Factor that effect the growth of Islamic

Banking in Pakistan

Research Advisor:
Sir Salman Masood
Submitted By:
Zahid Mahmood

Roll No
MBP-9642

Session 2008-2010

Superior University Lahore

Chapter#1

Introduction
The banking system in an economy works like the blood circulation system of
a body. As only an competent blood circulation system can make sure a
healthy body, similarly an efficient and reasonable banking system can
distribute economic efficiency and justice. These basic concepts and
objectives are common to any banking system whether it be Islamic or
conventional banking. . The difference lies in the methodology adopted to
achieve these objectives. What are the different factors that influence the
growth of Islamic banking and how can managers deal with these variables
to increase the growth of Islamic banks for ones own firm? Variables that
influence the growth of Islamic banking include the political support. But
what kind of the relationship is between the growth of Islamic banks (IbK)
and each of the variables? The main purpose of this study is to explore the
relationship between growth of Islamic banks and these variables. 150
questionnaires were filled to verify the spearman correlation and regression
equation. The empirical results showed that all the variables are good tools
to increase the growth of Islamic banking in Pakistan.

Purpose Statement:
Determine those factors that affect the development of Islamic banking in
the country. Research indicates these are many internal and external factors
are near which growth of Islamic banking. External factors cannot be
controllable but the internal factors can be controlled. So there are several
internal factors, which affect the growth of Islamic banking in the country.

Therefore, purpose of this study will be develop a questionnaires on the

variables which were defined in the model to quantify the findings and
checked the western model in the context of developing country (Pakistan).

Objectives of the study:

To find out the different factors, how affect the growth of Islamic
banking.

To know about deviation in the growth of Islamic banking.

Provide information about these factors.

Significance of the Study:

The growth of Islamic banking for the country cannot be neglected. In other
way it is the main Islamic source for the investors to make decision either to
invest or deposit their money in the Islamic way. Thats why growth of Islamic
banking is so important. The Growth of Islamic banking measures the
financial position of the economy. To increase the growth of Islamic banking
of the country can be an important step is achieving the desired goals. It
provides basics for the investors and also for the shareholders to make a
further stronger relation with the customers.

To check the role of those

factors who affect the growth of Islamic banking. There are several factors
that affect the growth of Islamic banking like, low knowledge, Innovation,
political support. These are those factors that help to enhance the growth of
Islamic banking. Secondly, no research has been found on theses determents
of growth of Islamic banking in Pakistan. Therefore, the present study will
prove to be a significant contribution in this area.

Research Question:
Main Question
What are the main factors that impact the growth of Islamic banking?
Sub Questions
1. What is the impact of Political support on the growth of Islamic
banking?
2. What is the impact of Low knowledge on the growth of Islamic
banking?
3. What is the impact of Innovation on the growth of Islamic banking?

Research hypothesis:
Hypothesis 1:
H1:

there is relationship between the Islamic banking and Political support.

H0:
there is no relationship between the Islamic banking and Political
Support.

Hypothesis 2:
H1:

there is relationship between the Islamic banking and low knowledge.

H0:
there is no relationship between the Islamic banking and low
knowledge.
Hypothesis 3:
H1:

there is relationship between the Islamic banking and innovation.

H0:

there is no relationship between the Islamic banking and innovation.

Key terms
Political Support:

It is the constitutional and legal responsibility of

the Pakistan government and its people to implement the interest free
economy and financial system in the country. However the government did

not devise any comprehensive strategy for Islamic and tried to enforce the
Islamic order in the economic arena only (Nomani and Rahnema, 1994). The
present governments claim that it has been promoting the interest-free
banking practice under a dual system is neither feasible nor realistic.

Low Knowledge:

In Islamic banking they cannot provide the proper

knowledge about the interest free banking. Proper knowledge can increase
the Islamic banking productivity in Pakistan. The success of this kind of
banking practice definitely looks for enforcing Islamic reforms in the overall
system, which is not possible. In fact the conventional banking system have
been acting very convenient source of funding for the government, but the
interest free banking order was supposed to be not.

Innovation: In business, revenue or revenues is income that a company

receives from its normal business activities, usually from the sale of goods
and services to customers. In many countries, such as the United Kingdom,
revenue is referred to as turnover. Some companies receive revenue from
interest, dividends or royalties paid to them by other companies. Revenue
may refer to business income in general, or it may refer to the amount, in a
monetary unit, received during a period of time, as in "Last year, Company X
had revenue of $32 million."

Chapter#2
Literature

review

Gait and Worthington (2008) An empirical survey of individual consumer,

business firm and financial institution attitudes towards Islamic methods of
finance. An important survey of empirical analyses about Islamic financial
products and services the comparison with the literature on conventional
financial services and products. It was found that while religious conviction is
a key factor in the use of Islamic finance consumers also identify bank
reputation service quality and pricing as being of significance. When
selecting a financial institution's products and services business firms
usually employ criteria that are more conventional such as the cost of
finance in their decision making. There is also interest among financial
institutions in supply Islamic financial products and services, but this
mitigations by difficulties with firm management and a lack of familiarity
with business conditions. The concept of risk sharing with borrowers serves
as a important barrier to most financial institutions engaging in Islamic
methods of finance. Need for further theoretical and empirical research on
how religious conviction affects consumers in their financial decision

making. In addition most work on Islamic finance in a single national context

international comparisons are required.
Khan and Bhatti (2006) studied that why interest-free banking and finance
movement failed in Pakistan. They studied to understand the reasons why
Islamic banking failed in Pakistan despite lots of efforts being made to
implement in contrast to its success in other parts of the world. There study
was based on arguable conceptual approach. They provided a longitudinal
view of the issue of replacing the interest-based financial system in Pakistan
with an interest-free system by taking the religious, socio-economic and
political factors of the country. They found that the slowly solutions to
remove interest from the financial sector of Pakistan could never succeed.
They concluded that all intellectual, practical, political, constitutional and
legal efforts undertaken in Pakistan to implement an interest free system
were not meant in serious and therefore they inflicted serious damage to the
basis of Islam as well as Islamic banking. Interest is prohibited in Islam for its
unfair nature. In case of Pakistan, interest institution is not only inherent, but
also strongly interlinked with other unequal tools that are prevalent in the
hands of some selected people to keep their control over political, economic
and social spheres of Pakistan. There was necessary need to eliminate
interest along with its related forces from the polity of Pakistan. The practical
success of interest-free banking and finance movement in Pakistan could not
be materialized except the position and polity of Pakistan are not convinced
seriously to discover the paradigm of their personal and state institutions
based on Islamic guidance and principles.
Baba and Amin (2009) conduct a research on the offshore bankers'
observation on Islamic banking niche for Labuan: an analysis. The objective
of their paper was to detail the finding of a study to determine the viability of
Islamic banking as a niche for the Labuan International Offshore Financial
Center (IOFC). Labuan was declared an IOFC by the Malaysian Government in
1990, with the goal of developing it as a financial superstore offering a

wide range of offshore financial products specializing in Islamic finance. They

employed the mail survey method to ensure the secrecy of the respondents
and the whole population of banks is used, which enable the researcher to
ignore the problems of bias in the sampling. The Data collected from the
survey to analyzed using descriptive statistics, mean, standard deviation,
and frequency counts. The results of the survey indicated that Labuan
offshore bankers did not have a clear idea of Islamic banking principles and
practices. The results also showed that most of the offshore banks did not
have officers and staff who were familiar with Islamic banking. Nevertheless,
conventional offshore banks were willing to train their officers in Islamic
banking skills and participate in future Islamic deals. The findings also
indicated that Islamic banking was a viable niche for the Labuan IOFC.
However, the results also showed that Labuan does not have competitive
advantage over Bahrain and London, Presently the important Islamic finance
centers in the world.
Nathan and Ribera (2007) explore the concepts and relationships between
intellectual capital knowledge perception and corporate responsibility in the
context of the corporate governance of Islamic financial institutions. The
presented an adaptation of the Nicholson and Kiel thinker capital model of
the board of directors including the role of the Sharis Supervisory Board
(SSB). The main research question was how the SSB added value to the
corporate governance model of IFIs through their intellectual capital. Was
there any value in replicating the IFIs structure in western conventional
banks and if yes how could it be done without the religious and cultural
impacts. They create that was only recently that one entered the knowledge
economic time and organizations were slowly realizing the need and the
benefits not only of managing knowledge better, but also of managing it in a
wiser way. The concepts and values carried by Islamic banking and by social
responsible investments have a lot in common and they both tend to bring
wisdom to the organizations operation and goals.

Choudhury

(2006) studied the Islamic macroeconomics. He designed to

offer a new perspective on the strictly microeconomic nature of all Islamic

economics. He provided a comparative study of received literature in the
history of economic thought and contrasts the ethical foundations of Islamic
economics

from

the

mainstream

between

microeconomic

and

macroeconomic parts. They found that there was a strong microeconomic

foundation of Islamic economics for the economy wide treatment of ethical
economic issues and problems including the policy framework. His research
was based on the theoretical exploration.
Anjum (2008) conduct a study on the Islamic worlds development
policy responses to the challenge of financial globalization. He analyzed the
nature mechanisms conventional and modern instruments dynamics and the
future possibilities of the modern phenomenon of financial globalization from
the point of view of identifying and addressing the corresponding real
politico-economic challenges confront by the contemporary Islamic world. He
focused on the institutional responses of the contemporary Islamic world to
the challenges of financial globalization. He developed a theoretical treatise
on its subject in the light of research work of Ali Khan (2000) who points to
the imperative of an Islamic institutional response to financial globalization.
by treating the institution of Islamic banking as the solid substitute of the
Islamic financial institution to highlight the actual and prospective responses
of the Islamic financial institutions to the challenges of financial globalization.
He found that financial globalization was an evolving reality. Because of its
atheistic, money-oriented, undemocratic, non-universal and interest-based
world view and character, financial globalization had been posing a serious
challenge to the contemporary Islamic countries agenda of economically
empowering and developing themselves through the integration of their
economies along the universal Islamic lines exhibit in the form of one Islamic
Omaha.

Karim and Affif (2005) conducted a study on the Islamic banking

consumer behavior in Indonesia. They used a qualitative approach to
conduct that research, three market segment was driven by different
motivation was found. Due to different motivation level, the consumer
decision making process of each segment very different. In addition, based
on our study, they just looked two segmentation variable, namely value
graphic variable and economic size variable. The combination resulted in our
Kmark

Segmentation

Model.

From

this

segmentation,

the

consumer

evaluation stage in the decision making process can be further classified.

They

found

that

the

Islamic

banks

development

in

Indonesia

was

phenomenal. The number of banks increased from only five banks (three
Islamic Banking Unit and two Islamic Commercial Banks ) in 2000 to 18
banks ( three Islamic Commercial Banks and 15 Islamic Banking Unit) by the
end of 2004. Therefore Assets grow by an average of 70% per year in the
last five years namely from Rp 1,790 trillion to Rp 14,035 trillion by the end
of 2004. Funds collected by the Islamic banks in Indonesia has reached Rp
10,559 trillions, while financing channeled by the Islamic banks reached Rp
10,978 trillions, creating a finance to deposits ratio of 104,00%.Therefore
Another important development of Islamic banks in Indonesia is the number
of branch and sub-branches offices. In 2000 the number of branch offices
was only 28, while in 2004 it has grown to 148.1 this does not include the
number of ATM (Automatic Teller Machines) that can be accessed by Islamic
bank customers. In 2005 it is estimated that the number of Islamic banks will
still increase significantly. Following this growth is the increase number of
branch offices, sub-branch offices, ATM, assets, and of course customers.
Unfortunately, studies regarding customers behavior of the Islamic banking
customers in Indonesia be still rare. Questions regarding what is the public
awareness of Islamic banks, why customers choose an Islamic bank for its
financial need, why customers choose a assured bank, why customers prefer
a certain Islamic bank, and what is customers knowledge on Islamic bank
products are so important but currently not fully understood so far. That need

of consumer knowledge then created the problem of Islamic banking in

Indonesia. In term of quantitative measures financial figures were all
progressing, but in term of the human nature many was yet to be
understood.

Cerimagic (2010) conducted a research on the effect of Islamic law

on business practices. His research gives professionals working in Islamic
countries a better understanding of the legal system in those countries. As
rule multinational companies were more equipped in dealing with problems
when govern by Western legal philosophies and jurisprudence. However
when certain issues fall on the jurisdiction of an Islamic country they had to
address it by using the Islamic laws (Shariah laws) maintained in the Quran.
The data used in paper was literature review based on texts and references
sourced in the business environment. The literature used was Islamic
literature in the Bosnian and English languages. He found that the Islamic
laws oblige companies to be wary of interest, uncertainty or risk, which
showed the companies that rely on compelling interest on the consumer
were prohibited in operating in Islamic states. The law was there to protect
the welfare of all the parties involved. The strict nature of these laws often
seeks to provide justice and fairness to both parties. Thus, for organizations
and international companies who intend to deal with companies based in
Islamic countries and stick to Shariah law should always be mindful of the
fairness of their offers and the justice of the outcomes of those agreements.
Burghardt and Fu (2004) conducted a research on the Islamic banking
credit products in Germany and in the United Kingdom. They analyzed
whether the predictions about a prosperous future of an international Islamic
banking market could be justified by evidence from the German and the
United Kingdom (UK) markets. They focused on Islamic Banking credit
products, since their characteristic features were heavily influenced by the

criticism of interest in Islamic law. The data was collected through the
interviews with bankers to analyze the German and the UK markets for those
products from both a supply and a demand perspective. They showed that
the Islamic population in Germany mainly came from secularized Muslim
countries, where the influence of religion on commercial and banking law
was low. Therefore they did not identify any particular need for German
Muslims to actively demand Islamic banking credit products in Germany.
They found that 63 percent of the Turkish population in Germany had savings
accounts in 2000, 42 percents and 25 percents had credit card and building
society savings agreements or securities accounts respectively. Of those
German Turks having bank accounts, a majority of 53 percent were
customers of local savings banks, followed by 24 percent being customers of
major German banks (11 percent were clients of former Deutsche Bank24)
and the Volks and aiffeisenbanken, those 17 percent held were accounts.
Unpredictably only 14 percent of German Turks were customers of Turkish
banks. These result were in line with the overall preferences of banks by the
entire German population according to the Deutsche Bundes bank, roughly
44 percent of private individuals were clients of savings banks, followed by
29 percent of regional banks, 20 percent of major German banks, 7 percent
of state banks and only 0.2 percent at branches of overseas banks.
Pearson (2008) conducted a study about the consciousness of Islamic
finance and its recent development in the UK. Second, to highlight the
unique challenges faced by the sector, identifying areas where good progress
has been made and providing the Governments perspective on where more
barriers to development lie. Islamic finance described the part of the
financial services industry those complied with the principles of Shariah
(Islamic law). Though that had obvious appeal to some Muslims, Islamic
finance was available to all consumers and investors. The Governments
policy objectives for Islamic finance be cleared. First to establish and
maintain London as Europes got away to international Islamic finance.

Second to ensure that nobody in the UK was without access to competitively

prices financial products on account of their confidence. The Governments
approach to achieving these objectives was characterized by the principles
of equality collaboration and commitment. Significant progress towards
meeting those objectives had been made. The UK was at that time important
centre for Islamic finance outside of the Gulf Cooperative Council and
Malaysia. London and Birmingham now host the only separate Islamic
financial institutions in the EU. UK consumers could now access a broad
range of Shariah compliant retail financial products and services, which were
in time to the same standard as conventional financial products, conferring
the same degree of consumer safety. The role of the Government in
achieving this progress has been important, particularly through the removal
of tax and narrow barriers. The Treasury and the Financial Services Authority
will continue to work towards creating a level tax and regulatory playing field
between conventional and Islamic finance. Furthermore the Government
would continue to keep the feasibility of issuing independent wholesale and
retail Islamic finance products under review they found that much of the
future work in developing the sector and removing barriers to growth in
areas such as consistency, awareness and skills must for industry to take
forward with Government providing support and encouragement where
suitable. Particular areas where the Government has identified opportunities
for further progress included.

Through

collaboration

between

industry

and

international

standard setting bodies creating a set of strong and accessible

term-sheets for the main Islamic products.
Through collaboration among industry and population groups
raising awareness and knowledge about Islamic finance at the
grass roots level.

 Through collaboration between industry and trade bodies high

lighting the UKs strength as a provider of education training and
skills in Islamic finance. Many remaining barriers will be
addressed as the sector grows and develops.

Shahinpoor (2009) studied, The relation between Islamic banking

and

micro

financing,

he described the basic principles of Islamic banking and micro financing and
then he showed the relationship between the two financial practices. In
general it was believed that the two practices were not compatible since
microfinance allowed interest payments on loans and Islamic banking
prohibit interest payment based on Islamic law by sharia. Both the practices
however promoted equality and fairness for all members of the society and
encourage entrepreneurship by giving collateral free loans to the poor. The
two practices therefore are ideologically linked. He found that Islamic
spiritual leaders usually dismissed micro financing because micro financing
requires high interest rates was against Islamic law. He found that it was
possible to join the two practices and to convince Islamic religious leaders
that Islamic banking could be applied to micro financing.
In (1999 conduct a study by) Naser, Jamal, Al-Khatib

conducted a

research on the Islamic banking in relative to a study of customer

satisfaction and preferences. The data was collected and samples are taken
from Jordan the Islamic banking system is gaining momentum. Many
international conventional banks have started to open branches which
operate in accordance with the Islamic Shariah principles in some Islamic
countries. The Islamic banking system is predictable to face strong
competition not only from the Islamic banks but also from well established
conventional banks offering Islamic products and services. In this study an
effort is made to assess the degree of customer awareness and satisfaction

towards an Islamic bank in Jordan. A sample 206 respondents took part in

this study. The analysis of their responses discovered a certain degree of
satisfaction of many of the Islamic banks products and facilities. The
respondents expressed their dissatisfaction with some of the Islamic banks
services. Although the respondents indicated that they are aware of a
number of specific Islamic financial products like Musharaka, Mudarabaand
Murabaha, they show that they do not deal with them.
Bhatti and Khan (2008) conducted a study on the growth of Islamic
banking with prospect with a financial risk-allocation approach they studied
unequaled development in Islamic banking, its infrastructures and supporting
institutions in current years. They expressive the case for Islamic banking in
a very comprehensive and effective manner. It depict Islamic banking as a
growing regulation adding more ethical, competitive and diversified tools and
systems into global finance. It highlights the paradigm theory and practice
achievements, pitfall and future prospects of Islamic banking. They used the
conceptual model and practice of Islamic banking. They cover other related
issues over the recent development of Islamic banking across the globe.
They observed that Islamic banking has made unparalleled progress over
recent years. The Middle East, South Asia and Indian Subcontinent have
emerged as hub of Islamic banking. Western conventional regulators and
investors and other agents have also shown a greater interest in and a
accessible attitude towards Islamic banking. Although all the Islamic banking
has been facing some core problems and challenges that will have deeply
impacts on its future growth and there improvements.
Alhabshi, Abdullah and Mokhtar (2008) studied the Efficiency and
competition of the

Islamic banking in Malaysia. The study measures the

technical and cost efficiencies of these banks using the nonparametric

border method, data envelopment analysis (DEA). They results showed that
on average the efficiency of the overall Islamic banking industry has

increased during the period of study The study also discovered that although
the fully fledged Islamic banking were more efficient than the Islamic
windows, they were still less efficient than the conventional banks. Finally
Islamic windows of the foreign banks were found to be more efficient than
Islamic windows of the domestic banks.
Metawa and Almossawi (1998) conducted a study on the Banking behavior of
Islamic bank customers perspective and implications. They described a study
planned to investigate the banking behavior of Islamic bank customers in the
state

of

Bahrain.

The

study

sample

comprised

300

customers.

comprehensive profile analysis and a series of chi square tests were

conducted to expose key characteristics and patterns the majority of Islamic
bank customers are well educated, approximately 80 percent are between
25-50 years of age more than 50 per cent of the surveyed customers have
maintained their current banking relationship with Islamic banks for more
than six years, customers understanding and usage rates are quite high for
savings accounts, current accounts, investment accounts and automated
teller machines, customers were found to be mostly satisfied with the
products and services they use most with investment accounts receiving the
highest satisfaction score Islamic bank employees received the highest
satisfaction score among the elements of the service delivery system. The
two most important bank selection criteria were adherence to the Islamic
principles, followed by the rate of return.
Ismail (2010) studied Strength and improve the liquidity management in
Islamic

banking.

They

analyzed

and

evaluate

the

current

liquidity

management in the Indonesian Islamic banking industry. It also suggest an

integrate and comprehensive program of liquidity risk management which
captures and assimilate the whole aspects of the issue and brings the
industry into a better way of managing liquidity risk based on sharia
principles. They examine the organizational structure of Islamic banks and

Islamic

windows

in

managing

liquidity.

Second

it

investigates

the

characteristics of the depositors their investment behaviors and expectations

followed by the banks efforts and policies to manage the liquidity. Then it
identifies the potential liquidity problems and Islamic liquid instruments.
Finally it proposes an integrated and comprehensive program for managing
liquidity. They were suggested that institutional deepening restructuring the
liquidity management on the liability and asset sides and refreshing the
usage of the Islamic liquid instruments in the integrated program.
Haron and Azmi (2008) conducted a research on the Determinants of
Islamic and conventional deposits in the Malaysian banking system. They
investigate the impact of selected economic variables on deposits level in
the Islamic and conventional banking systems in Malaysia. Both long and
short run relationships between these variables are measured by using
advanced time series econometrics. These techniques are co integration and
error correction framework which are conducted within the vector auto
failure framework. They applied recent econometric techniques. We find
determinants such as rates of profit of Islamic bank rates of interest on
deposits of conventional banking base lending rate, Kuala Lumpur composite
index, consumer price index, money supply and gross domestic product have
different impact on deposits at both Islamic and conventional banking
systems. In most cases customers of conventional system behave in
conformity with the savings behavior theories. In contrast most of these
theories are not applicable to Islamic banking customers.

There is a

possibility that religious belief plays an important part in the banking

decisions of Muslim customers.
Sufian (2007) conducted a study the efficiency of Islamic banking industry
in Malaysia Foreign vs. domestic banks .The documents utilized the Data
Envelopment

Analysis

(DEA)

methodology

which

allows

for

the

decomposition of technical efficiency into its pure technical and scale

efficiency components. The authors additional examined whether the

domestic and foreign banks are drawn from the same population by
performing a series of parametric and nonparametric tests. Finally the
authors attempt to investigate the consistency of the estimated DEA
efficiency scores by investigative its relationship with the traditional
measures of banks performance. The result obtained from the DEA suggest
that Malaysian Islamic banks efficiency declined in year 2002 to recover
slightly in years 2003 and 2004. The domestic Islamic banks was more
efficient compared to the foreign Islamic banks although marginally. The
source of this incompetence of Malaysian Islamic banks in general has been
scale. Suggesting that Malaysian Islamic banks have been operating at the
wrong

scale

of

operations.

The

results

from

the

parametric

and

nonparametric tests further suggested that the foreign and domestic banks
are drawn from the same population. Most of the test results could not reject
the null hypothesis at the (0.05) levels of significance. The results of
correlation coefficients have further confirmed the authority of scale in
determining the technical efficiency of Malaysian Islamic banks. The results
also suggest that profitability is significantly and positively correlated to all
efficiency measures.
Alexakis and Tsikouras (2009) Islamic finance regulatory framework
challenges two-faced ahead conducted a study on the regulatory framework
and key regulatory institutions and industry associations in Islamic finance
today and highlight areas that merit increased awareness. The Data is
collected from a large range of bibliography was reviewed with particular
focus on the standards published by the Islamic Financial Services Board of
Accounting and Auditing Organization for Islamic Financial Institutions.
Regulatory topics of particular interest in the Islamic financial world are
reviewed. An overview of the main Islamic regulatory institutions is provided.
The paper ends with a set of hypotheses requiring more research. They
found that the growth of the Islamic finance sector may be impacted by the
increased involvement in Islamic finance by Western regulators as well as

credit rating agencies, existence of sound accounting procedures, increased

protection of stakeholders of Islamic Financial Institutions.
Choudhury, Husain (2005) conducted a study on the paradigm of
Islamic money and banking. The logical perspectives in ethics, values and
their functional application in the real world are brightly covered by the
theory and practice of Islamic banking in recent times. They seeked to
formalize the logical paradigm of the unity of God (Tawhid) and to make the
foundation of unity of knowledge in the context of the money of finance and
real economy linkages. The data is collected by combines description with
argument and analysis. On the basis of this study they structure of the
balance sheet of Islamic banks with no interest rate as an ethical condition of
Islamic financing is delineated. This topic is followed by a discussion on the
experience of Islamic banks in recent times in the area of mobilizing
resources and gaining profitability popularity and permanence by the Islamic
financing methods and the direct mobilizing of financial resources into the
real economy. In this technique the Islamic banks are shown to attain the
much needed complementary relations between social well being for clients
and financial efficiency for the banks.
Hasan (2008) conducted a study on the credit creation and control. In view
of a rapid development of Islamic banking in recent decades the answer to
questions whether Islamic banks can create credit like conventional banks
and if yes what methods central banks could use to control in their case of
principal importance. An overview of the literature on the subject is provided
and credit creation process is explained as background material for the
discussion. They found the literature on the subject is insufficient,
controversial and questionable. One reason seems to be the difference
between structural design of Islamic banks and the objectives they are
supposed to meet. It is conclude that Islamic banks can create credit in the
usual manner but central banks will have to design new tools for credit
control appropriate to Islamic banks. The findings of papers may have

serious implication for the current structure of Islamic banking and legal
framework for regulating their credit creation and activities
Hassan and

Aldayel (1998) studied on the stability of money demand

under interest free versus interest based banking systems. They study and
examine empirically the constancy of the demand of money under two
different financial systems. One system pays interest on money deposited at
the bank and charges interest on bank loans, the other does not pay interest
on money deposited in the bank, and enter into a profit sharing contract
with the bank borrower instead of charging interest on bank loans. Therefore
the first system resemble the western financial system and the second
resemble Islamic financial system. A study by Darrat (1988) studies the
behavior of demand for money in Tunisia and fulfilled that interest free
money is more stable than the interest bearing money. The behaviour of
demand for money in 15 countries has been analyzed in this research in
order to find out if the findings by Darrat (1988) are applicable to other
countries that practices of Islamic banking. This study finds that the velocity
of money and its variance are lower for interest free banking system than for
interest bearing banking system. This result may support the hypothesis
that interest free money is more stable than interest bearing money. The
financial policy implications of interest free banking are also analyzed.
Hassan, Christopher (2005) conducted a study on corporate governance
declaration disclosure of Malaysian banks and the role of Islam The objective
of this study is to undertake a qualitative study to examine the influence of
religion specifically Islam on corporate governance statement disclosure in
the annual reports of three major Malaysian banks both conventional and
Islamic banks. It has been argued that given the characteristics and values
espouse by Islam there is an expectation that in Malaysia an Islamic
organization like the Bank Islam should make additional governance
disclosures would set it apart from conventional banks. This evidence thus

far seems to suggest that the role of Islam has not been as expected.
Specifically being an Islamic organization (by virtue of label attached to
and/or the nature of its operations) and having Malays/Muslim directors
leading such Islamic organization have not resulted in better corporate
governance practices and disclosure relative to other secular banking
institutions that have fewer Malay/Muslims directors. Possible implications of
these findings are proffered in the paper.
Anjum (2006) conducted the study on globalization at junction of
competition, revolution, and universally. The Islamic universal remedy,
strategy and policy instrument. The planned paper aims at contributing an
objective analysis of the nature agenda and political economic and strategic
dynamics of the contemporary movement of globalization. The paper is
going to explore the important pattern of economic changes, which have
culminate into global warfare resulting from the contemporary world level
experiences of globalization and the corresponding revolutionary tendency
responses encounter on the global level. In this background the basis for
adhere to the Islamic program of universalization shall be addressed from
the point of view of the sustainable development of the Islamic world. He
found that Because of either the perpetual nature (e.g. in case of Pakistan's
debt crises) or habitual nature (e.g. in case of Malaysia's slow down in 199798 and in 2001) of the economic crises of the Islamic countries within the
current framework of the capitalistic globalization the expected way out for
the realization of the sustainable economic and human development in the
Islamic world seem to be offered only by the Islamic program of
universalization.
Boocock and Presley (1993) equity capital for Small and mediumsized enterprises in Malaysia Venture Capital or Islamic Finance .This article
seeks to explore whether there is a role for venture capital in the funding of
small and medium sized enterprises (SMEs) within a developing country,

where there has not been an established culture of equity linked funding. In
addition the links between venture capital and the concepts of Islamic
banking are examined. The Malaysian economy is taken as a case study as it
allows a discussion of venture capital issues along the potential for Islamic
finance.
Choudhury (1994) conducted that study the Muslim republics of the CIS.
Their Political Economy under socialism, Capitalism and Islam discuss the
present day economic transformation sponsored by the IMF in the direction
of privatization in the Common wealth of Independent States. Chooses as a
case study the Muslim CIS community as the perfect example of the failure
of the instruction of structural transformation by the socialist and capitalist
orders. Adopt a methodological and empirical approach to demonstrate the
extreme destabilization and disequilibrium which are shown to remain
surrounded in these prescriptions of change. Hence the monetary fiscal,
trade and pricing policies prescribed by the IMF are under attack as much as
the old socialist prescription is shown to have been an unreal one. Gives a
brief history of the Muslim CIS community pointing to an altogether different
approach to structural change desired by these people, the world view of
Islam in socioeconomic matters. Gives details of this bring out the nature of
this world view in the form of a universally knowledge based model of
structural change. Discusses the policy implications in the context of this
Islamic knowledge based world view.

Chapter III
Theoretical Foundation

Introduction
System of banking consistent with principles of Islamic law and Islamic
economics, Islamic law prohibits the collection of interest, commonly called
riba, although revenue-sharing arrangements are generally permitted. With
increased trade between western nations and Islamic nations in the Middle
East, Citibank, Deutsche Bank, and other western banks have been opening
Islamic banking units since 1996. Because modern Islamic banking is
relatively new, rules for financial accounting, bank governance, and lending
standards are continually evolving as business practices become more
refined.

The

organization,

Institute
says

of

Islamic

Islamic
banks

Banking
are

and

structured

Insurance,
to

retain

a
a

London
clearly

differentiated status between shareholders' capital and clients' deposits to

ensure correct profit sharing according to Islamic law.

Evaluation
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 fundamental which was abhorrence to the political
government. 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 198l), by which time there
were nine such banks in the country. These banks, which neither charged nor
paid interest, invested mostly by engaging in trade and industry, directly or
in partnership with others, and shared the profits with their depositors
(Siddiqi 1988). Thus, they functioned essentially as saving investment
institutions rather than as commercial banks. The Nasir Social Bank,
established in Egypt in 197l, was declared an interest-free commercial bank,
although its charter made no reference to Islam or Shariah (Islamic law).

The IDB was established in 1974 by the Organization of Islamic Countries

(OIC), but it was primarily an inter governmental bank aimed at providing
funds for development projects in member countries. The IDB provides fee
based Faisal Islamic Bank of Egypt (1977), and the Bahrain Islamic Bank
(1979), to mention a few.
The Asia-Pacific region was not oblivious to the winds of change. The
Philippine Amanah Bank (PAB) was established in 1973 by Presidential
Decree as a particular banking institution without reference to its Islamic
character in the bank's charter. The establishment of the PAB was a response
by the Philippines Government to the Muslim revolution in the south,
designed to serve the special banking needs of the Muslim community.
However, the primary task of the PAB was to assist rehabilitation and
reconstruction in Mindanao, Sulu and Palawan in the south (Mastura 1988).
The PAB has eight branches located in the major cities of the southern
Muslim provinces, including one in Makati (Metro Manila), in addition to the
head office located at Zamboanga City in Mindanao. The PAB, however, is not
strictly an Islamic bank, since interest based operations continue to coexist
with the Islamic modes of financing. It is indeed attractive to observe that
the PAB operates two 'windows' for deposit transactions, i.e., conventional
and Islamic. Nevertheless, efforts are underway to convert the PAB into a full
fledged Islamic bank (Mastura 1988). Islamic banking made its debut in
Malaysia in 1983, but not without antecedents. The first Islamic financial
institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in
1963 to help people save for performing hajj (pilgrimage to Mecca and
Medina). In 1969, this body evolved into the Pilgrims Management and Fund
Board or the Tabung Haji as it is now popularly known. The Tabung Haji has
been acting as a finance company that invests the savings of would be
pilgrims in accordance with Shariah, but its role is rather limited, as it is a
non bank financial institution. The success of the Tabung Haji, however,
provided the main thrust for establishing Bank Islam Malaysia Berhad (BIMB)

which represents a full fledged Islamic commercial bank in Malaysia. The

Tabung Haji also con tribute l2.5 per cent of BIMB's initial capital of M$80
million. BIMB has a complement of fourteen branches in several parts of the
country. Plans are taking place to open six new branches a year so that by
1990 the branch network of BIMB will total thirty-three (Man 1988)
References should also be made to some Islamic financial institutions
established in countries where Muslims are a minority. There was a increase
of interest-free savings and loan societies in India during the seventies
(Siddiqi 1988). The Islamic Banking System (now called Islamic Finance
House), established in Luxembourg in 1978, represents the first attempt at
Islamic banking in the Western world. There is also an Islamic Bank
International of Denmark in Copenhagen and the Islamic Investment
Company has been set up in Melbourne Australia financial services and profit
sharing financial support to member countries. The IDB operations are free of
interest and are clearly based on Shariah principles.

Theoretical model:

Political Support

Low knowledge
Islamic Banking
Less innovative

Theoretical framework
Political Support:

It is the constitutional and legal responsibility of

the Pakistan government and its people to implement the interest-free

economy and financial system in the country. However, the government did
not devise any comprehensive strategy for Islamic and tried to enforce the
Islamic order in the economic arena only (Nomani and Rahnema, 1994). The
present governments claim that it has been promoting the interest-free
banking practice under a dual system is neither feasible nor realistic.

Low Knowledge:

In Islamic banking they cannot provide the proper

knowledge about the interest free banking. Proper knowledge can increase
the Islamic banking productivity in Pakistan. The success of this kind of
banking practices definitely looks for enforcing Islamic reforms in the overall
system, which is not possible. In fact, the conventional banking system have
been acting very convenient source of funding for the government, but the
interest-free banking order was supposed to be not.

Innovation: In business, revenue or revenues is income that a company

receives from its normal business activities, usually from the sale of goods
and services to customers. In many countries, such as the United Kingdom,
revenue is referred to as turnover. Some companies receive revenue from
interest, dividends or royalties paid to them by other companies. Revenue
may refer to business income in general, or it may refer to the amount, in a

monetary unit, received during a period of time, as in Last year, Company X

had revenue of $32 million.

Chapter 4
Data and Methodology
Data
The objective of this study is to find out the factors that affect the growth of
Islamic banking. For the purpose of that data have been collected on four
variables. In this research there are four main variables, one is dependent
and other three is independent variables. Islamic banking is dependent
variables where as Political support, Low knowledge and innovation is
independent variables. Data on the four variables have been collected
through questionnaire. The study covers the sample of 150 questionnaire
people having different position in the Islamic banks and some questionnaire
are filled by the regular banks in Lahore.

Methodology:
Number of method has been used in my study to judge the relationship of
independent and dependent variable. Descriptive analysis, Scatters plot,
Correlation and regression analysis.