland Bosnia Bank International Islamic Bank International of Denmark Copenhagen BNP Paribas Commerzbank and Deutsche Bank ABN Amro Samba Capital Management International Badr Bank Dar Al Maal Al Islami Trust and Union Bank of Switzerland

UNITED STATES

General Council of Islamic Banks and Financial Institutions (GCIBFI) educate regulators and Treasury officials on Islamic finance

Al Baraka Corp., Al Manzil Islamic Financial Services, Lariba Bank,

Development of Islamic Banking and Finance Pakistan

PAKISTAN
Entire financial system is being transformed to make it compliant with Islamic principles

From 1985, no banks were allowed to accept any interest bearing deposits and all existing deposits became subject to PLS (Profit and Loss Sharing) rules
On 14 November 1991, the Federal Shariat Court declared bank interest Riba A petition was filed in the Supreme Court challenging this judgment. For the next 8 years, the appeal could not be heard.

On 23 December 1999 The Shariat Appellate Bench of the Supreme Court of Pakistan upheld the FSC decision, turning down the appeal.

Development of Islamic Banking and Finance Pakistan

The government received extension upto 30 June 2001 to eradicate riba from the economy In January, 2002 State Bank of Pakistan gave first Islamic Banking License to Meezan Bank Ltd In 2004, State Bank of Pakistan permitted conventional commercial banks to establish Shariah-compliant non-banking finance companies (NBFCs)

At present In Pakistan total 17 Islamic Banks with 751 branches

Islamic banking institutions (IBIs) share of 6.7 % as of December 2010, starting from a mere 0.3 % in 2003.

Continued..

Islamic Banking Products and Services

a) Partnership based modes of financing
Musharaka Finance (Partnership) Mudaraba Finance (Investment management )

b) Trade based modes of financing

Murabaha Finance (cost plus, deferred payment) Salam finance (sale of goods, advance payment)

a) Rental based modes of financing

Ijarah Finance (Leasing) Diminishing Musharaka Finance (hybrid and leasing.)
of Musharika

Conclusion
Globally Since 2006 the industry grew on average 28 percent annually with its asset base reaching about $1 trillion In the global crises of 2008, IFIs being assets backed acted as shock absorber, and proved better than conventional In Pakistan Islamic Bank share is likely to increase share to 10-12% over the next 2-3 years NBP should serve the market with its wide network

So, Islamic Banking is the Way Forward

Thank you

Questions ??