Professional Documents
Culture Documents
In the early stages of 20th century, the Islamic banking was only limited to
models and modus operandi. The full-fledged system of Islamic banking was
introduced in 1960s by an Egyptian bank 'Myt Ghamr'. The earliest Islamic
banks faced serious challenges ranging from general suspicions about their
viability to a common mistrust about their intentions. Since then, the Islamic
banks have been steadily growing to a remarkable level at this stage. During the
last decades, financial instruments used by Islamic banks have developed
significantly, both on assets and liability sides. Many instruments have been
developed to mobilize financial surpluses. A number of Islamic banks have
launched investment instruments in the form of certificates with short-term
maturities or have established funds earmarked for certain investments.
Accordingly, at present, there are around 70 countries in which the Islamic
financial institutions are operating in full-fledged or in part. Recently six countries
including Bahrain, Saudi Arabia, Malaysia, Indonesia, Brunei and Sudan have
signed a memorandum of understanding (MOU) for establishment of the first
International Islamic Financial Market (IIFM) in co-operation of Islamic
Development Bank (IDB). IIFM is designed to provide a co-operative framework
among around 200 Islamic banks and financial institutions all over the world. A
Liquidity Management Centre (LMC) is also working in Bahrain which addresses
the critical need for liquidity management by Islamic banks in line with the
Shariah principles.
The Islamic Financial Institutions (IFIs) can be divided into two broad categories:
In Pakistan, the process of Islamic financing and banking started with the reforms
in specialised financial institutions like NIT, ICP and HBFC in conformity with the
Islamic principles. From 1st July, 1985 all the commercial banking operations
were made 'interest free'.
Recently, State Bank of Pakistan has allowed the formation of full-fledged Islamic
banks in the private sector. The existing scheduled commercial banks were also
authorised to open subsidiaries for Islamic banking operations. Such
subsidiaries shall be considered as the Islamic Banking Subsidiaries and shall
have a separate body of governance. It is a statutory requirement for the bank to
appoint a Shariah Adviser / Shariah Supervisory Committee consisting of Shariah
scholars of repute to advise the Islamic bank on matters pertaining to Shariah.
Shariah Adviser / Committee will be responsible to vet all agreements, and
products offered by the Islamic bank. The detailed criteria for setting up Islamic
Banking Subsidiaries has been issued by the State Bank, which are highlighted
as below:
(b) To liaise with other departments in the bank and the Shariah Adviser /
Committee to ensure smooth operations of IBB;
(c) To ensure that all funds pooled into the Islamic Banking Fund (IBF) are
channelled into Shariah complaint financing and investment activities;
(f) To ensure that all directives and guidelines, particularly those applicable
to Islamic banking, issued by State Bank are strictly complied with;
Islamic Banking Fund (IBF): The bank shall be required to maintain a minimum
fund of Rs. 50 million or 8% of risk weighted assets of IBB, whichever is higher.
The funds of Islamic Banking shall be funded by the head office or its country
office and controlled by the IBD for the operations of IBB.
Thus, Murabaha is a cost plus transaction where the seller expressly mentions
the cost of a commodity sold and sells it to another person by adding mutually
agreed profit thereon which can be either in lump-sum or through an agreed ratio
of profit to be charged over the cost, thus resulting in an absolute price.
According to IFAS 1, Murabaha should fulfill the following conditions:
(c) The bank must have a good title to the commodity before it sells it to its
clients; and
(d) The commodity must come into the possession of the bank, whether
physically or constructive, in the sense that the commodity must be its
risk, though for a short period.
For a Murabaha transaction, the bank itself may purchase the commodity and
keep it in its possession. But, as soon as the client purchases the commodity
from the bank, the ownership, as well as the risk, passes to the client. According
to this Standard, for a valid Murabaha transaction, the financing must be in
accordance with Shariah principles.