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National University of Modern Languages

A Project of Economics

Interest in Islam and

Modern Islamic Banking

Submitted To: Madam Shumaila

Submitted By: Group – A

Submission Date: 05-10-2007

Department of Management Sciences

National University of Modern Languages, Lahore Campus

Mujib –ur- Rehman M-7592

Muhamad Mansoor M-7577

Wasim Abbas M-7596
Naveed Aslam M-7611
Muhamad Rizwan M-7595

Dedicated to
My beloved Parents who are always caring to me

Table of Contents

Sr. No. Description
1 Introduction to Interest 1
1.1 History of interest 1
1.2 Types of Interest 2
2 Interest in Islam 3
2.1 Prohibition of ‘riba’ (interest) in Islam 4
2.2 Why Does Islam Prohibit Interest (Riba) 6
3 Introduction to Islamic Banking 7
3.1 History of Modern Islamic Banking 7
3.2 Principles of Islamic Banking 7
3.3 Shariah Advisory Council/Consultant 8
3.4 Some Concepts in Islamic Banking 8
3.5 Criticism 10
4 Islamic Banks in Pakistan 11
4.1 Meezan Bank 11
4.2 BankIslami Pakistan 15

1 ─ Introduction to Interest

The standard dictionary definition for interest is as follows:

‘A charge made for a loan or credit facility’[3]

According to wikipedia encyclopedia

Interest is a fee paid on borrowed assets. By far the most common form these assets are
lent in is money, but other assets may be lent to the borrower, such as shares, consumer
goods through hire purchase, major assets such as aircraft, and even entire factories in
finance lease arrangements. In each case the interest is calculated upon the value of the
assets in the same manner as upon money. [1]

1.1 ─ History of interest [1]

The charge of interest dates back to 1500 B.C. among the Sumerian and Egyptian
cultures. References to the concept can be found in the religious text of the Abrahamic
religions such as the counsel against excessive interest. Some argue that Islamic banking
ought to be interest-free by law.

Interest is the earning of capital, particularly the price paid for the use of savings over a
given period of time. In medieval times, time was considered to be property of God.
Therefore, to charge interest was considered to commerce with God's property. Also, St.
Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of
interest is wrong because it amounts to "double charging", charging for both the thing and
the use of the thing. The church regarded this as a sin of usury, nevertheless, this rule was
never strictly obeyed and eroded gradually until it disappeared during the industrial
revolution. Some scholars think that banking started among Jewish families because of
the restrictions of the church.

“... financial oppression of Jews tended to occur in areas where they were most disliked,
and if Jews reacted by concentrating on moneylending to gentiles, the unpopularity - and
so, of course, the pressure - would increase. Thus the Jews became an element in a
vicious circle. The Christians, on the basis of the Biblical rulings, condemned interest-
taking absolutely, and from 1179 those who practised it were excommunicated. But the
Christians also imposed the harshest financial burdens on the Jews. The Jews reacted by
engaging in the one business where Christian laws actually discriminated in their favour,
and so became identified with the hated trade of moneylending”

In the Renaissance era, greater mobility of people facilitated an increase in commerce and
the appearance of appropriate conditions for entrepreneurs to start new, lucrative
businesses. Given that borrowed money was no longer strictly for consumption but for
production as well, it could not be viewed in the same manner. The School of Salamanca
elaborated various reasons that justified the charging of interest. The person who received

a loan benefited; one could consider interest as a premium paid for the risk taken by the
loaning party. There was also the question of opportunity cost, in that the loaning party
lost other possibilities of utilizing the loaned money

Economically, the interest rate is understood as the price of credit and, therefore, subject
to the laws of supply and demand. The first attempt to control interest rates through
money printing was made by the French central Bank until 1847.

The first formal studies of interest rates and their impact on society were conducted by
Adam Smith, Jeremy Bentham and Mirabeau during the birth of classic economic
thought. In the early 20th cetury, Irving Fisher made a major breakthrough in the
economic analysis of interest rates by distinguishing nominal interest from real interest.
Several perspectives on the nature and impact of interest rates have arisen since then.
Among academics, the more modern views of John Maynard Keynes and Milton
Friedman are widely accepted.

1.2 ─ Types of Interest

1.2.1 ─ Simple interest

Simple Interest is calculated only on the principal, or on that portion of the principal
which remains unpaid.

The amount of simple interest is calculated according to the following formula:

Where A is the amount of interest, P the principal, r the interest rate as a percentage, and
n the number of time periods elapsed since the loan was taken.

There are three problems with simple interest.

1. The time periods used for measurement can be different, making comparisons wrong.
One cannot claim that 1%/day of credit card interest is 'equal' to a 365%/year GIC
(Certificate of deposit).
2. The time value of money means that $3 paid every six months costs more than $6 paid
only at year end. So the 6% bond cannot be 'equated' to the 6% GIC.
3. When interest is due, but not paid, the consequences are unclear. For example, does it
remain 'interest payable', like the bond's $3 payment after six months? Alternatively, will
it be added to the original principal, as would typically be the case in the 1%/day
borrowed via the credit card? In the latter case, it is no longer simple interest, but
compound interest.

1.2.2 ─ Compound interest

In the short run, compound Interest is very similar to Simple Interest, however, as time
continues the difference becomes considerably larger. The conceptual difference is that
the principal changes with every time period, as any interest incurred over the period is
added to the principal. Put another way, the lender is charging interest on the interest.

Assuming that no part of the principal or subsequent interest has been paid, the amount of
compound interest incurred is calculated by the following formula:

where A, P, r and n have the same meanings as before.

A problem with compound interest is that the resulting obligation can be difficult to
interpret. To simplify this problem, a common convention in economics is to disclose the
interest rate as though the term were one year, with annual compounding, yielding the
effective interest rate. However, interest rates in lending are often quoted as nominal
interest rates, i.e., compounding interest uncorrected for the frequency of compounding.
The discussion at compound interest shows how to convert to and from the different
measures of interest.

In economics, continuous compounding is often used due to its particular mathematical


2 ─ Interest in Islam [6]

Islam is a complete code of life which offers its own social, political and economic
systems to guide human behavior in all spheres of life. History has recorded that the
economic system of Islam, for the first time in the world had established social and
economic justice during the period of al-Khilafah al-Rashidah. In any ideal Muslim
society, socio-economic justice is considered as one of the most significant characteristics
for the social, political, economic as well as all realms of human interaction. Exploitation
and any source of unjustified enrichment in Islam is prohibited. The Holy Qur’an has
emphatically instructed Muslims not to acquire each other’s property wrongfully[1].
Islam is not an ascetic religion. It takes a positive view of life as the natural outcome of
the belief that human beings are the vicegerents of Allah(swt).

The goals of socio-economic justice and equitable distribution of income and wealth are
integral parts of the moral philosophy of Islam. However, one of the socio-economic
reforms made by Islam was the prohibition of riba (interest). About the efficacy and
usefulness of the prohibition of interest in Islam, Muslim economists have tried to
provide the juridical clarity and support based on reason, as opposed to mere belief. The
purpose of this paper is to spell out the meaning of riba or interest, its different kinds, and
the social, moral, as well as economic rationale of its prohibition.

2.1 ─ Prohibition of ‘riba’ (interest) in Islam

Riba is prohibited in Islam as it appears explicitly in the Holy Qur’an. There is complete
unanimity among all Islamic schools of thought regarding the prohibition of riba. Since
the Qur’an is the undisputed source of guidance in Islam for all Muslims, there is
unanimous agreement on the fact that Islam has forbidden the practice of riba. The
debate on whether interest is riba or not has been settled. The ulama have made crystal
clear that interest is riba. The modern banking system is organized on the basis of a fixed
payment called interest. That is why the practices of the modern banking system are in
conflict with the principles of Islam which strictly prohibit riba.

Islam is opposed to exploitation in every form and stands for fair and equitable dealings
among all men. To charge interest from someone who is constrained to borrow to meet
his essential consumption requirement is considered an exploitative practice in Islam.
Charging of interest on loans taken for productive purposes is also prohibited because it
is not an equitable form of transaction[8]. Now let’s have a look on the prohibition of
interest in the light of the Qur’an and the Sunnah (tradition of Prophet Muhammad
(saw)). [6]

2.1.1 ─ Prohibition of ‘riba’ in the Holy Quran [6]

In several verses of the Holy Qur’an, Allah(swt) has mentioned the consequences of riba.
The Qur’an did not declare the prohibition of riba in the early stage of revelation, rather
we find that the complete prohibition of interest came sequentially.

In the Qur’an Allah(swt) says:

“That which ye lay out for increase through the property of (other) people, will have no
increase with Allah: But that which ye lay out for charity, seeking the countenance of
Allah (will increase): it is these who will get a recompense multiplied”. (30:39)

“That they took riba (usury), through they were forbidden and that they devoured men’s
substance wrongfully – We have prepared for those among men who reject faith a
grievous punishment.” (4:161)

“O ye who believe! Devour not usury doubled and multiplied; but fear Allah, that ye may
(really) prosper.” (3:140)

“Those who devour usury will not stand except as stands one whom the evil one by his
touch hath driven to madness. That is because they say: ‘Trade is like usury.’ But Allah
hath permitted trade and forbidden usury. Those who after receiving direction from their
Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those

who repeat (the offence) are companions of the fire, they will abide therein (forever)”

“O you who have attained faith! Remain conscious of God, and give up all outstanding
gains from Usury, if you are (truly) believers” (2: 278)

2.1.2 ─ Prohibition of ‘riba’ in the Hadith [5]

These ahaadith have been taken from Mishkat-ul-Masabih under the section of interest
and the English translation has been taken from its English version written by Al Hajj
Moulana Fazl Karim (218-227 vol. II)

Hazrat Jabir radiyallahu anhu has reported that the Messenger of Allah sallallahu alaihe
wasallm cursed the devourer of usury, its payer, its scribe and its two witnesses. He also
said that they were equal (in sin).

Hazrat Abu Hurairah radiyallahu anhu reported that the Holy Prophet sallallahu alaihe
wasallm said: A time will certainly come over the people when none will remain who will
not devour usury. If he does not devour it, its vapour will overtake him.
(Ahmed, Abu Dawood, Nisai, Ibn Majah.)

Hazrat Abu Hurairah radiyallahu anhu reported that the Messenger of Allah sallallahu
alaihe wasallm said : Usury has got seventy divisions. The easiest division of them is a
man marrying his mother.
(Ibn Majah)

Hazrat Abu Hurairah radiyallahu anhu reported that the Messenger of Allah sallallahu
alaihe wasallm said: I came across some people in the night in which I was taken to the
heavens. Their stomachs were like houses wherein there were serpents, which could be
seen from the front of their stomachs. I asked: O Gabriel! Who are these people? He
replied these are those who devoured usury.
(Ahmed, Ibn Majah)

Hazrat Ali radiyallahu anhu reported that he heard the Messenger of Allah sallallahu
alaihe wasallm cursing the devourer of usury, its giver, its scribe and one who refuses to
give Zakat and he used to forbid mourning.
Hazrat Umar bin Al-Khattab radiyallahu anhu reported: the last of what was revealed was
the verse of usury. The Messenger of Allah sallallahu alaihe wasallm was taken and he
had not explained it to us. So, give up usury and doubt.
(Ibn Majah, Darimi)

Hazrat Abdullah bin Hanzalah radiyallahu anhu (who was washed by the angels) reported
that the Messenger of Allah sallallahu alaihe wasallm said: A dirham of usury that a man
devours and he knows is greater than 36 fornications. (Ahmed, Darqutni)

Baihaqi reported from Ibn Abbas radiyallahu anhu in shuabul iman. He added and said:
(as for) one whose flesh has grown out of unlawful food, the fire is more suitable for him.

2.2 ─ Why Does Islam Prohibit Interest (Riba) [3]

2.2.1 ─ Failures of Interest Based Finance

‘The richest 225 people own more wealth than the poorest 2.5 Billion’

United Nations Development Report, 1998

“If the American people ever allow the banks to control the issuance of their currency,
first by inflation then by deflation, the banks and corporations that will grow up around
them will deprive the people of all property until their children will wake up homeless on
the continent their fathers occupied. The issuing power of money should be taken from
the banks and restored to Congress and the people to whom it belongs. I sincerely believe
that banking institutions are more dangerous than standing armies. “

Thomas Jefferson, Former President of the United States

The governments and elites of the Western world clearly have a vested interest in
ensuring society retains confidence in interest based banking. The biggest threat comes
from inflation which over time devalues the worth of a currency and therefore
undermines confidence in the system. This effort to control inflation has been taken very
seriously, with the development of an entire economic school of thought ‘Monetarism’.
This ensures the supply of money is tightly regulated and does not lead to excessive price
rises in times of economic growth. Conversely, control is loosened and banks encouraged
to supply more money in times of depression as a mechanism designed to artificially
boost growth. Central Banks all over the world have also been tasked with a delicate
balancing act of raising central interest rates on the one hand to ensure inflation is kept
under control and lowering interest rates on the other hand to prevent recession.

This ‘boom & bust’ cycle has the following glaring faults: ─ Banks are given too much power

The ability to create money gives banks and other financial institutions incredible levels
of power by permitting the creation of artificial wealth for which they have carried out no
corresponding real economic activity. This elite have an unacceptable level of control
over society’s well being. Abuse of this power takes many diverse forms but can perhaps
best be understood by examining the impact of debt on the third world.
7 ─ Economic growth is hindered

As money is permitted to attract a rate of return, banks are able to generate profits
through interest. Banks will invariably prefer to lend to those who have the greatest
collateral because they represent the lowest risk of default. Those who have the most
viable business plans are not always those who have the greatest collateral. Consequently,
interest based banking inhibits economic growth by failing to promote the best business
ideas which, if supported would result in higher economic growth. ─ The rich get richer

Those with the most collateral are by definition the wealthiest in society, By giving these
people preferential access to money, capitalism has a persistent tendency to favour the
rich and discriminate against the poor, ensuring that the rich just keep getting richer, and
the poor just keep getting poorer.

3 ─ Introduction to Islamic Banking [2]

Islamic banking refers to a system of banking or banking activity that is consistent with
Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic
law prohibits usury, the collection and payment of interest, also commonly called riba in
Islamic discourse. In addition, Islamic law prohibits investing in businesses that are
considered unlawful, or haraam (such as businesses that sell alcohol or pork, or
businesses that produce media such as gossip columns or pornography, which are
contrary to Islamic values). In the late 20th century, a number of Islamic banks were
created, to cater to this particular banking market.

3.1 ─ History of Modern Islamic Banking

The first modern experiment with Islamic banking was undertaken in Egypt under cover
without projecting an Islamic image—for fear of being seen as a manifestation of Islamic
fundamentalism that was anathema to the political regime. The pioneering effort, led by
Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian
town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which
time there were nine such banks in the country.

3.2 ─ Principles of Islamic Banking

Islamic banking has the same purpose as conventional banking except that it operates in
accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on
transactions). The basic principle of Islamic banking is the sharing of profit and loss and
the prohibition of riba´ (interest). Amongst the common Islamic concepts used in Islamic
banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture
(Musharakah), cost plus (Murabahah), and leasing (Ijarah).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the
item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit,
while allowing the buyer to pay the bank in installments. However, the fact that it is
profit cannot be made explicit and therefore there are no additional penalties for late
payment. In order to protect itself against default, the bank asks for strict collateral. The
goods or land is registered to the name of the buyer from the start of the transaction. This
arrangement is called Murabaha. Another approach is Ijara wa Iqtina, which is similar to
real-estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the
vehicle at a higher-than-market price to the debtor and then retaining ownership of the
vehicle until the loan is paid).

3.3 ─ Shariah Advisory Council/Consultant

Islamic banks and banking institutions that offer Islamic banking products and services
(IBS banks) are required to establish Shariah advisory committees/consultants to advise
them and to ensure that the operations and activities of the bank comply with Shariah

In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank
Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these
institutions and on their products and services.

3.4 ─ Some Concepts in Islamic Banking

3.4.1 ─ Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or
service for a fixed price or wage. Under this concept, the Bank makes available to the
customer the use of service of assets / equipments such as plant, office automation, motor
vehicle for a fixed period and price.

3.4.2 ─ Mudarabah (Profit Loss Sharing)

Mudarabah is an arrangement or agreement between a capital provider and an

entrepreneur, whereby the entrepreneur can mobilize funds for its business activity. The
entrepreneur provides expertise and management and is referred to as the Mudarib. Any
profits made will be shared between the capital provider and the entrepreneur according
to an agreed ratio, where both parties share in profits and only capital provider bears all
the losses if occurred. The profit-sharing continues until the loan is repaid. The bank is
compensated for the time value of its money in the form of a floating interest rate that is
pegged to the debtor's profits.

3.4.3 ─ Murabahah (Cost Plus)

This concept refers to the sale of goods at a price, which includes a profit margin agreed
to by both parties. The purchase and selling price, other costs, and the profit margin must
be clearly stated at the time of the sale agreement. The bank is compensated for the time
value of its money in the form of the profit margin. This is a fixed-income loan for the
purchase of a real asset (such as real estate or a vehicle), with a fixed rate of interest
determined by the profit margin. The bank is not compensated for the time value of
money outside of the contracted term (i.e., the bank cannot charge additional interest on
late payments); however, the asset remains in the ownership of the bank until the loan is
paid in full.

This type of transaction is similar to rent-to-own arrangements for furniture or appliances

that are very common in North American stores.

3.4.4 ─ Musharakah (Joint Venture)

Musharakah is a relationship established under a contract by the mutual consent of the

parties for sharing of profits and losses in the joint business. It is an agreement under
which the Islamic bank provides funds, which are mixed with the funds of the business
enterprise, and others. All providers of capital are entitled to participate in management,
but not necessarily required to do so. The profit is distributed among the partners in pre-
agreed ratios, while the loss is borne by each partner strictly in proportion to respective
capital contributions. This concept is distinct from fixed-income investing (i.e. issuance
of loans).

3.4.5 ─ Qard Hassan (Good Loan)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the
amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount
beyond the principal amount of the loan (without promising it) as a token of appreciation
to the creditor. In the case that the debtor does not pay an extra amount to the creditor,
this transaction is a true interest-free loan. Some Muslims consider this to be the only
type of loan that does not violate the prohibition on riba, since it is the one type of loan
that truly does not compensate the creditor for the time value of money.

3.4.6 ─ Takaful (Islamic Insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of
loss due to misfortunes. The concept of takaful is not a new concept; in fact, it had been
practiced by the Muhajrin of Mecca and the Ansar of Medina following the hijra of
Muhammad over 1,400 years ago. Takaful is based on the idea that what is uncertain with
respect to an individual may cease to be uncertain with respect to a very large number of
similar individuals. Insurance by combining the risks of many people enables each
individual to enjoy the advantage provided by the law of large numbers.

In modern business, one of the ways to reduce the risk of loss due to misfortunes is
through insurance which spreads the risk among many people. The concept of insurance
where resources are pooled to help the needy does not contradict Shariah. However,
conventional insurance involves the elements of uncertainty (Al-gharar) in the contract of
insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and
interest (Al-riba) in the investment activities of the conventional insurance companies
that contravene the rules of Shariah. It is generally accepted by Muslim jurists that the
operation of conventional insurance does not conform to the rules and requirements of

3.5 ─ Criticism

Islamabad, Pakistan, June 16, 2004: Members of leading Islamist political party in
Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the
National Assembly of Pakistan against what they termed derogatory remarks by a
minority member on interest banking:

Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the
National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank
interest was not un-Islamic. He said without interest the country could not get foreign
loans and could not achieve the desired progress. A pandemonium broke out in the house
over his remarks as a number of MMA members...rose from their seats in protest and
tried to respond to Mr Bhandara's observations. However, they were not allowed to speak
on a point of order that led to their walkout.... Later, the opposition members were
persuaded by a team of return to the house...the government team accepted
the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal
Karim said the Council of Islamic ideology had decreed that interest in all its forms was
haram in an Islamic society. Hence, he said, no member had the right to negate this
settled issue.

Many Muslims and non Muslims alike have opposed these Islamic banks, claiming that
they do deal in interest but merely conceal it through legal tricks.[citation needed]
Indeed, from an economic perspective, Islamic banks do compensate and charge for the
time value of money, thus paying and receiving what is known in economics as interest.
Such people compare Islamic banking to contractum trinius—a legal trick devised by
European bankers and merchants during the Middle Ages, designed to facilitate the
borrowing of money at a fixed rate of interest (something that the Church fiercely
opposed) through combining three different contractual agreements that in and of
themselves were not prohibited by the Church. While Islamic law prohibits the collection
of interest, it does allow a seller to resell an item at a higher price than it was bought for,
as long as there are clearly two transactions.

These arguments and criticism are exactly the same as those used at the time of
Muhammad. The Qur'an addresses this issue in simple terms, Interest is forbidden by
Allah, while trade has been permitted by Him:

4 ─ Islamic Banks in Pakistan

The following is the list of Islamic banks operating in Pakistan. [4]

• First Dawood Islamic Bank

• Dubai Islamic Bank
• Meezan Bank
• AlBaraka Islamic Bank
• BankIslami Pakistan Limited
• Emirates Global Islamic Bank

Here we will mention two of the Islamic banks: Meezan Bank and BankIslami Pakistan

4.1 ─ Meezan Bank [7]

Meezan Bank Limited is a publicly listed company, first incorporated on January 27,
1997. It started operations as an Islamic investment bank in August of the same year. In
January, 2002, in an historic initiative, Meezan Bank was granted the Nations first full-
fledged commercial banking license dedicated to Islamic Banking, by the State Bank of

Meezan Bank, stands today at a noteworthy point along the evolution of Islamic Banking
in Pakistan. The banking sector is showing a significant paradigm shift away from
traditional means of business, and is catering to an increasingly astute and demanding
financial consumer who is also becoming keenly aware of Islamic Banking. Meezan
Bank bears the critical responsibility of leading the way forward in establishing a stable
and dynamic Islamic Banking system replete with dynamic and cutting-edge products
and services.

The Banks main shareholders are leading local and international financial institutions,
including "Pak Kuwait Investment Company", the only AAA rated financial entity in the
country, the ‘Islamic Development Bank of Jeddah’, and the renown ‘Shamil Bank of
Bahrain’. The established position, reputation, strength and stability, of these institutions
add significant value to the Bank through Board representation and applied synergies.

4.1.1 ─ History

During 1997, Al-Meezan Investment Bank is established as the first Islamic bank of
Pakistan. Mr. Irfan Siddiqui appointed as first and founding Chief Executive Officer.

During 2002, the Shariah Supervisory Board is established at Al-Meezan Investment

Bank led by Justice (Retd.) Muhammad Taqi Usmani as chairman. State Bank sets
criteria for establishment of Islamic commercial banks in private sector and subsidiaries
and stand-alone branches by existing commercial banks to conduct Islamic banking in the

During 2003, A Musharaka-based Export Refinance Scheme has been designed by the
State Bank in coordination with Meezan Bank Limited, in order to provide export finance
to eligible exporters on the basis of Islamic modes of financing. Efforts are underway to
develop Islamic money market instruments like Ijarah Sukuk to facilitate the banks in
respect of liquidity and SLR management.

Pakistan’s first Shariah compliant Mortgage facility is launched by Meezan Bank.

Approved by the Shariah Supervisory Board, the product enables home purchase, home
construction, renovation, as well as replacement of any existing mortgage. Al Meezan
Investment Management Limited (AMIM), a group company of Meezan Bank,
introduces Meezan Islamic Fund (MIF). MIF is an open-end mutual fund that is Shariah
compliant. Meezan Bank’s asset management arm, Al Meezan Investment Management
Limited (AMIM), launches the Meezan Balance Fund (MBF). The offering was
oversubscribed 1.25 times.

In March 2005, to further strengthen & ensure strict Shariah compliance in bank’s
operation a dedicated and full fledged Product Development & Shariah Compliance
(PDSC) department was formally setup. The role of this research department is
centralization of Product development activities, new product research, Islamic banking
training and Shariah Compliance functions. The department works under the guidance &
supervision of bank’s Shariah Advisor – Dr. Muhammad Imran Usmani and the Shariah
Supervisory Board of the Bank.

PDSC now plays a very critical and vital role at the bank by actively supporting new
product development activities, refining existing products menu, preparing product
policies & standardize agreements, imparting Islamic banking knowledge at various
levels to new & existing staff members, corporate customers and general public,
coordinating with bank’s Shariah Board, conducting regular Shariah audits & reviews

During 2005, Meezan Bank launches the Meezan Islamic Institution Deposit Account
(MIIDA), a unique product tailored exclusively for Islamic Financial Institutions (IFIs).
The facility is the first of its kind in Pakistan, whereby Islamic Banks (including
dedicated, as well as conventional Islamic windows) now have the opportunity to manage
excess liquidity by maintaining a checking account with Meezan Bank specifically
designed for this purpose.

Meezan Bank becomes the first customer of Islamic Insurance (Takaful) by signing the
first Memorandum of Understanding MoU with Pak Kuwait Takaful Company Limited
(PKTCL). The signing of this MoU has ushered Pakistan into a new era of Islamic
Insurance (Takaful).

4.1.2 ─ Vision

Establish Islamic banking as banking of first choice to facilitate the implementation of an

equitable economic system, providing a strong foundation for establishing a fair and just
society for mankind.

4.1.3 ─ Mission

To be a premier Islamic bank, offering a one-stop shop for innovative value added
products and services to our customers within the bounds of Shariah, while optimizing
the stakeholders value through an organizational culture based on learning, fairness,
respect for individual enterprise and performance.

4.1.4 ─ Services

• Personal Banking and Finance

• Corporate Finance
• Commercial Finance
• Structured Finance
• Treasury
• Car Ijarah - Car Financing
• Easy Home - Home Financing
• Asset Management

4.1.5 ─ Product Development & Shariah Compliance (PDSC) Department

Product Development & Shariah Compliance (PDSC) is one of the important

departments of the bank that reflects strong commitment of the bank towards Islamic
banking and research. PDSC works directly under the supervision of bank’s Shariah
Advisor – Dr. Muhammad Imran Usmani and is managed by Mr. Ahmed Ali Siddiqui.
The function is vital in ensuring strict Shariah Compliance in all area of bank’s

PDSC role is manifold and comprises of facilitating new Product Development activities,
refining existing products & procedures, providing Islamic Banking training to new
recruits and existing staff members, conducting regular Shariah Audit & reviews of
branches & departments, coordinating with Bank’s Shariah Board and providing Islamic
Banking Advisory Services to both local and foreign financial institutions.

PDSC has played a vital role in imparting Islamic banking training to bank employees,
customers, Ulemas & scholars throughout Pakistan. The department regularly carries out
training sessions ranging from basic to in-depth specialized workshops. During the year
2006, a comprehensive Islamic Banker Certification (IBC) Program was successfully
introduced in Pakistan.

The bank has also provided Product Development Advisory services to different financial
institutions interested in offering Islamic Banking products & services around the world
via its research wing. The main objective of Meezan Bank’s Advisory function is to help
financial institutions develop Islamic Banking Products by sharing the experience,
research & success stories. The bank has successfully entered into advisory arrangements
with Capitas Group of USA, Al Meezan Investment Management (AMIM), Pakistan &
other Islamic banks & financial institutions.

The bank has also executed MoUs with INCEIF, Malaysia & Utruj Foundation, UK to
collaborate in the areas of training, research and product development.

4.1.6 ─ Internet banking

Meezan Bank’s Internet Banking system puts access to your accounts at your fingertips,
anywhere in the world. Using any computer with Internet connectivity the following
facilities are available by Meezan Bank;

• Balance inquiry
• Statement viewing & download (in PDF or MS Excel format)
• Cheque status
• Cheque blocking
• Payorder request
• Funds transfers between own accounts at Meezan Bank
• Cheque book request
• Change of address request
• Complaint logging

4.1.7 ─ Branches

Meezan Bank has over sixty branches in Pakistan including the following according to
each province of Pakistan;

• Sindh: Hyderabad, Karachi, Sukkur.

• Punjab: Dera Ghazi Khan, Faisalabad, Gujranwala, Kasur, Lahore, Multan,
Rawalpindi, Rahim Yar Khan, Sadiqabad, Sahiwal, Sargodha, Sialkot.
• NWFP: Abbottabad, Swat, Peshawar, Gujar Khan.
• Islamabad Capital Territory: Islamabad.
• Balochistan: Quetta.

4.1.8 ─ Shariah Supervisory Board

The Bank has an internationally renowned, very high caliber and pro-active Shariah
Supervisory Board presided over by Justice (Retd.) Maulana Muhammad Taqi Usmani, a
renowned figure in the field of Shariah, particularly Islamic Finance. He holds the

position of Deputy Chairman at the Islamic Fiqh Academy, Jeddah and in his long and
illustrious career has also served as a Judge in the Shariat Appellate Bench, Supreme
Court of Pakistan. The Bank also has a resident Shariah advisor, Dr. Imran Usmani, who
strictly monitors the regular transactions of the Bank. The board also includes Sheikh
Essam M. Ishaq (Bahrain), and Dr. Abdul Sattar Abu Ghuddah (Saudi Arabia).

4.1.9 ─ Credit Rating [8]

Meezan Bank has reaffirmed its entity ratings at A+ for medium to long-term and A-1 for
short-term. This rating was made by JCR-VIS Credit Rating Company, which has also set
Meezan Bank’s outlook on medium to long-term rating as “Stable”. The rating is yet
another milestone achievement in the Bank’s endeavor to be the Bank.

4.2 ─ BankIslami Pakistan [9]

BankIslami Pakistan Limited (“BankIslami”) is located in Karachi, Sindh, Pakistan.

BankIslami Pakistan has received an Islamic commercial banking license from State
Bank of Pakistan on March 31, 2005. It is the first financial institution in Pakistan that is
going to focus on Wealth Management as the core area of business. It intend to offer
retail banking products, proprietary and third party product, and integrated financial
planning services. The Bank is expected to start its operations in the last quarter of year

4.2.1 ─ Vision [10]

The Vision of BankIslami is to be recognised as the leading authentic Islamic Bank.

4.2.2 ─ Mission

The Mission of BankIslami is to create value for our stakeholders by offering Authentic,
Shariah Compliant and technologically advanced product and services. We differentiate
ourselves through (i) authenticity (ii) innovation (iii) understanding our client's needs (iv)
commitment to excellence, and (v) fast, efficient and seamless delivery of solution. As a
growing institution, the foundation for our performance lies on our human capital and
BankIlsmai remains committed to becoming an employer of choice, attracting, nurturing
and developing talent in a transparent and performance driven culture.

4.2.3 ─ Core Values

BankIslami is strongly commited towards its core values of:

• Product authencity
• Customer focus
• Meritocracy
• Integrity

• Team work
• Humility

4.2.4 ─ Major Sponsors:

• Randeree Family of the DCD Group

• Jahangir Siddiqui & Co. Ltd.
• Dubai Bank PJSC

4.2.5 ─ Products & Services

BankIslami Pakistan Limited offers a full range of Shariah compliant commercial

banking products and services such as current accounts, saving accounts, term deposits,
auto ijarah, home financing, murabaha financing, trade financing, biometric ATM facility,
internet banking service, locker facility, phone banking etc.

It aims to be the first Islamic Financial institution in Pakistan to focus on Wealth

Management as the core area of business. The Bank intends to offer Shariah compliant
integrated financial planning services, proprietary & third party products and host of
other new retail banking products and services in future.

The following products and services are provided at BankIslami: ─ Deposit Products

• Islami Current Account

• Islami Bachat Account
• Islami Dollar Bachat Account
• Islami Amadni Certificate
• Islami Mahana Munafa Account
• Historical Deposit Rates and Weightages ─ Corporate Banking

• Working Capital Finance

• Medium & Long Term finance
• Leasing /Ijarah
• Islamic Export Refinance
• Structured Finance ─ Trade Finance

• Letter of Credit (Sight & Usance)

• Letter of Guarantee

• Forward Cover
• Bill Purchase ─ Consumer Banking

• Auto Ijarah
• MUSKUN Home Financing ─ Wealth Management Services (Soon to be launched)

• Integrated financial planning solutions

• Proprietary products
• Third party products ─ Services

• Biometric ATM services

• Internet Banking
• Nationwide Online Banking
• Round the clock self service Phone Banking
• 24/7 Call Center at 111-ISLAMI (475-264)
• Lockers
• Interbank Fund Transfer (IBFT) facility
• eStatement Facility
• Utility Bill Payment Facility

4.2.6 ─ Shariah Supervisory Board

• Justice (Retd.) Muhammad Taqi Usmani - Chairman

• Prof. Dr. Fazlur Rahman- Member
• Mufti Irshad Ahmad Aijaz -Shariah Adviser & Member

4.2.7 ─ Competition Situation [9]

The bank is finding itself in a very competitive Islamic Banking industry in Pakistan and
faces a lot of real competition from other similar banks such as the legendary Meezan
Bank Limited (probably the oldest Islamic Bank in Pakistan), Emirates Global Islamic
Bank (launched recently in Feb 2007), and the Islamic divisions of the conventional old
banks like MCB (Al Makhraj), Standard Chartered Islami Bank, Bank Alfalah Islamic
Banking, Faysal Islamic Bank, Al Barakah Islamic Bank etc.

The severe competition has led all the banks to offer innovative services to retain and
gain customers from the local religious minded public. Bank Islami, for instance, is the
second bank that has installed the ATM in Pakistan with bio-metric verification (thumb
impression) to eliminate the requirement of a PIN code otherwise needed in ATM
transactions. Tameer Microfinance Bank Limited, launched the first ATM in Pakistan
with bio-metric verification with a local ATM vendor AeroCar (for details see press
releases of Pakistan's newspapers Dawn and Daily Times)

4.2.8 ─ Image Marketing [9]

Bank Islami has been able to form a strong image of having a staunch and
authentic basis for its banking operations by using smart marketing ideas that
resonate well with the public mind. For example, the calligraphy of the bank's
name in Urdu is claimed to have been done by the same calligraphers who have
done similar work in the Holy Mosque of Madina in Saudi Arabia.

Interest [On-Line]
Islamic banking [On-Line]
Why Islam has prohibited Interest & Islamic Alternatives for Financing [On-Line]
List of banks in Pakistan [On-Line]
Interest (Riba`) [On-Line]
Prohibition of Interest (Riba) in Islam – The Social, Moral and Economic Rationale
(Part I) [On-Line]
Meezan Bank [On-Line]
Credit Rating [On-Line]
BankIslami Pakistan [On-Line]
BankIslami Pakistan Limited [On-Line]