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Submitted to: Mr. Ahmed Arif By: Zain ul Abidin Zahid Khan M. Abdullah Tariq

SZABIST Factors Affecting Growth of Islamic Banking in Pakistan

Table of Contents
INTRODUCTION ..................................................................................................................................................... 3 PROBLEM STATEMENT ........................................................................................................................................... 4 RESEARCH QUESTIONS........................................................................................................................................... 4 RESEARCH OBJECTIVES .......................................................................................................................................... 5 FRAMEWORK ......................................................................................................................................................... 5 REASEARCH DESIGN AND METHODOLOGY ............................................................................................................ 5 BIBLIOGRAPHY ....................................................................................................................................................... 7

SZABIST Factors Affecting Growth of Islamic Banking in Pakistan

1. INTRODUCTION Islamic financing has shown tremendous growth in the past few years and is continuously flourishing. This phenomenon, as the world has witnessed, is becoming interesting for financial institutions all over the world. Islamic banking has laid a number of milestones in a very short time period as compared to the conventional banks. There are about 300 Islamic financial institutions across 75 countries. Islamic banking is basically a system that has zero-based interest, equity participation, joint ventures, mutual funds, leasing, innovation and a promising rate of return. Islamic banking replaces interest-based system with profit and loss sharing (PLS) and interest-free banking (M. Mansoor Khan, 2008) The basic ideology of Islamic finance is socio-economic justice and benevolence (Al-Adle Walihsan) (Warsame, 2009). The thrust for Islamic Banking is founded on the desire to submit to the Divine Instructions on all transactions, particularly those involving exchange of money for money. However, it would be quite unfair to limit Islamic Banking to elimination of Riba only (Bank Alfalah Limited, 2006-2007). The Islamic banks conduct their affairs within the limit of the laws of Shariah and to comply with its overall objectives. (kahf, 2004) Pakistan is a country with more than 188 million residents and among them more than 95% are Muslims (CIA, 2012), so thrive for shariah compliant services are very natural for them. Pakistan economic activities are being very slow paced in past few years but shariah compliant financial services have shown notable growth rate even higher than conventional financial institutions. The establishment of a full-fledged Islamic Banking Department at SBP to focus on all Islamic Banking issues provided the industry with necessary tools to grow and emerge as a preferred choice of the customers. SBPs contribution to promote Islamic banking as a parallel

SZABIST Factors Affecting Growth of Islamic Banking in Pakistan

system, operating at a level playing field with commercial banking, is aimed at building a broad based financial system in the country to enable all segments of the population to access financial services and play their role in the overall economic development. The total assets of the Islamic banking industry in Pakistan were over Rs. 225 billion as of 30th June, 2008 which accounted for a market share of 4.5% of total banking industry assets. The market share of deposits was 4.2%. Total branch network of the industry comprised of more than 3581 branches with presence in over 50 cities & towns covering all the four provinces of the country and AJK (Pervaiz Said, 2008). Currently, total assets of the Islamic banking industry in Pakistan have increased to Rs 568 billion and total deposits worth Rs 463 billion. According to SBP, Islamic banking sector is enormously growing at the rate of 30 percent in Pakistan. At present five full-fledged Islamic banks are operating in the country there are 841 bank branches in 70 districts across the country. (Raza, 2012) 2. PROBLEM STATEMENT The present world is facing a number of economic challenges including poverty, unemployment, in equitable distribution of income, social and economic in justice, in stability in the real value of money, inflation & accumulation of wealth in a few hands and all of these problems greatly disturb the process of achieving and maintaining peace and happiness in the world (Loqman, 1999) The research will focus on the major factors that are affecting the growth of Islamic banking financial institutions in Pakistan as compared to the conventional banking institutions? 3. RESEARCH QUESTIONS Which banking system is growing in Pakistan? Is it Islamic or conventional banking system?

SZABIST Factors Affecting Growth of Islamic Banking in Pakistan

What are the major factors that affect the growth of Islamic banks in Pakistan? What are the major factors because of which people and institutions are turning towards Islamic financial methods? 4. RESEARCH OBJECTIVES The research will try to compare the conventional and Islamic banks growth over the past few years to find out which system has high growth rate and finally identifying the major factors that are affecting the growth of Islamic banks. 5. FRAMEWORK Independent variables Dependent variables

Govt. policies and regulations

Shari'ah compliance

Growth

Global recession

6. RESEARCH DESIGN AND METHODOLOGY The Nature of this research is descriptive and in this research we will gather secondary data of different Islamic and conventional banks. We will apply different tools to measure and compare the performance and growth of the Islamic and conventional banks. The type of the research is quantitative as we will apply different tools and analyze quantitative data. Following sources will be used to collect data

SZABIST Factors Affecting Growth of Islamic Banking in Pakistan

Websites of banks Financial statements of banks

The financial statements will be obtained from websites of banks and financial ratios will be used to analyze data and measure the performance of banks. These ratios have been used by number of researchers and an advantage of this technique is that it eliminates the disparities among banks regardless of their size and volume (Waheed Akhter, 2011). Profitability ratios o Return on Assets (ROA)= Net Profit/Total Assets o Return on Equity (ROE)= Net Profit/Equity. o Cost income Ratio (COSR)= Total cost/Total income Liquidity ratios o Net Loans to Asset Ratio (NLAR)= Net loans/Asset Ratio o Liquid Assets to Customer Deposits and Short Term Funds Ratio (LaCDSF)=
Liquid Asset/Customer deposit and short term funds

o Net Loans to Deposits and Borrowing (NiTDB): Net Loans/Total Deposits and
Borrowing

Credit risk o Common Equity to Total Assets (CeTA)= Common Equity/Assets o Total Equity to Net Loans (TeNL) = Total Equity/Net Loans o Impaired Loans to Gross Loans (ImGL) = Impaired Loans/Gross Loans

SZABIST Factors Affecting Growth of Islamic Banking in Pakistan

Bibliography
Akhtar, D. (2007). Islamic Banking: Past, Present & Future Outlook. State Bank of Pakistan. Akram, M., Rafique, M., & Alam, H. M. (2011, May). Prospects of Islamic Banking: Reflections From Pakistan. Australian Journal of Business and Management Research , 125-134. Bank Alfalah Limited. (2006-2007). Islamic Banking:Bank Alfalah Limited. Retrieved from Bank Alfalah Limited Web site: http://bankalfalah.com/islamic/index.asp CIA. (2012, february 8). The World Fact Book. Retrieved february 19, 2012, from CIA website: https://www.cia.gov/library/publications/the-world-factbook/geos/pk.html kahf, M. (2004). SUCCESS FACTORS OF ISLAMIC BANKS. Loqman, M. (1999). A Brief Note on the Is lamic Fi nancial Sys tem. 52-60. M. Mansoor Khan, M. I. (2008). Development in Islamic banking:a financial risk-allocation. The Journal of Risk Finance , 40-51. Pakistan, S. b. (2008, November 8). Departments of SBP. Retrieved Feb 22, 2012, from SBP.org: http://www.sbp.org.pk/departments/ibd.html Pervaiz Said. (2008). Pakistans Islamic Banking Sector Review. SBP. Raza, A. (2012). Islamic Banking assets hit Rs568bn mark SBP official. (p. 3). Islamabad: Business Recorder. Shariah Fortune. (2010). History of Islamic Banking: Shariah Fortune. Retrieved from Shariah Fortune Web site: http://shariah-fortune.com/history-of-islamic-banking Sufian, F. (2007). The efficiency of Islamic banking. Humanomics , 23 (3), 174-192. Waheed Akhter, A. R. (2011). Efficiency and Performance of Islamic Banking: The Case of Pakistan. Far East Journal of Psychology and Business , 54-70. Warsame, M. H. (2009). The role of Islamic finance in tackling financial. Durham E-Theses .