PAKISTAN ISLAMIC BANKS JOIN HANDS

Pakistan’s six Islamic banks are going to set up an Islamic inter-bank price market in order to stop relying on interest-based conventional banks in meeting their short-term funds requirements. "Things are almost finalized and an official announcement in this regard will soon be made," Ahmed Ali Siddiqui, head of Product Development Shari`ah Compliance at Meezan Islamic Bank, Pakistan's first full-fledged Islamic bank. Pakistan has six Islamic banks, Meezan Bank, Bank-al-Islami, Global Islamic Bank, Al-Barka Bank, Dawood Islamic Bank and Global Emirates Islamic Bank. They have around 500,000 customers in consumer financing and deposits sectors and hold 5 percent share in the overall banking sector in the country. Meezan is the first full-fledged Islamic bank in Pakistan and was issued license by the State Bank of Pakistan in 1997. There is already a conventional inter-bank price market for interest-based conventional banks in the South Asian Muslim country. "Though, the exiting interbank price market is not completely haram, our customers and religious scholars feel awkward about that because of the involvement of interest-based banking sector," Siddiqui said. "Therefore, the Shari`ah advisory boards of the six Islamic banks sat together a few months back and decided to set up their own interest-free price market," he added. "The major thrust of the proposed market is that the Islamic banks should not depend on the conventional banking sector in order to meet short-term funds requirement, which is unavoidable in this field," Siddiqui explained. "Therefore, we have decided to meet our respective funds requirements through each other. We believe that the Islamic banks have sufficient funds to meet each others’ funds requirements." Dr Shahid Hasan Siddiqui, a Karachi-based veteran economist, welcomed the Islamic inter-bank price market plan. "This is a very timely decision because the Islamic banks have been depending on interestbased banks to meet their short-term funds requirement, which confuses their customers," he told IOL. "There is no doubt about its viability. It will work Inshaullah." Expanding The banks decision is the latest sign of the boom in Islamic finance in Pakistan. "This is a major step which we are going to take vis-à-vis expansion of Islamic banking in Pakistan," said Siddiqui. He asserted that Islamic banking has gained a boom during the last few years, especially after the simmering global financial crunch.

"We have witnessed a growth rate (in Islamic Banking) in three figures during the last year. And we are targeting 12 percent share in the overall banking sector by 2012." Siddiqui says the current global financial crisis has diverted more and more Pakistanis towards Islamic banks. "We have not received any direct impact of the global financial crisis because our investments are assets-based rather than speculations." Islamic finance is already one of the fastest growing sectors in the global financial industry. The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world. Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013. A CONSUMER PERSPECTIVE The Idea of Islamic Banking is still hot these days in Pakistan. Either completely new Islamic institute are being emerged or recent traditional banks are opening additional branches focusing in Shariah-based Financing products/services. But still consumers doubt that how much are they Islamic? Three years back, Fazal Ahmed, chief financial officer of the Islamic Investment Bank quoted that “Pakistan followed Malaysia and Bahrain considered the role models of Islamic banking while it formulated its regulations, now Pakistan has the best possible framework for Islamic banking that it can”. But, at the end of the day, government institutions and authorities cannot judge whether they have proved themselves or not while consumers do. Now, according to the average consumer of the Islamic banks in Pakistan they still have doubt in their mind from the scratch to the main services provided by Islamic Banks. Consumers would be open to the thought of acquire Islamic banking products and services given that the organization that is offering the service is renowned, and better customer service features such as ATM access, phone banking and so on, are offered. This provides a great prospect for Islamic financial organizations in a market that already have many other competitive existing commercial banks. If Islamic financial organizations can make on their understanding and status in the monetary world, and can offer Islamic banking products/services in non Islamic markets such as Singapore, United Kingdom, Australia, they can plan to increase an emergent consumer base of the local residents in Pakistan, some of who may have beforehand excused themselves from dealing with the usual financial organizations because of the use of interest. The consumers still also believe on the fact the lack of consciousness about some basic concepts and philosophy of Islamic banking. In Pakistan, a number of consumers would not adopt halal banking products because they feel insecure

that what will happen if credit facilities were taken away. In the Islamic monetary structure money is not lent out, as an alternative it is an asset-backed scheme where monetary organizations invest in projects. Consequently, financial organizations deal in equity, not debt. To counter this inadequacy, some banks have started issuing ‘debit’ cards. These cards are alike to the credit cards excluding the actuality that they use the consumers own funds as an alternative of trust on any credit. Another concern is that of sharing profits and not losses. A lot of consumers who have been using the Islamic banking services were not educated about the loss sharing concept earlier. This would designate that some economic organizations have been assuring profits. In fact, it breaches the fundamental law of Islamic financing structure that is, relating compensations to risk. Any kind of money earned on investment without risk is simply interest more willingly than profit. So, it reveals the fact that, in order to recognize how the Islamic structure makes a distinction between profit and interest, they have to look at the dissimilarities in financial beliefs. Because past experiances have already shown that the rationale of ‘monetary and financial standing’ is very important for a consumer to select a particular bank. In capitalist theory, capital and entrepreneurs are taken care of as two separate identities of production where the first identity acquires interest and the second identity is permitted to get the profit. It is implicit that interest is a fixed return to offer capital, and profit can simply be produced after allocating the fixed return to land, labor and capital. On the contrary, the Islamic monetary system does not regard as capital and entrepreneurs as separate identities of production. It accepts as true that each individual who puts in capital in the figure of money to a business enterprise assumes the risk of loss and as a result is permitted to a proportional share in the actual profit. The system is caring of the entrepreneur, who in a capitalist economy would have to make fixed interest repayments even when the venture is making a loss. Capital has a fundamental aspect of entrepreneurship, until now as the risk of the industry is apprehensive and for that reason, rather than a fixed return as interest, it develops profit. So, as much profit one earn of the business, the more return on capital. The profit would be privileged if there are no fixed interest repayments. In this fashion the profits produced by the money-making activities in the public are uniformly dispersed among those who have given capital to the organization. In this way, an integration of social responsibility and extra Islamic values in rewarding consumers’ needs to be worthy of ultimate consideration as it signifies an excellent and basic discrimination between Islamic and conventional banking systems, and potentially competent to push Islamic banking to better pinnacle in securing consumers’ gratefulness and response.

Top researchers in the area of Islamic Finance have affirmed that assurance made by organizations that consumers will take delivery of a set rate of return without having to acquire losses are prohibited and immoral. Thus far, not only are financial organizations enduring the practice but government societies in Muslim nations are also contributing venture openings with certain income. Taking into consideration, that the Muslim administration is accountable for overseeing the structure in order to battle the prohibited practices of monetary institutes, by giving definite returns; the governments are seen to be overlooking the performance of the monetary organizations. Even though these proceedings may assist Islamic Banks develop in the short run, but in the long run overall cost will prevail over the profit in shape of damage to the repute and legitimacy. Such progress also offer ammunition to the detractors of the system who are previously questioning whether the structure is nothing more than an interest based system operating under the guise of profit. The most essential information discovered by the past behaviors is that consumer satisfaction over and over again is directly related to the quality of services that Islamic banks offer. The excellence of services comprises of factors like taking care of consumers with politeness and admiration; workforce capability to put across faith and self-assurance; effectiveness and efficacy in managing any operation; and well-informed and attentiveness in offering clarifications and answers relating to the products and services of an Islamic bank. As a result, Islamic bankers can no more rely only at marketing strategy of pulling religious and holy consumers towards them who might only worry about Islamicity of banking services. Some significant insights acknowledged on the bases of different thoughts of consumer baking selection criterion entails the requirement for Islamic banks to improve its quality of services which is at the present measured as an important success factor that have an effect on an institute’s competitiveness. With respect to the standing of a variety of bank selection criterion, some of these would undoubtedly revolutionize accordingly of people having turn out to be extra conscious of the culture of Islamic banking. For instance, media advertising would be probable to have an extreme good impact on Muslims. The aspiration by Muslims to be compensated a high rate of interest have to decrease. In case of non- Muslims, media advertising may turn out to be well rated accordingly of being uncovered to revealing bank promotion. Besides this, an additional considerable subject, which needs awareness, is the need to strengthen community learning and understanding towards the distinguishing features of Islamic banks and how it may beneficially go with the concern of consumers in their economic transactions. Islamic banks have latent of being advertised to different sectors of consumers who are worried with the legality of the ability from Islamic viewpoint and those who try to find for service value, handiness and well-organized business. Customer learning programs are for that reason vital if they are to amplify the level of customer consciousness

about the distinctive features of Islamic banking and the range of services and products offered by it. On the whole, after consumers have been uncovered to the ethnicity of Islamic banking, it would be anticipated that consumer’s knowledge of what Islamic banking engages would enhance and their thoughts towards this type of banking should vary. The change would be estimated to be much bigger in local consumers. Similarly with the standing of the different banking selection criterion. Shifts would be likely, extra predominant with banking customers throughout the country. Islamic banking has proved vital potential as a competitive and better substitute against conventional banking system in many countries of the world. Currently, two different approaches are experienced towards the development of Islamic banking. First way experienced by Pakistan, Iran and Sudan is to implement Islamic banking on a country wide and on a comprehensive basis. Second, way is to setup individual Islamic banks in parallel to the conventional interest based banks. Pakistan and Malaysia can be assumed as the two leaders of Islamic Finance. Both countries selected different tracks to achieve the same goals of developing full fledge Islamic banking but gained different results. The Governments of Pakistan has tried to employ Islamic banking system at once at national level. The overnight exercise of islamization didn’t produce the required results due to lack of required support and continue efforts to eliminate the interest (Riba) from the economy. Most of the Islamization efforts either had been reversed or at least, further progress was stopped. Since 2001, the Central Bank of Pakistan has started adopting the gradual policies of implementing Islamic banking which Malaysia has adopted twenty years back. Al-Meezan Bank in Pakistan (fully Islamic and independent commercial bank) and full fledge separate Islamic banking branches from few commercial banks are healthy indicators for positive expectations. Malaysia employed the gradual approach of implementing Islamic banking. Although, the country is facing problems in segregating Islamic and conventional banking fixed assets and overheads expenses but, no doubt, it has successfully developed viable Islamic financial system. After developing Islamic banking infrastructure and Islamic instruments for financial investments and liquidity management, the country is actively progressing towards the development of Islamic capital market. Malaysia is now also inviting the international players to experience its new dual banking system.

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