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Islamic Banking

Islamic Banking

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Published by: KAMZnKIRZ Media Marketing Group on Mar 19, 2010
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05/25/2011

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PAKISTAN ISLAMIC BANKS JOINHANDS
Pakistan’s six Islamic banks are going to set up an Islamic inter-bank pricemarket in order to stop relying on interest-based conventional banks in meetingtheir short-term funds requirements. "Things are almost finalized and an officialannouncement in this regard will soon be made," Ahmed Ali Siddiqui, head of Product Development Shari`ah Compliance at Meezan Islamic Bank, Pakistan'sfirst full-fledged Islamic bank.Pakistan has six Islamic banks, Meezan Bank, Bank-al-Islami, Global IslamicBank, Al-Barka Bank, Dawood Islamic Bank and Global Emirates Islamic Bank.They have around 500,000 customers in consumer financing and depositssectors and hold 5 percent share in the overall banking sector in the country.Meezan is the first full-fledged Islamic bank in Pakistan and was issued licenseby the State Bank of Pakistan in 1997.There is already a conventional inter-bank price market for interest-basedconventional banks in the South Asian Muslim country. "Though, the exiting inter-bank price market is not completely haram, our customers and religious scholarsfeel awkward about that because of the involvement of interest-based bankingsector," Siddiqui said.
 
"Therefore, the Shari`ah advisory boards of the six Islamic banks sat together afew months back and decided to set up their own interest-free price market," headded. "The major thrust of the proposed market is that the Islamic banks shouldnot depend on the conventional banking sector in order to meet short-term fundsrequirement, which is unavoidable in this field," Siddiqui explained."Therefore, we have decided to meet our respective funds requirements througheach other. We believe that the Islamic banks have sufficient funds to meet eachothers’ funds requirements." Dr Shahid Hasan Siddiqui, a Karachi-based veteraneconomist, welcomed the Islamic inter-bank price market plan. "This is a verytimely decision because the Islamic banks have been depending on interest-based banks to meet their short-term funds requirement, which confuses their customers," he told IOL. "There is no doubt about its viability. It will workInshaullah."
Expanding
The banks decision is the latest sign of the boom in Islamic finance in Pakistan."This is a major step which we are going to take vis-à-vis expansion of Islamicbanking in Pakistan," said Siddiqui. He asserted that Islamic banking has gaineda boom during the last few years, especially after the simmering global financialcrunch.
 
"We have witnessed a growth rate (in Islamic Banking) in three figures during thelast year. And we are targeting 12 percent share in the overall banking sector by2012." Siddiqui says the current global financial crisis has diverted more andmore Pakistanis towards Islamic banks."We have not received any direct impact of the global financial crisis because our investments are assets-based rather than speculations." Islamic finance isalready one of the fastest growing sectors in the global financial industry. TheIslamic banking industry, which began almost three decades ago, has madesubstantial growth and attracted the attention of investors and bankers acrossthe world.Currently, there are nearly 300 Islamic banks and financial institutions worldwidewhose assets are predicted to grow to $1 trillion by 2013.
A CONSUMER PERSPECTIVE
The Idea of Islamic Banking is still hot these days in Pakistan. Either completelynew Islamic institute are being emerged or recent traditional banks are openingadditional branches focusing in Shariah-based Financing products/services. Butstill consumers doubt that how much are they Islamic? Three years back, FazalAhmed, chief financial officer of the Islamic Investment Bank quoted that“Pakistan followed Malaysia and Bahrain considered the role models of Islamicbanking while it formulated its regulations, now Pakistan has the best possibleframework for Islamic banking that it can”. But, at the end of the day, governmentinstitutions and authorities cannot judge whether they have proved themselves or not while consumers do.Now, according to the average consumer of the Islamic banks in Pakistan theystill have doubt in their mind from the scratch to the main services provided byIslamic Banks.Consumers would be open to the thought of acquire Islamic banking productsand services given that the organization that is offering the service is renowned,and better customer service features such as ATM access, phone banking andso on, are offered. This provides a great prospect for Islamic financialorganizations in a market that already have many other competitive existingcommercial banks. If Islamic financial organizations can make on theiunderstanding and status in the monetary world, and can offer Islamic bankingproducts/services in non Islamic markets such as Singapore, United Kingdom,Australia, they can plan to increase an emergent consumer base of the localresidents in Pakistan, some of who may have beforehand excused themselvesfrom dealing with the usual financial organizations because of the use of interest.The consumers still also believe on the fact the lack of consciousness aboutsome basic concepts and philosophy of Islamic banking. In Pakistan, a number of consumers would not adopt halal banking products because they feel insecure
 
that what will happen if credit facilities were taken away. In the Islamic monetarystructure money is not lent out, as an alternative it is an asset-backed schemewhere monetary organizations invest in projects. Consequently, financialorganizations deal in equity, not debt. To counter this inadequacy, some bankshave started issuing ‘debit’ cards. These cards are alike to the credit cardsexcluding the actuality that they use the consumers own funds as an alternativeof trust on any credit. Another concern is that of sharing profits and not losses. Alot of consumers who have been using the Islamic banking services were noteducated about the loss sharing concept earlier. This would designate that someeconomic organizations have been assuring profits. In fact, it breaches thefundamental law of Islamic financing structure that is, relating compensations torisk. Any kind of money earned on investment without risk is simply interest morewillingly than profit.So, it reveals the fact that, in order to recognize how the Islamic structure makesa distinction between profit and interest, they have to look at the dissimilarities infinancial beliefs. Because past experiances have already shown that therationale of ‘monetary and financial standing’ is very important for a consumer toselect a particular bank. In capitalist theory, capital and entrepreneurs are takencare of as two separate identities of production where the first identity acquiresinterest and the second identity is permitted to get the profit. It is implicit thatinterest is a fixed return to offer capital, and profit can simply be produced after allocating the fixed return to land, labor and capital.On the contrary, the Islamic monetary system does not regard as capital andentrepreneurs as separate identities of production. It accepts as true that eachindividual who puts in capital in the figure of money to a business enterpriseassumes the risk of loss and as a result is permitted to a proportional share in theactual profit. The system is caring of the entrepreneur, who in a capitalisteconomy would have to make fixed interest repayments even when the ventureis making a loss. Capital has a fundamental aspect of entrepreneurship, until nowas the risk of the industry is apprehensive and for that reason, rather than a fixedreturn as interest, it develops profit. So, as much profit one earn of the business,the more return on capital.The profit would be privileged if there are no fixed interest repayments. In thisfashion the profits produced by the money-making activities in the public areuniformly dispersed among those who have given capital to the organization. Inthis way, an integration of social responsibility and extra Islamic values inrewarding consumers’ needs to be worthy of ultimate consideration as it signifiesan excellent and basic discrimination between Islamic and conventional bankingsystems, and potentially competent to push Islamic banking to better pinnacle insecuring consumers’ gratefulness and response.

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