PROJECT REPORT ON ISLAMIC BANKING

Constraints & obstacles in Islamic banking

INSTITUTE OF MANAGEMENT SCIENCES

University of Baluchistan

Submitted by Mr. Umar Javaid Enrolment no 2008-A32 MBA (banking & finance)

Submitted to Sir Zia Ul Hassan

Dedication

I dedicate this report to my parents Whom unwavering faith in me Has been the driving force in my life Their unconditional love and prayers Remain my unremitting source Of strength

(Umar Javaid)

CONSTRAINTS & OBSTACLES IN ISLAMIC BANKING

Introduction
An Islamic Bank is a financial institution that operates with the objective to implement and materialize the economic and financial principles of Islam in the banking arena. The Organization of Islamic conference (OIC) defined an Islamic Bank as a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations. According to Islamic Banking Act 1983 of Malaysia, an Islamic Bank is a company which carries on Islamic Banking business....... Islamic Banking business means banking business whose aims and operations do not involve any element which is not approved by the religion Islam.

Objectives
The objective of Islamic Banking is not only to earn profit, but to do good and bring welfare to the people, Islam upholds the concept that money, income and property belong to Allah and this wealth is to be used for the good of the society. Islamic Banks operate on Islamic principles of profit and loss sharing and other approved modes of Investment. It strictly avoids interest which is the root of all exploitation and is responsible for large scale inflation and unemployment. An Islamic Bank is committed to do away with disparity and establish justice in the economy, trade, commerce and industry; build socio-economic infrastructure and create employment opportunities.

History and Present Status of Islamic Banking around the World

The History of Islamic Banking

The History of Islamic Banking can be divided in to two parts. First When it still remained an Idea, Second-When it became a reality-by private initiative in some counties and by law in others.

Islamic Banking as an Idea

The scholar of the recent past in early fifties started writing for Islamic Banking in place of Interest Free Banking. In the next two decades Islamic Banking attracted more attention. Early seventies saw the institutional involvement. Conference of the Finance Ministers of the Islamic Countries was held. The involvement of institutions and Government led to the application of theory to practice and resulted in the establishment of the Islamic Banks. In this process the Islamic Development Bank (IDB) was established in 1975.

The coming into being of Islamic Banks

The first private Islamic Bank, the Dubai Islamic Bank was also set up in 1975 by a group of Muslim businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and Sudan. In the same year the Kuwaiti Government set up the Kuwait Finance House. In the ten years since the establishment of the first private commercial bank in Dubai, more than 50 Islamic Banks have come into being. Though nearly all of them are in Muslim countries, there are some in Western Europe as well : in Denmak, Luxembourg, Switzerland and the UK.

In most countries the establishment of Islamic banking had been by private initiative and was confined to that bank.. In Iran and Pakistan, however, it was by government initiative and covered all banks in the country. The Governments in both these counties took steps in 1981 to introduce Islamic Banking.

PROBLEMS FACED BY ISLAMIC BANKING IN THE WORLD

Twenty-five years ago Islamic banking was considered a wishful thinking. However, serious research work of the past two and half decades has shown that Islamic banking is a feasible and viable way of financial intermediation. A number of Islamic banks have also been established during this period under heterogeneous social and economic milieu. The successful operation of these institutions and the countrywide experiences in Pakistan, Iran, Sudan and partly in Malaysia are sufficient to show that Islamic banking offers an alternative method of commercial banking. The commendable achievements during the last twenty years should not lead us to ignore the problems that Islamic banking is facing, and there is no dearth of those. While many problems are a result of the inappropriate environment in which Islamic banks are working, there are others which have arisen from the practices of Islamic banks themselves. Most of the Islamic Banks operate on Bai- Murabaha, Bai Muazzal, Bai- Salam, Istisna, Hire Purchase/ Leasing mode of Investment i.e. Islamic Banks always prefer to run on markup/ guaranteed profit basis having Shariah coverage. For this reason some times the conventional Economists and General people fail to understand the real difference between Islamic Banking and conventional Banking.

An Overview on the Review of Problems