Contents

Introduction ........................................................................................................................................................................ 2
Research Objectives......................................................................................................................................................... 3
Research questions .......................................................................................................................................................... 3
Literature Review ............................................................................................................................................................. 4
Research Gap ...................................................................................................................................................................... 6
Research Methodology ................................................................................................................................................... 7
Data collection .............................................................................................................................................................. 7
Data Analysis ................................................................................................................................................................. 7
Data Requirement and analysis Table ................................................................................................................ 8
Study Schedule................................................................................................................................................................ 10
References ........................................................................................................................................................................ 11

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Review of Islamic Banking System in Pakistan in the light of Islamic Banking Theory

Introduction
According to Muhammad Taqi Usmani (2002, P.9) Muslims are trying to restructuring their
lives according to Islamic principles. They are trying to implement Islamic principles in all
walks of life including social and economic aspects. Especially the Muslim countries who
have political freedom are trying to revive Islamic principles. In that struggle the biggest
challenge Islamic countries are facing to apply Islamic principles in their economic and
financial fields and institutes and banks are the most targeted field. We also know that current
banking system and Islamic banking system is totally opposite to each other. Current banking
system is entirely based on interest system and in Islam interest is Haram. On the other hand
Islamic banking system is based upon Shari’ah. So it is a big challenge for the Muslim
countries like Pakistan to transform current banking system into Islamic banking system
based upon Islamic theory and principles. Munawar Iqbal & David T. Llewellyn (2002, P.)
argued that concept of Islamic banking system is not a new idea. There are many evidence
founded in history that Islamic banking system was established successfully in the early days
of Islam and been working quite well for a long time. Muslims were able to perform financial
activities very well under the light of Islam where interest is taking as a Haram. They further
argued that as time went on western world have becoming dominant and it introduces non-
Islamic financial system that is entirely based on interest. But after a long time many Muslim
countries like Pakistan starts realizing the need of reviving the Islamic golden rules in their
financial activities.

According to www.pakistaneconomists.com the following Islamic banks are leading banks in

pakistan

 Bankislami Pakistan Limited

 Emirates Global Islamic Bank
 Dawood Islamic Bank Limited
 Meezan Bank Limited
 Dubai Islamic Bank Pakistan Limited

Many researchers already have done lot of work on the implication of Islamic banking in
Pakistan and how Islamic banks are working under the light of Islamic theory. So the

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purposed research will be exploratory in nature and will review the banking system in
Pakistan in the light of Islamic theory. So the basic objectives of this research will be

Research Objectives

 To understand the Islamic banking system and the underlying principles

 To review the Islamic banking system in Pakistan
 To analyze the practical implication of Islamic banking theory and principals
 To identify if there is any contradiction in theory and practice

In other words proposed research will be conducted to answer the following questions.
Although many researchers have already done research on Islamic banking and Islamic
banking system in Pakistan but the proposed research will focus on answering the following
questions

Research questions

 How Islamic banking sector in Pakistan is functioning

 What types of financial services Islamic banks are providing in Pakistan
 How much Islamic banks are successful in aligning their practice with Shariah

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Literature Review
“We shall call an Islamic bank a financial institution which complying with Quran and Sunna
precept, neither gives nor requires any interest and also chooses its investmenst according to
ethical criteria”. (M. Fhaim Khan, 2010)

According to Abu Umar Faruq Ahmad (2010, P.31) Shariha is not only a source of laws for
Muslim society that shows then right path but also divide human activities according to the
degree of desirability in Allah’s point of view or in other words Shariha tells what is Halal
and Haram. He further explains that according to Shariha human activities according to the
degree of desirability in Allah’s point of view could be divided into the following four
catogries

Human activities according to the degree of desirability in Allah point of view

Fard/Wajib Mandub/Mustahab Jaiz/Mubah Makruh Haram

(Permitted or
(Obligatory) (Recommended) left legally (Reprobated (prohibited)
undetermined) Forbidden)

According to Hennie van Greuning& Zamir Iqbal (2008, P.4) Islamic economic system is
based on Islamic laws known as Shariah that covers all activities of Muslim life and provide
guidance in all walks of life. Shariah laws are itself based on Quran and Sunna.

Abu Umer Faruq (2010) argued that Fiqih (juris-consult) determined what is permitted and
prohibited by searching the proof or evidence from authentic sources of Islamic juries and
Shariah laws are the reflection of the judgment of Fiqih. So in other words it can be said that
Shariah is the bases of Islamic banking system and provide full guidance under the light of
Quran and Fiqih.

Juan Sole (2007, P.4) explains in her book Introducing Islamic Banks into Conventional
Banking Systems argued that the basic principle of Islamic finance are mainly based upon the
Shariah and Fitwa issued by Muslim scholar under the light of Quran and Hadid. Sometimes
it is difficult for the common man to understand Islamic law and Shariah so Islamic banks
appoint a shariah board that regulate all the mechanism of Islamic banking, its products and
services according to Quran and Hadid. She further argued that it has become the basic
requirement that any financial institute who want to sell Islamic financial products or services
have Shariah board or at least shariah counseler. It is necessary to avoid any kind of risk of
selling any product that is against Islamic law.

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So after the above discussion it is concluded that the bases of Islamic banking is Shariah that
is determined in the light of Quran and Hadid. After understanding the bases of Islamic
banking the next question is what are the basic principle of selling Islamic principle or which
things needs to consider to make sure that offered product is according to Shariah.

Mohamed Arif (1988, P.34) quoted Quran’s verse (Quran, 2: 278-279) that talk about the
prohibition of interest and prohibits any claim in the excess of the principle sum lent, no
matter what the purpose of loan is. In other words interest is haram (prohibited) on any kind
of loan whether it is taken for productive activities or for normal day to day consumption.

Kabir Hassan & Mervyn Lewis (2007, P.3) argues that as we know that interest is Haram in
Islam that raise the question that how interest rate mechanism will be replaces that is the
bases of conventional banks. How Islamic banks work in the absence of interest mechanism.
The answer of questions is the profit and loss sharing (PLS). PLS is that mechanism that
replaces the interest mechanism in Islamic banking.

According to Munawar Iqbal & David T. Llewellyn (2002, P. 57) in Islamic banks interest
system is replaced by financial contacts that are based upon profit loss sharing relationships
between the supplier of funds and entrepreneur. They further argued that the main form of
these contacts is profit/loss sharing contact between lender and borrower and in Islamic term
this contact is called Mudarabah.

There are many other Islamic banking products that banks can offer. Dr Natlalie Schoon in
her book Islamic Banking and Finance presented some Islamic financial products that are
shown in table below.

Islamic Financial Product Description

Money transfer from one person to another.
Hawala There could be an administrative fee form
recipient that should be proportionate to the
sum of money
Ijara Bilateral contact for lease
Mudaraba Profit/loss sharing contract or partnership
Qard Interest free loan
Qard al Hassan Interest free loan but for charitable purposes

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So it could be concluded that the basic idea behind Islamic banking is to regulate banking
system that is free from interest and offer Islamic product. In other words the whole
functioning of Islamic banking system should be under the light of Quran and Sunna.

Research Gap
As already mentioned above that many Muslim and western researchers have done lot of
work on Islamic banking system and the principal of Islamic banking not only in Muslim
countries but also in western countries. Even some researchers have worked on Islamic
banking system in South east countries, Middle East and briefly on Pakistan but no one have
particularly focus Pakistan. So the proposed research will bridge this gap and particularly
focus Islamic banking in Pakistan and review in detail that who Pakistani Islamic banks are
working under the shariha laws and how much they are able to bring their financial services
under Shariha laws and Quranic principals. So after understanding the Islamic theory and
principles for banking and finance researcher will review the working of leading Islamic
banks (Bankislami Pakistan Limited, Emirates Global Islamic Bank, Dawood Islamic Bank
Limited, Meezan Bank Limited and Dubai Islamic Bank Pakistan Limited) under the light of
Shariah. Hopefully this research will contribute to understand the functioning of Islamic
banks more clearly and will encourage other conventional banks to adopt Islamic doctrine in
day to day business. This research will also help to identify the challenges of adopting
Islamic approach and how these challenges could be faced.

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Research Methodology

As the title suggest that it is a review of Islamic Banking system in Pakistan in the light of
Islamic theory and principle. So the purposed study is exploratory in nature where it will be
explored that how much Pakistani banking system have been succeed to move from
conventional banking system to Islamic banking system by understanding the golden Islamic
theory and principle. So the basic theory is given and shariah tells that how Islamic banks
supposed to work or sell products under the Islamic laws/ Shariah so researcher is trying to
explore and confirm whether Islamic banks in Pakistan are able to regulate their system
successfully or not. So by considering the problems in hand and research objectives it is said
that research approach is exploratory in nature.

Data collection

There are two main data collection sources (a) primary data sources (b) secondary data
sources.

According t Dr C R Kothari (2008, P.95) primary data is a data that is collected 1st time and
fresh means never been used before. So in other words primary data is original in character.
he further explains the secondary data and says that secondary data is 2nd hand data that
already have been collected and used for other purposes but the researcher use it for his/her
own purpose.

Philip Kotler, Gary Armstrong (P.133) argued that the basic benefit of secondary data is that
it provides the starting point of research and is very helpful to define the research problem
and objectives but a great care is needed to evaluate the quality of secondary data.

For the purposed study mainly data will be collected from secondary sources. The main data
collection sources will be books, research papers, articles and reports and websites of Islamic
banks in Pakistan. Data will also be collected from leading Islamic banks form Pakistan’s
websites and from their published annual reports.

Data Analysis

There are two main methods of data analysis that includes qualitative analysis and
quantitative analysis.

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Quantitative analysis

Denscomb M (2007) argued that data collected in numbers and figures is called quantitative data and
the methods to use to analyze this qualitative data is called quantitative analysis. Quantitative data
analysis approach is used when data is collected in numbers forms. In quantitative approach data
could be analyzed by using mathematical formulas, tables or graphs. This kind of research approach is
adopted where research problem is purely related to science.

Qualitative analysis

On the other hand qualitative data is that consists of words and images and data analysis
approach to analyze this kind of data is called qualitative data analysis approach. This kind of
approach is adopted where research comes into the social psychology, socio anthropology,
sociology and other types of social sciences are the focus of study. (Denscomb M, 2007)

As purposed research is purely based on collected secondary data in words and there is very
low chance to involve numbers so researcher will tend to adopt qualitative approach to
analyze data to produce results.

In the end it is concluded that purposed research will be exploratory in nature and will
explore the functioning and mechanism of Islamic banking in Pakistan by taking leading
Islamic banks as an example and mainly data will be collected from secondary sources and
will be analyzed by adopting qualitative approach.

Data Requirement and analysis Table

Objectives Data source How to use data Analyses

To understand By using Main part of the

secondary data literature review
Islamic Theory sources like books
and research
and principles for
papers written by
banking Muslim scholars
in the light of
Shariah

To understand the By reviewing Some part of data Data will be

scholars research will be used in analyzed

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functioning of papers, data bases, literature review qualitatively by
online journals relating Islamic
Islamic banks in and reviewing theory and
Pakistani leading principles with
Pakistan
Islamic banks practical
function accessed implementation in
by their online Pakistani Islamic
sities. banks

To identify if there Secondary Functioning of Qualitatively

Islamic banking in
is any Pakistan will
analyzed in the
contradiction
light of Islamic
between theory theory

and practice and

what could be

practicl steps that

could be taken to

align Islamic

banking in

Pakistan with

Islamic Shariah

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Study Schedule

Activities Week Week Week Week Week Week Week Week Week Week
1 2 3 4 5 6 7 8 9 10
Data
searching
Literature
review
writing
Analyzing
data and
findings
Writing 1st
draft
Editing
and proof
reading
Final sub-
mission

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References

 Abu Umar Faruq Ahmad,2010, P.31, Developments in Islamic Banking practices: The
experience of Bangladesh, Universal Publishers
 Dr C R Kothari, 2008, P.95, Research Methodology: Methods and techniques, New
Age International

 Denscomb M (2007), The Good Research Guide, England: Open University Press.
 Dr Natalie Schoon, 2009, P.25-26, Islamic Banking and Finance, Spiramus Press
Limited
 Hennie van Greuning& Zamir Iqbal, 2008, P.4, Risk Analysis of Islamic Banks,
World Bank Publications
 Juan Sole, 2007, P.4, Introducing Islamic Banks into conventional banking system,
International Monetary Bank
 Kabir Hassan & Mervyn Lewis, 2007, P.3, Hand book of Islamic Banking, Edward
Elgar Publishing
 M. Fahim Khan, 2010, P.1, Islamic Banking and finance in European union: A
Challenge, Edward Elgar publishing
 Muhammad Taqi Usmani, 2002, P.9, An Introduction to Islamic Finance, Volume 20
of Arab and Islamic laws seriesVolume 20 of Arab and Islamic laws series, BRILL
 Munawar Iqbal & David T. Llewellyn, 2002, P. 57, Islamic Banking and Finance:
New perspectives on profit sharing and loss, Edwid Elgar Publishing
 Mohamed Ariff, , 1988, P. 34, Islamic banking in Southeast Asia: Islam and the
economic development of Southeast Asia, Institute of Southeast Asian Studies
 Munawar Iqbal, David T.Llewellyn, 2002, P.1, Islamic banking and finance: new
perspectives on profit sharing and risk in association with the Islamic Development
Bank (IDB), the Islamic Foundation (IF) and the Association of Islamic Economics
(IAIE) Series, Edward Elgar
 Philip Kotler, Gary Armstrong, 2010, P.13, Principles of marketing, 10th Edition,
Pearson Education
 http://www.pakistaneconomist.com/database2/pakbanks.asp accessed on 5th October
2010

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