COMSATS INSTITUTE OF INFORMATION TECHNOLOGY,

LAHORE

ISLAMIC NG AND NANC

BANKI FI E
MOHSIN SP1 -BAF -020
NOOR 9
SYED RAHIB FA19-BAF-004
ALI
SUBMIITED SR.
TO USMAN
DATE 05 T, 2022
OC
ASSIGNMEN 1
T
 GLOBAL ISLAMIC ECONOMY REPORT
Islamic finance works to increase diversity in the financial services industry. Many Islamic
beliefs impose financial boundaries, restrictions, or limitations, such as what types of income
or business practices are acceptable. These practices could be incompatible with non-Islamic
financial instruments. To avoid excluding a group of people because of their religious beliefs,
a set of Islamic financial principles and financial system entities cater to Islam's accepted
financial practices.

The provision of financial services in accordance with Shari'ah Islamic law, principles, and
rules is referred to as Islamic finance. Shari'ah prohibits the receipt and payment of "riba"
(interest), "gharar" (excessive uncertainty), "maysir" (gambling), short sales, or financing of
activities deemed harmful to society.

The advantage of Islamic Financing is that it guarantees financial conclusion which means
that both businesses and individuals can gain access to affordable and useful financial
services and products to help them meet their needs. It provides payments, transactions,
credit, insurance, and savings in a responsible and sustainable manner.

 HISTORY OF PAKISTAN ISLAMIC FINANCE

Steps for Islamization of banking and financial system of Pakistan were started in 1977-78.
Pakistan was among the three countries in the world that had been trying to implement
interest free banking at comprehensive/national level. Pakistan has a long history of
establishing Islamic banking, which began in the 1980s and resulted in significant changes in
associated laws and regulations. The Islamic ideology council was tasked with developing a
system for eliminating interest and establishing Islamic banking in the economy. It consulted
with many economists and bankers and presented a report in June 1980 that primarily
recommended that the transactions be based on profit and loss sharing. National
Investment Trust and ICP, two government-owned mutual funds, began to avoid
investments in interest-bearing securities and declared themselves to be interest-free. The
government amended the legal framework for the issuance of PTC and Modaraba
Companies in 1980, and the Modaraba Ordinance 1980 was promulgated to facilitate the
introduction of Modaraba.
  ISLAMIC BANKING DEPARTMENT

Islamic banking is defined as banking that observes to Islam's spirit and value system and is
governed by Shariah principles.

The Islamic Banking Department, led by the Director, has been working to create a
progressive, sound, and stable Shariah-compliant banking system. In this regard, the
department is responsible for facilitating and catalyzing the development of the country's
Islamic banking industry by (a) enabling a legal, regulatory, and Shariah compliance
framework, (b) promoting Islamic finance as a distinct and competitive system to serve the
financial services needs of the masses, (c) conducting targeted research initiatives to better
understand market dynamics, and (d) collaborating with local and international
stakeholders for development.

The State Bank of Pakistan was helpful in establishing Islamic banking and took reasonable
steps. In 1981, separate interest-free counters were established, and banks were prohibited
from engaging in certain interest-based transactions. It issued a circular for interest-free
transactions and restricted banks from financing through interest-based modes. Ghulam
Ishaq Khan announced in 1984 that the country would be interest-free until the end of the
year (Shamshad Akhtar, 2007).

there was a lack of awareness in the untimely conversion of the interest-based system to the
interest-free system. The Federal Shariat Court ruled that the new products are un-Islamic.
The Islamic ideology council also declared that the new products and processes, for example,
are un-Islamic. Musharakat conditions are prohibited by Islamic law (Al-Bayan Magazine,
2017). Short-term liquidity management has been a problem for Islamic financial institutions
in Pakistan, whereas other countries have well-managed short-term liquidity positions.
Islamic banks are unable to invest in interest-bearing securities such as T-bills and must seek
Sharia'h-compliant alternatives. Without a doubt, the government of Pakistan's Ijara Sukuk
provided some relief against the Pakistan Investment Bonds, However, due to limited supply
and rising demand, these Susuk are rarely traded. With a Muslim population of 96%,
Pakistan has the potential to be a center for Islamic banking and finance. However, these
challenges are roadblocks in the development of Islamic banking that must be overcome.
  GLOBAL RATINGS

According to S&P Global Ratings, the global Islamic finance industry will grow by 10% to 12%
in 2021-2022, after growing by 10.6% in 2020. (excluding Iran). This performance can be
explained by the growth of Islamic banking assets in some Gulf Cooperation Council (GCC)
countries, Malaysia, and Turkey, as well as sukuk issuances exceeding maturities. Despite
the double shock of the pandemic and the drop in the oil price, Islamic finance grew rapidly
in 2020, albeit at a slower rate than in 2019. We have excluded Iran from our statistics this
year due to the country's currency's extreme volatility in the parallel market (as disclosed by
the Central Bank of Iran), which makes comparisons with previous years' figures or forecasts
less meaningful. The recovery of the sector is critical for the wider Islamic economy, with
Islamic finance serving as a key driver of the overall ecosystem. It is also a sign of the public
and private sectors' commitment to Islamic principles, with finance, investment, and
insurance (takaful) to be sourced from Islamic sources. The global Islamic finance industry
grew by 10.2 percent in 2021, compared to 11.4 percent in 2020 (excluding Iran),
encouraged by banking asset growth.

 ISLAMIC COMPNENTS

The Islamic financial system consists of the Islamic banking system, the Islamic money
market, Islamic insurance or takaful, the Islamic capital market, and specialized financial
institutions that offer alternative sources of financing.

Islamic components which are mentioned in Global Islamic Economy Report are as

 Susuk

In susuk, the financier assumes ownership of real property and receives a return derived
from that property. This is different from traditional bonds, where the investor owns a debt
instrument that primarily earns a return through the payment of interest (riba).

Susuk are made in accordance with a particular contract for the exchange of assets that
complies with Shariah. These agreements can be created through the leasing of particular
assets, the sale and purchase of assets with immediate, incremental, or deferred payments,
or involvement in joint-venture firms. In a sukuk, the financier assumes ownership of real
property and receives a return derived from that property. This is different from traditional
bonds, where the investor owns a debt instrument that primarily earns a return through the
payment of interest (riba). Sharia law prohibits riba, or excess.

 Takaful

Islamic insurance known as takaful, participants put money into a pool system to protect
one another against loss or injury. Sharia, or Islamic religious law, which outlines how people
are obligated to cooperate and protect one another, is the foundation for takaful-branded
insurance.

A takaful agreement must be built on the tenets of cooperation, mutual protection, and
accountability while forbidding activities motivated by self-interest (riba), gambling (al-
maisir), and uncertainty (al-gharar).

Four people are often involved in takaful: the participant, the operator, the insured, and the
beneficiary. In a society, anybody with the legal right to do so may make a financial
contribution to a mutual cooperative fund.

In compared to conventional insurance, where risk is gone from the insured to the insurer,
participants in takaful insurance share a common risk. The foundation of Takaful operations
is mutuality, where each participant contributes to a Takaful fund.

 SUSUK RATINGS

Higher commodity prices are expected to support a stronger recovery in many core Islamic
finance markets this year. We anticipate a decline in total sukuk issuance in 2022, following
a stabilization at $147.4 billion in 2021, versus $148.4 billion in 2020, due to a number of
factors. Shrinking global liquidity and increasing regulatory complexity are likely to limit
sukuk issuance in 2022, assuming that any negative Covid-19-related disruption in core
Islamic finance countries is contained. There are 241 Islamic fintechs, with a market value of
approximately US$49 billion in 2020. This is expected to grow to $128 billion by 2025. (based
on transaction volumes).

We also see opportunities in the convergence of certain Islamic financial products and
environmental, social, and governance (ESG) considerations. We anticipate that ISDB will
issue a greater volume of green and sustainability sukuk (from a low base) as issuers seek to
broaden the investor base and include funds aligned with sustainability themes.
Many Islamic finance countries are vulnerable to climate transition risk, and several are
developing or implementing transition strategies, which include significant investments in
clean energy. These present genuine opportunities for long-term sukuk in Islamic finance's
core countries. Islamic Banking, Islamic Insurance 'Takaful,' Other Islamic Financial
Institutions (OIFLs), Islamic Bonds 'Sukuk,' and Islamic Funds comprise the Global Islamic
Finance market. Geographically, the Islamic Finance market can be divided into the Gulf
Cooperation Council (Saudi Arabia, Kuwait, UAE, Qatar, Bahrain, and Oman), the Middle
East and North Africa (Iran, Egypt, Rest of MENA), South Asia and Asia-Pacific (Malaysia,
Indonesia, Brunei, Pakistan, Rest of South Asia and Asia-Pacific), Europe, and the Middle
East and North Africa (Iran, Egypt, Rest of MENA) (United Kingdom, Ireland, Italy, Rest of
Europe).

the energy transition is expected to take a long time in the GCC and Malaysia, necessitating
periodic use of green sukuk. The social aspect of Islamic finance provides another
opportunity for long-term sukuk. As the economic consequences of the pandemic emerge in
the form of higher unemployment rates, particularly in fiscally constrained countries, social
sukuk can help absorb the shock. If these and other Islamic finance instruments are properly
leveraged, they have the potential to have an even greater impact.

 MENA FUNDINGS

In contrast to expectations, the past year has been a significant milestone for Islamic
finance, with new benchmarks established. MENA-based startups raised more than $1
billion in venture capital funding in 2020, while global sukuk issuances reached a record high
of US$100 billion in the first half of 2021. Last year's increase was fueled by Islamic banking
assets in some GCC countries and Malaysia, sukuk issuances exceeding maturities, and the
Islamic funds industry's strong performance. Covid-19 provides an opportunity for more
integrated and transformative growth through increased standardization, a greater
emphasis on the industry's social role, and meaningful adoption of financial technology, or
fintech.

 PROJECTIONS
The Islamic finance industry is expected to be worth US$3.6 trillion in 2021, rising to US$4.9
trillion by 2025. The Influence of COVID-19 A 4-year CAGR of 7.9% (2021) is projected to
reach $4.9 trillion by 2025.

Islamic fintech investments and financial institution consolidation through M&A are
expected to total $17 billion in 2020.

The largest bank in Saudi Arabia (national bank) formed by the merger of SAMBA and MCB
in a 14 billion transaction.

 ISLAMIC INDUSTRY IN PAKISTAN

Islamic banking is defined as a banking system that is in accordance with the spirit, ethos,
and value system of Islam and is governed by Islamic Shariah principles. Interest-free
banking is a broad term that refers to a variety of banking instruments or operations that do
not charge interest.

Islamic banks contribute the most to the Islamic finance industry (67% of total assets),
followed by sukuk (26% of outstanding amount), Islamic funds (6% of total assets), and
takaful (1%). (total contributions). Pakistan has the world's second-largest Muslim
population but has very low banking penetration. Islamic banking is expanding at an
incredible rate all over the world. Pakistan, as a Muslim country, is also attempting to
establish this banking system. Several steps have been taken in the past to accomplish this,
and the Islamic banking system is now gaining strength as a result. Similarly, the future of
Islamic banking in Pakistan is very promising. Since Pakistan's independence in 1947,
conventional banking has had deep roots.

As of 2006, Pakistan's financial sector had adopted an Islamic banking system that worked
in tandem with the conventional banking system. Pakistanis can choose between the two
financing options. Most informed Pakistanis, on the other hand, insist that there is "no
concerted move" to abolish the traditional banking system or replace existing links and
relationships with international financial markets.

There are 1314 Islamic banking branches in total, with total assets of 1016 billion Pakistani
rupees and total deposits of 872 billion Pakistani rupees. Islamic banking has grown at a 15
to 20% annual rate over the last 12 years, accounting for 10% of the country's total banking
network (SBP). These landmarks demonstrate that Islamic banking is currently flying high in
the country, achieving extraordinary growth. The government is also determined to convert
the entire conventional banking system to Islamic banking. As a result, the future of Islamic
banking in Pakistan is bright, and it will reach new heights in the coming years.

The main regulators of Islamic Finance market of Pakistan are

 MEEZAN BANK LIMITED

 DUBAI ISLAMIC BANK LIMITED
 BANK ALFALAH ISLAMIC
 ASKARI ISLAMIC BANKING LIMITED
 MCB ISLAMIC BANKING