Islamic Banking

ISLAMIC BANKING
 

• ISLAMIC BANKING is based on the

principles of interest free financing and
investments. Its liability side is
dominantly based on profit and loss
sharing basis, and the assets side
earn profit through trading, rent and
profit and loss on investments and
financing.
Islamic Banking – Global Perspective

• International Groups • Many foreign banks now

have Islamic windows.
– DMI
– Citibank
– Al Baraka
– ANZ
– Al Rajihi – RBS
– Kuwait Finance House – Goldman Sachs
– Noor Financial – Hong Kong Shanghai
– Abu Dhabi Islamic bank bank
• In Pakistan – Saudi American bank
– Meezan – Saudi British Bank
– Al Barakah – UBS AG
– Dubai Islamic
Islamic Banking - a Success Story

Different types of IFIs have emerged globally

• Islamic Commercial Banks

• Islamic Investment Banks
• Islamic Units of conventional banks
• Islamic Funds
• Islamic House Financing Schemes
• International Financial Market
• International Institutions of Islamic Banking
Global Bodies for Islamic banking
AAOIFI

IFSB

IIRA

CIBAFI
 AAOIFI
Accounting & Auditing Organization of
Islamic Financial Institutions

An Umbrella organization for Islamic banking

 AAOIFI – brief Introduction
• Established on 1 Safar, 1410H (26th February 1990).
• AAOIFI is headquartered in Bahrain.
• Entrusted with the task of developing for IFIs:
- Shariah Standards
- Accounting Standards
- Auditing Standard
• Has published standards for all major modes of
Islamic Finance.
• In Pakistan, AAOIFI standards are being adapted
 
through ICAP’s Committee
• Total Members are 122 Islamic Financial Institutions
from 29 countries.
Islamic Banking – in Pakistan

“We must work our destiny in our own way and

present to the world an economic system based
on true Islamic concept of equality of manhood
and social justice.
Speech at the opening ceremony of State Bank of Pakistan, Karachi
July 1, 1948
 Islamic Banking – in Pakistan
History
1947 Pakistan Resolution
1949 Objectives Resolution
1962 Creation of Council of Islamic Ideology (CII) in 1962
1979 Pakistan adopted a policy of gradual transformation of its banking system
1980 A 15 member committee of CII prepared a report on elimination of banking
& commercial interest from Pakistan and outlining the Islamic modes of
financing
1980 Introduction of zakat system
1983 Introduction of Ushr system
1985 Introduction of mark-up based financing system in banks
1991 Federal Shariat Court (FSC) Declared mark-up procedure un-
Islamic
 Islamic Banking – in Pakistan

1999 Shariah Appellate Bench of Supreme Court rejected all appeals against the
previous and called for the establishment of an interest free financial
system

2002 Meezan Bank established as Pakistan’s first Commercial Islamic Bank

2003 Establishment of Islamic Banking Department at SBP

2007 Adapted Accounting Standards for Murabaha

2008 SBP issue Instruction & Guidelines for Shariah Compliance in Islamic banks

2008 Government of Pakistan issue Ijarah based sukuk to finance its needs.

2010 6 Full fledge Islamic banks & 14 Islamic banking windows are operating and
have over 5% market share in a very short span of time
Islamic Banking – in Pakistan
CURRENT STATUS

• Legal framework in place, licenses available for

– Islamic commercial bank
– Islamic Subsidiary of a conventional bank
– Stand alone Islamic branches of a
conventional bank
 Islamic Banking – in Pakistan
Steps Taken for promotion

• Shariah Board established at SBP

• Islamic products available to cover 85% of the services offered by

conventional banks

• Shariah compliant export refinance scheme launched

• Model agreements for products developed by IBD of SBP

• Shariah Audit/Compliance manuals have been developed

• Various training courses and degree programs at universities

• Tax laws are being rationalized to avoid double taxation of IFIs

Islamic Banking – in Pakistan
• Full Fledged Islamic Banks – 5
 Meezan Bank
 Al-Baraka Bank Pakistan Limited
 Dubai Islamic Bank
 Bank Islami Pakistan
 MCB Islamic Bank
• Many conventional banks operating Islamic Banking
Branches: Bank of Khyber, Bank Alfalah, Habib Metro
Bank, Bank Al Habib, Standard Chartered Bank, Soneri,
HBL, UBL, Askari, NBP, Faysal/RBS etc. (13) – as they have
accepted the reality and difference of Islamic banking.

* Due to merger of Al-Baraka and Emirates Global Islamic Bank Announced

What distinguishes Islamic banking
from conventional banking
 Objectives of Islamic banking
• Equitable Distribution & Circulation of Wealth in the
society

• Avoid all Impermissible transactions

Riba (Riba Al Nase’ah / Riba Al Fadhl)
Maysir / Gambling
Gharar (Al Jahalah, Bai Qablal Qubz etc).
Uqood-e-Fasida

• Promote participation based & asset Backed Financing

• Fulfilling halal Customer Needs

• Ensuring Shari’a Compliance in all transactions

Distinguishing Features
We find the differences are on three levels:

1. Conceptual & Socio-religious level

- not money lenders

- cannot deal with interest & non permissible industries

2. Business model & Governing framework

- IB actively participates in trade and production process
as a supplier, customer or investor
- Governing framework in terms of Shariah Advisor &/or
SSB
Distinguishing Features
3. Product Level Implementation
- usually asset backed & involve trading/renting of
asset & participation on profit & loss basis

- Implementation is not just a mere change of paper

work and terms but it involves
- having the right intention,
- the correct sequence of steps and timing of
execution

Without a clear understanding of these differences some people

even experts tends to makes a common mistake of equating
Islamic banks as just another bank with mere change of name.
Basic Difference between Islamic and
Conventional Modes of Finance

Conventional

money
Bank Client

money + money (interest)

Whereas Allah has permitted trading

and forbidden Riba

Basic Difference b/w Islamic and
Conventional Modes of Finance

Islamic

Bank Goods & Client

Services

money
 Islamic Bank’s Assets Side

Islamic Bank’s Assets or Investable Funds

Equity Based Trade Based Rental Based

Instruments Instruments Instrument

• Musharaka • Murabaha • Ijarah

--Permanent • Istisna (Leasing)
--Diminishing
• Salam
• Mudarabah
 What Distinguishes Islamic Banking
Islamic banking
• Transactions are asset-
based/backed
• It is socially-responsible
banking because it operates
under Shariah restrictions
• Does not permit financing of
prohibited goods /
Industries
• Ethics and moral values play
a major role in investment
decisions. Not a choice but a
must
Conventional banking
• Transactions are money
lending and Riba based
• Involve in many
impermissible transactions
like Short selling, Sale of
Debt, Speculation, artificial
financial transactions, no
sanctity for Islamic law of
contract.
• Permit financing of
prohibited goods /
Industries like alcohol,
casinos etc.
• A matter of choice
The Way Forward
 Islamic banking is a globally accepted reality and a viable
alternative to interest based banking.

 It is ethically & economically better way of banking.

 Its objective are inline with the goal of Islamic Economics

 Islamic alternates of Banking Products can be very effectively

developed for all types of needs

 However, there is a need for more focus research and innovative

product development.

 Ulema, bankers and professionals need to coordinate more

frequently to find solutions.
‫جزاک اللہ خیر‬