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History of Islamic Banking in Pakistan

History of Islamic Banking in Pakistan



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Published by aamir mumtaz
It is a detailed report on murabaha financing in pakistan!including risk management, pricing, accounting standards as well.
It is a detailed report on murabaha financing in pakistan!including risk management, pricing, accounting standards as well.

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Published by: aamir mumtaz on May 19, 2010
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C,x7ik y7ku`w2History of Islamic Banking in Pakistan
Efforts to Islamize the economy of Pakistan started in the mid 60s. However a significantattempt was made in the mid 80s
to convert the banking system to an Islamic banking system.The Banking Companies Ordinance (BCO, 1962) was amended to accommodate non-interest based transactions and the industry was given a specific timeline to convert to the non-interest based system. In early 90s, the whole exercise was challenged in the Federal Shariat Courtwhich declared some products and processes being used by the banking system un-Islamic.Prior to the re-launch, to study the experience of different countries in Islamic banking, adelegation from Ministry of Finance (MoF), led by Advisor to Finance Minister, Dr. TariqHassan visited Malaysia, Egypt and Saudi Arabia in September 2001
. Based on therecommendations of this delegation and the past experience of SBP, the policies for promotionof Islamic banking were formulated. Accordingly, State Bank of Pakistan issued detailed criteriafor setting up of Islamic banks in December 2001.Al-Meezan Investment Bank Limited applied under the criteria issued by SBP to convert itself into an Islamic commercial bank. They were issued a license in the name of Meezan Bank Limited to operate as full-fledged Islamic bank in January, 2002
Current Status of Islamic Banking Industry in Pakistan
As at end of the year 2003 only one bank operated as a full-fledged Islamic bank and threeconventional banks were operating Islamic banking branches. Today there are 6 full fledgelicensed Islamic banks (IBs) and 12 conventional banks have licenses to operate dedicatedIslamic banking branches (IBBs).
The total assets of the Islamic banking industry are over Rs. 225 billion as of 30th June, 2008which accounts for a market share of 4.5% of total banking industry assets. The market share of deposits stands at 4.2%. Total branch network of the industry comprises of more than 330 branches with presence in over 50 cities & towns covering all the four provinces of the countryand AJK 
Aurangzeb Mehmood, “Islamisation of Economy in Pakistan: Past, Present and Future” Islamic Studies.
2 Strategic Plan for Islamic Banking Industry of Pakistan, by Islamic Banking Department of State Bank of Pakistan3 www.meezanbank.com4 PAKISTAN ISLAMIC BANKING: PAST, PRESENT AND FUTURE OUTLOOK Bu Dr. Shamshad Akhtar (Governor State Bank of Pakistan, 11 September 2007)
Islamic Banking Products
Islamic Banking Institutions of Pakistan are offering a wide range of compliant products &services. Murabaha is dominating the financing portfolio of Islamic Banking Institutions (IBIs),Similarly, Ijara, Musharaka and DiminishingMusharaka are also used noticeable share in totalfinancing of IBIs. However, Mudaraba, Salamand Istisna portfolios still needs to be triggered.
Originally, Murabaha was a particular type of sale and not a mode of financing. The idealmodes of financing according to Shariah areMudaraba or Musharaka. However in the perspective of the current economic circumstance thereare certain practical difficulties in using Mudaraba and Musharaka as instruments in every typeof financing. Therefore, the contemporary Shariah experts have allowed, subject to certainconditions, the use of Murabaha on a deferred payment basis as a mode of financing.MURABAHA is a particular kind of sale in which seller honestly discloses the cost incurred onthe sale of commodities to be sold and sell to the buyer at disclosed cost plus mutually agreed profit margin ratio. The agreed profit ratio varies from bank to bank. MURAHABAH is beingused to purchase any tangible asset: Real Estate, Stocks, Machinery, Equipments, furniture, building materials, vehicles or any identifiable and tangible goods which are in Shariahcomplains. More than 60% of Islamic Financing transactions all over the world are throughMurabaha financing.
Scope of Murabaha
Financing of purchasing commodities and goods from the local markets
Financing import and export transactions
Financing fix assets (machines and equipments)
Financing of working capital (purchasing feedstock used for production)
Financing construction and installations material purchases
Financing purchasing of real estate (land and building)
Islamic Bankin Bulletin Setember 2009
The payment of Murabaha price may made
At spot at time of sale
In installments
In lump Sum (Bullet Payment) after a period of time
Difference between Murabaha and Sale
A simple sale in Arabic is calledMusawamah- a sale without disclosing or referring to the costof goods sold. However when the cost price is disclosed to the client, it is called Murabaha. Asimple Murabaha is one where there is cash payment and Murabaha Muajjal is one on deferred payment basis.The Murabaha transaction does not come into existence by merely replacing the ‘interest’ by thewords "profit" or "mark-up". Actually, murabahah as a mode of financing has been allowed bythe Shariah scholars with some conditions. Unless these conditions are fully observed, Murabahais not permissible. In fact it is the observance of these conditions which can draw a clear line of distinction between the interest-bearing loan and the transaction of Murabaha. If these conditionsare not observed, the transaction becomes invalid according to Shariah.
Basic Features of Murabaha Financing
Murabaha is not a loan given on interest. It is a sale of a commodity for a deferred pricewhich includes an agreed profit added to the cost.2.Being a sale and not a loan, Murabaha should fulfill all the conditions necessary for validsale.
The financier must have a good title to the commodity before he sells it to his client.
The commodity must come into possession of the financier, whether physicallyconstructively, in the sense that the commodity must be in the risk of the financier eventhough the risk may be for a short period.
The best way for Murabaha according to Shariah is that financier himself purchases thecommodity and keeps it in his own possession or purchases the commodity through athird person appointed by him as his agent before he sells it to the customer. However, itis also allowed that the financier may make the client himself his agent to buy thecommodity on his behalf. In this case the client first purchases the commodity on behalf of his financier and takes possession as such. Thereafter, he purchases the commodityfrom the financier for a deferred price. His possession of the commodity in the first

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