National University of Modern Languages

A Project of Economics

Interest in Islam and Modern Islamic Banking

Submitted To: Submitted By: Submission Date:

Madam Shumaila Group – A 05-10-2007

Department of Management Sciences National University of Modern Languages, Lahore Campus


Mujib –ur- Rehman Muhamad Mansoor Wasim Abbas Naveed Aslam Muhamad Rizwan

M-7592 M-7577 M-7596 M-7611 M-7595


Dedicated to My beloved Parents who are always caring to me


Table of Contents
Page No. 1 1 2 3 4 6 7 7 7 8 8 10 11 11 15

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


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 interesttaking 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

2 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.

3 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 properties. 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.

4 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

5 who repeat (the offence) are companions of the fire, they will abide therein (forever)” (2:275) “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). (Muslim) 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. (Nisai) 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).

8 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 principles. 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.

9 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 preagreed 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.

10 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 Shariah. 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:

11 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 Limited. 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 fullfledged commercial banking license dedicated to Islamic Banking, by the State Bank of Pakistan. 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 country.


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).

13 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 operations. 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.

14 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

15 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 2005. 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

16 • • 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

17 • • 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.

18 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] Available

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]