Islamic Banking and finance

Assignment # 5
Name: Muhammad Ali Jawad
Roll number: SP20-BBA-103
Moderator: Dr. Sabeen

Question: Explain Islamic Money and Capital Market with

reference to Pakistan. How their commonly used instruments are
different from their conventional counterpart?

Answer:

Capital Market structure in Pakistan:

The capital market structure in Pakistan consists of the apex regulator of the markets, the
Securities and Exchange Commission Pakistan (SECP), three Stock Exchanges, Mercantile
Exchanges, Central Depository Company (CDC) and a Clearing and Settlement Company. The
structure further includes intermediaries or market participants such as Brokers which handle the
transaction of shares in the capital markets on behalf of investors.

Islamic Economic:
The economic policies proposed under the banner of "Islamisation" in Pakistan include executive
decrees on Zakāt (poor-due), Ushr (tithe), judicial changes that helped to halt land redistribution
to the poor, and perhaps most importantly, elimination of riba (defined by activists as interest
charged on loans and securities).Perhaps the foremost exponent of Islamisation among Pakistan's
rulers—General Muhammad Zia-ul-Haq advanced a program in 1978 to bring (according to Zia
and his supporters) Pakistan law in line with the principles of Sharia law.
Islamic Instruments:
Current Account
Conventional
No specific underlying mode is used in
Current Account.
The Bank can use these funds for
investment and other purposes
regardless Shariah prohibition
Free of cost services are offered to
customer which tantamount to
interest
Islamic
Ameen Current Account is based on
Qard contract where the Bank is
liable to pay depositor’s money back
on demand
The Bank can use these funds for
investment and other purposes. It
allows satisfaction of having the
money safely deposited with a bank
with the additional assurance that the
Bank is not investing it in activities
that contravene Shariah principles.
Free of cost services are offered to
all customers across the board
means all free services are offered to
current as well as saving
accountholders.
 Saving Account
Conventional Islamic
No specific underlying mode is used Islamic Saving Account is an
in Saving Account. “investment for profit” account
governed under the rules of
Mudarabah with an objective to
provide return on the investment.
The Bank can use these funds for The funds deposited will be invested
investment and other purposes in an investment pool;
regardless Shariah prohibition. investment/deposit/transfer-in of
funds will be deemed purchase of
investment share in the respective
investment pool and withdrawal /
encashment / premature
encashment of funds are deemed to
be sale of investment share in the
said investment pool
Debtor-Creditor Relationship. Mudarib, Rab-ul-Maal/Partners.
Interest. Profit.
 Lending/Fiancing
Conventional banks are in the Islamic Banks are not money
business of lending & borrowing lending institutes but they work as a
money based on interest. trading/ investment house.
In Conventional banks, we see no Islamic Banks work under the socio-
such restrictions. Interest is the back- religious guidelines that prohibit
bone of this system and short selling, charging and paying interest and
sale of debts and speculative avoid all impermissible transactions
transactions are common. like gambling, speculation, short
selling & Sale of debts &
receivables.
In Conventional Banks, all types of Islamic Banks do not permit
industries are financed, only financing to industries that cause
businesses deemed illegal by the law harm to the society such as alcohol,
of the land are not supported. tobacco etc
Generally Conventional Banks do not One of the Islamic Bank business
involve themselves in trade and model is based on trade, thus it
business as they act only as money needs to actively participate in trade
lenders. and production process and
activities.
In Conventional Banks almost all the Islamic Banks recognize loan as
financing and deposit side products non-commercial and exclude it from
are loan based. the domain of commercial
transactions. Any loan given by
Islamic Banks must be interest free.
 Leasing/Ijarah
Lease commences the very day on Rentals start after the delivery of
which the price is paid by the Bank, asset, not from the day the price has
whether the Customer has taken the been paid by Bank.
delivery or not.
Expenses incurred in the process of Bank is the owner of the asset
purchase of asset are paid by the therefore it is liable to pay all
Customer expenses incurred in the process of
its purchase
Lease does not differentiate between The Customer is responsible only for
wear & tear or losses caused by the misuse and negligence, but not for
negligence of Customer and events beyond control. In Auto
Customer is liable for cost incurred Ijarah, each situation is treated
due to natural disasters. separately.
Penalty charges are taken from If the Customer fails to pay rental on
Customer on late payment. They are due date, customer under takes to
taken as income by the Bank. pay charity which is credited into
charity account, for further
disbursement to charitable
organizations.
In a lease agreement it has been If the Customer breaks any term of
noticed that unrestricted power has the agreement, Bank has a right to
been given to Bank to terminate the terminate Auto Ijarah unilaterally.
lease unilaterally. However, if there is no contravention
at Customer’s end Auto Ijarah cannot
be terminated without mutual
consent.