ISLAMIC BANKING

GROUP MEMBERS

 MUHAMMAD NASEER BB-06-37

 IMTIAZ TABASSUM BB-06-38
 ALI RAZA BB-06-42
 IRFAN KHAN BB-06-64
ISLAMIC BANKING
 Introduction
 Islamic economic system
 Historical context of Islamic banking
 Current scenario of Islamic banking
 Industry growth and market share
 Difference b/w Islamic and conventional
banking
 Modes of financing in Islamic banking
 Survey analysis
 Conclusion
INTRODUCTION
 Pakistan………on basis of Islam
 The guidelines of Islam’s shariah

 In 1948, Mr. Muhammad Ali Jinnah emphasized the

virtues of Islamic principles
“I shall watch with keenness the work of your
Organization in evolving banking practices
compatible with Islamic ideas of social and
economic life. We must work our destiny in our
own way and present to the world an
economic system based on true Islamic
concept of equality of manhood and social
justice
PROHIBITION OF RIBA IN
THE QURAN
 "O ye who believe! Observe your duty to Allah, and
give up what remaineth (due to you) from usury, if
ye are (in truth) believers." (Quran, 2:278). 
 "0 ye who believe! Devour not usury, doubling and
quadrupling (the sum lent). Observe your duty to
Allah, that ye may be successful" (Quran 3:130). 
 "And of their taking usury when they were forbidden
it, and of their devouring people's wealth by false
pretences. We have prepared for those of them who
disbelieve a painful doom". (Quran 4:161) 
Islamic economic system
 Capitalism…interest based system
 Islam prohibits this kind of trading
 The economic philosophy of Islam has no
concept of Riba
 Riba is curse in society, as it
 Accumulates money around handful of people,
 Results inevitably in creating monopolies,
 Opening doors for selfishness, greed, injustice and
oppression
Islamic economic system
 Islam encourages
 Universal brotherhood
 Collective welfare and prosperity
 Social fairness and justice
 Islam renders Riba as absolutely haram
and strictly prohibits all types of interest
based transactions
 The importance of economic
goals
 According to materialistic economics:
 "Livelihood is the fundamental problem of man and
economic developments are the ultimate end of
human life”
 While according to Islamic economics:
 “Livelihood may be necessary and indispensable, but
cannot be the true purpose of human life”

 “And know that your possessions and your children

are but a trial” ( 8:28).
Difference b/w Islam,
Capitalism and Socialism
 Capitalism affirms an absolute and
unconditional right to private property.

 Socialism totally denies the right to private

property.

But Islam admits the right to private property

but does not consider it to be an absolute and
unconditional right that is bound to cause
"disorder on the earth”.
Historical Context of Islamic
Finance in Pakistan
 In 1979, two Government-owned mutual
funds in Pakistan, the NIT and ICP, started to
eliminate interest from their operations
 The state-run House Building Finance
Corporation (HBFC) also eliminated interest
from its operations from July 1, 1979
 In June 1980, legal framework was amended
to permit issuance of a new, interest-free
instrument of corporate financing called
Participation Term Certificate (PTC).
Historical Context
 Modaraba Companies and Modarabas Ordinance,
1980
 Modaraba Companies and Modaraba Rules, 1981 was
introduced
 In 1984, the Banking and Financial Services
Ordinance, 1984
 New system of recovery of non-interest based modes of
financing
 From January 1, 1981, separate interest-free
counters started operations in all the nationalized
commercial banks to mobilize deposits on profit and
loss sharing basis
Historical Context
 Finally, SBP issued Circular of 1984 that called
for elimination of Riba from the banking
system
 From July 1, 1985 all commercial banking in
Pak Rupees was made interest free.
 The Federal Shariat Court challenged some
emerging products and processes and
declared them un-Islamic
Current situation
 SBP has put into place a comprehensive Shariah
compliance mechanism to lend customers and
investors confidence in the Islamic banking industry

 Three main pillars


a Shariah Board at SBP which approves policies
and guidelines as well as the fit and proper criteria
for Advisors
 Shariah Advisors in all banks to provide guidance

to banks and comfort to customers on Islamic

financial services
 a Shariah audit system
Current situation
 SBP worked on a three pronged strategy for
promotion of Islamic Banking
 Allow new full fledged Islamic banks in the private
sector,
 Allow the conventional banks to set up Islamic
banking subsidiaries
 Allow the existing conventional banks to open
Stand-alone Islamic banking branches.
 Today 6 full fledged Islamic banks (IBs)
 13 conventional banks offer a network of
around 170 branches
 Industry Progress and
Market Share in Brief
 In 2003 only one full fledged Islamic bank and
two conventional banks with Islamic banking
branches
 The total assets of the Islamic banking industry
accounted for a market share of about 0.5% and
the total branch network comprised of 17
branches
 As on 30th June 2008
 Total assets of the Islamic banking Rs. 229 billion
 A market share of about 4.5%.
 Industry Progress and
Market Share in Brief
 The total branch network of the
industry comprises of over 358
branches
 present in over 50 cities & towns and
covering all the four provinces of the
country and AJK.
 Pakistan has shown much better
performance than other global players
Year Wise Entry of Players
 2003  2006
1. Meezan Bank 1. Dubai Islamic Bank
2. Bank of Khyber 2. Bank Islami Pakistan
3. MCB Bank 3. ABN Amro N.V. (Now RBS
4. Bank Alfalah Bank)
4. Askari Bank Ltd.
5. National Bank
6. United Bank Ltd.
 2005  2007
1. Habib Bank 1. Emirates Global Islamic
2. Bank Al Habib 2. Dawood Islamic Bank
3. Al Baraka Islamic bank
 Difference b/w Islamic and
conventional banking
 The absence of interest-based (riba)
transactions;
 The avoidance of economic activities involving
oppression (zulm)
 The avoidance of economic activities involving
speculation (gharar);
 The introduction of an Islamic tax, zakat;
 The discouragement of the production of
goods and services which contradict the
Islamic value (haram)
 Difference b/w Islamic and
conventional banking
Conventional Banks
 based on fully manmade
principles.
 predetermined rate of
interest.
 maximizing profit without
any restriction.
 It does not deal with Zakat.
 Lending money and getting
it back with compounding
interest
Islamic Banks
 based on the principles of
Islamic Shariah
 risk sharing between
provider of capital
(investor) and the user of
funds (entrepreneur).
 maximizing profit but
subject to Shariah
restrictions.
 Islamic banks to be a Zakat
Collection Centre and they
also pay out their Zakat.
 Participation in partnership
business
 Difference b/w Islamic and
conventional banking
 charge penalty and  no provision to charge any
compounded interest in extra money from the
case of defaulters. defaulters
 no effort to ensure growth  Its ultimate aim is to
with equity. ensure growth with equity.
 greater emphasis on the
viability of the projects.
 greater emphasis on
credit-worthiness of the
clients.  its clients is that of
 relation to its clients partners, investors and
creditor and debtors. trader, buyer and seller.
 ISLAMIC MODES OF
FINANCING IN PAKISTAN
SBP approved the following twelve modes of financing
 Financing by Lending
     i) Loans Carrying Service Charge:
     ii) Qard-e-Hasanah 
 Trade Related Modes of Financing:
i) Purchase of goods by banks and their sale to clients at appropriate
markup in price on deferred payment basis. 
ii) Purchase of Trade Bills:

iii) Purchase of moveable or immovable property by the bank from their

clients with Buy-Back Agreement or otherwise.
      iv) Leasing
      v) Hire-Purchase
vi) Financing for development of property on the basis of a
development charges. 
 ISLAMIC MODES OF
FINANCING IN PAKISTAN
 Investment Type Modes of Financing
i) Musharakah or Profit and Loss Sharinq:
ii) Equity Participation/Purchase of Shares:
iii) Purchase of Participation Term Certificates
LPTCs) and Mudarabah Certificates.
iv) Rent Sharing 
 Survey analysis
 We visited different Islamic banks to get
16 questionnaires filled.
 We used scores and percentages for
analysis
 Most of our respondents were working
with Islamic banking for one to three
years
 Purpose of Research
 Our aim was to find
 Whether Islamic banking is really
Islamic banking?
 Growth pattern of Islamic banking?
 Profitability in Islamic banking?
 Satisfaction of employees while working
with Islamic banking?
 Findings
 Most of the people were agreed that
 In Pakistan, Islamic banking is purely
an Islamic banking
 The growth pattern was upward in
previous years
 The 62% people were agreeing that
Islamic banking is more profitable than
conventional banking
 Findings
 Most of employees were satisfied
working with Islamic banking.
 And about 43.75% were of the view
that they joined Islamic banking for
spiritual satisfaction
 Conclusion
 Islamic banking is true banking system which
can solve economic problems
 Islamic system make equal distribution of
wealth possible.
 Islamic system considers economic goals as
secondary one.
 Islamic banking is growing at very high rate
and soon it will compete the conventional
banking.