Islamic banking report an analysis and overview of the industry.

1. Term Report
Course:
Analysis of Pakistani Industries
Submitted by:
Junaid Zamir
SP06-BB-0010
Tariq Ali Khan
SP06-BB-0022
Submitted to:
Sir Afaq Ali Khan
Submission Date:
09
th
May, 2009
Mohammad Ali Jinnah University, Karachi
ISLAMIC BANKING IN PAKISTAN 1

2. 22-E, Block-6, P.E.C.H.S. Karachi-75400, Pakistan
Tel: 111-87-87-87 & 431-1325-26
URL: www.jinnah.edu E-mail: info@jinnah.edu
Table of Contents
1. Acknowledgement ……………………………………………………………………... 3
2. What is Islamic Banking ……………………………………….….......................... 4
3. Principles ………………………………………………………………………..…………4
4. Terminologies ………………………………………………………………….……….. 5
5. Products offered by Islamic Banks ….………………………………………………. 7
6. History …………………………………………………………………………….……....9
7. How it is Different ? .…………………………………………………………………...10
8. Industry Overview …………………………………………………….......................11
9. Key Challenges Facing Islamic Banks ……………………………………..…….….13
10. SWOT analysis………………………………..…………………………………….……14
11. Problems …………………………………………………………………………………18
12. Future …………………………………………………………………….…………..….18
ISLAMIC BANKING IN PAKISTAN 2

3. ACKNOWLEDGEMENT
First of all we are very thankful to ALLAH-RAB-UL-IZZAT who gives us such
power, knowledge and ability to accomplish our goals. With out His kind help
we would be unable to do this report.
We are grateful to our teacher Mr. Afaq Ali Khan for teaching us this course
of ‘Analysis of Pakistani Industries’. His versatile knowledge in this discipline
and unique teaching style has developed our knowledge and cleared many
ambiguities.
We are all very grateful to him for assigning this challenging presentation,
which will further help us in evaluating many interrelated dimensions in
establishing quality control systems in any business.
Finally, we thank all our other professors and teachers who has taught us in
different fields as finance, marketing, management and other areas of
specialization and made us able to think differently as an intellectual and
specially to those who has directly or indirectly supported us with their
assistance and guidance to compose this project report and accomplish
broader vision to visualize things.
“MAY ALLAH, THE ALMIGHTY BLESS ALL THE PERSONALITIES WHO
HAD DIRECTLY OR INDIRECTLY HELPED US TO ACHIEVE OUR GOALS”
ISLAMIC BANKING IN PAKISTAN 3

4. What is Islamic Banking
A system of financial activities consistent with Shariah, based on
Islamic principles which at the core refuses collecting interest,
transactions involving uncertainty and speculation.
 It is based on the Islamic economic system.
 It is not restricted to Muslims only.
Principles
• It works on Islamic set guidelines consisting of Risk Sharing,
Individual Rights & Duties, Property Rights, Purity of Contracts,
Commitments, Transparencies & Fair Deals.
• Any predetermined payment over & above the actual amount of
principal is prohibited (interest) the only loan it allows is qard-ul-
hassna whereby lender does not charge any interest.
• The Islamic financial system employs concept of participation ,
utilizing funds on a profit-and- loss-sharing basis.
ISLAMIC BANKING IN PAKISTAN 4

5. Terminologies
Takaful
It is a form of Islamic Insurance. Takaful is an alternative form of
cover that a Muslim can avail himself against the risk of loss due to
misfortunes.
Sukuk
It is a form of Islamic Bonds the Arabic name for a financial certificate
but can be seen as an Islamic equivalent of bond.
Murabaha
It is a contract for purchase and resale and allows the customer to make purchases
without having to take out a loan and pay interest. Bank purchases the goods on behalf of
the customer, and re-sells them to the customer on an agreed profit margin and the
customer pays the sale price for the goods over installments.
Musharaka
It means partnership. It involves you placing your capital with another
person and both sharing the risk and reward with profit sharing ratio,
but losses must be proportionate to the amount invested.
Mudaraba
It refers to an investment on your behalf by a more skilled person. It
ISLAMIC BANKING IN PAKISTAN 5

6. takes the form of a contract between two parties, one who provides
the funds and the other who provides the expertise and who agrees to
the division of any profits made in advance. The Bank would make
Sharia’a compliant investments and share the profits with the
customer, in effect charging for the time and effort. If no profit is
made, the loss is borne by the customer and Islamic Bank of
Britain takes no fee.
Ijarah
Ijara is a form of leasing. It involves a contract where the bank buys
and then leases an item. For example auto ijarah is simply an
agreement under which the vehicle shall be given to you on rent for a
period, agreed at the time of the contract. Bank purchase the vehicle
and it out to the consumer for a period upon completion of the ijarah
period the consumer get owner ship of the vehicle through a separate
sale agreement.
ISLAMIC BANKING IN PAKISTAN 6

7. Products offered by Islamic Banks
Islamic current account
Islamic current account provides a very convenient and flexible option
to deposit holder. It offer ease of doing unlimited transaction. This is
an ideal deposit product for business and individuals who require
unrestricted access to their banking account. Islamic banking holds the
same properties and features like a conventional account.
Islamic mahana account
All funds raised by bank are invested in businesses which are in
compliance with shariah. Importantly the are invested in the manner
which is pre scribed by the shariah. All profit are pooled and
distributed according to the per-agreed ratio between the Islamic bank
and the depositor. While the transaction are reviewed by the shariah
adviser to ensure compliance with shariah.
Automobile
Auto ijarah is simply a rent agreement under which the vehicle shall be
given to you on rent for a period, agreed at the time of the contract.
Islamic bank purchase the vehicle and rents it out to the consumer for
a minimum period of 3 years and upon completion of the ijarah period
the consumer get owner ship of the vehicle through a separate sale
ISLAMIC BANKING IN PAKISTAN 7

8. agreement (as per the requirement of shariah ) against an agreed
price.
Home finance
It is based on the concept of diminishing musharakah (shirkat- ul-
malik) the bank rent its share in the property to the customer. The
customer pay rent for the bank’s share and simultaneous busy share in
the property from the bank the bank at the end of the tenure, the
customer becomes the sole owner of the property.
PRODUCT TREE
Islamic Modes of Finance
Trade Based
Modes
Partnership Based
Modes
Rental Based
Modes
Musharaka
Mudaraba
Murabaha Ijarah
ISLAMIC BANKING IN PAKISTAN 8

9. History
• The pioneering effort, led by Ahmad Elnaggar, took the form of a
savings bank based on profit-sharing in the Egyptian town of Mit
Ghamr in 1963. This experiment lasted until 1967 by which time
there were nine such banks in the country.
• In 1973, the Islamic Development Bank was set-up.
• The first Islamic bank in Malaysia was established in 1983. In
1993, commercial & merchant banks were allowed to offer
Islamic banking products and services under the Islamic Banking
Scheme (IBS). These institutions however, are required to
separate the funds and activities of Islamic banking transactions
from that of the conventional banking business.
• The Islamic Summit of Lahore, Pakistan held in 1974
recommended the creation of Islamic Banks and Islamic
Development Bank.
• On 14 Ramadan 1420, the Shariah Bench of the Supreme Court
of Pakistan gave its landmark decision banning interest in all its
forms and by whatever name it may be called. The court also
specified a step by step approach to rid the country of the evil of
interest. (The Historic Judgment on Interest by the Supreme
Court of Pakistan)
ISLAMIC BANKING IN PAKISTAN 9

10. • After 55 years after its creation in the name of Islam, Pakistan
became the first Muslim country to officially declare modern
bank interest as ar-riba, declared haram by Qur'an
How it is Different ?
• Islamic Orders not to use Money as a commodity.
• They operate under the concept of lender-borrower relationship
and the profits generated through this relationship are divided
between the two parties as per agreement.
• How does it works ?
• The bank entirely depends upon the fixed deposits and does not
borrows money from the central bank.
• Bank gives loan on basis of mutual agreement.
• Marjorly focuses on sales transaction.
ISLAMIC BANKING IN PAKISTAN 10

11. Industry Overview
• Islamic Banking is growing rapidly in Pak it has been expected
that by 2012 total share in Banking sector will be 12%.
• Present Islamic Banking share is 5%
• Growth rate is 50%
• Overview
• Assets Rs 276 Bn (asset base of entire Banking System Rs 5,653
Bn)
• Profit Rs 1.8 Bn dec-08
• Deposits Rs 201.7 Bn (17.7%)
ISLAMIC BANKING IN PAKISTAN 11

12. Performance of various Banks
8,333UBL
630Standard Chartered
621Meezan Bank
15,459National Bank
15,375MCB
(53)Bank Islami
4,157Allied Bank
Profit (March 30, 2009) (Millions)Bank Name
Islamic Banks in Pakistan
• Dubai Islamic Bank Pakistan Limited
• Meezan Bank
• Dawood Islamic Bank Limited
• AlBaraka Islamic Bank
• Bank Islami
• Emirates Global Islamic Bank Limited
Branch Network
• Dubai Islamic Bank Pakistan Limited branches 25 in 10 cities
ISLAMIC BANKING IN PAKISTAN 12

13. • Meezan Bank 166 branches in 40 cities
• Dawood Islamic Bank Limited 19 branches in 9 cities
• BankIslam102 branches in 49 cites
• Emirates Global Islamic Bank Limited 41 branches in 24 cities
Total branch network of combine Islamic banks is 353 Branches in
almost all big cities of Pakistan.
Key Challenges Facing Islamic Banks:
• Shariah interpretations
It is the legal framework within which the public and private aspects of
life are regulated for those living in a legal system based on fiqh for
Muslims living outside the domain. Sharia deals with many aspects of
day-to-day life, including politics, economics, banking and business.
On the other hand, there are also those who believe that no form of
banking can ever comply with the shariah. The current issue with
Islamic banking is the difference of opinions given by different shariah
commite which create doubt in the mind of people.
• Shariah experts
Islamic banks and banking institutions that offer Islamic banking
products and services (IBS banks) are required to establish Shariah
ISLAMIC BANKING IN PAKISTAN 13

14. advisory committees / consultants to advise them and to ensure that
the operations and activities of the bank comply with Shariah
principles. Shariah experts in its broader sense that gives primacy to
objectives over rules and regulations shares these concerns.There
views may vary creating contradictions.
• Product development and execution
The hasn’t been any such Islamic product developed by the Islamic
banks. Till now they have modified products from conventional banking
which creates doubts in the mind of a general user. Shariah
compliance leads to additional time, greater product complexity,
higher skills requirements, and more onerous documentation relative
to conventional banking.
• Competition from conventional banking:
The above-mentioned obstacles already hamper Islamic banks’ ability
to compete on an equal footing with conventional banks. Profit-loss
sharing arrangements may also be viewed with caution by bank
customers.
SWOT analysis
STRENGTHS WEAKNESSES
1. Advantages of religious
proposition in a country
made on name of Islam i.e.
Pakistan.
2. Competitive advantage:
Less marketing is required
1. Lack of standardization
across the Muftis /scholars of
the country and among the
scholars and bankers.
2. Disadvantage of
proposition is that there
ISLAMIC BANKING IN PAKISTAN 14

15. than conventional banking
and better cost control as a
result.
3. Morale and commitment to
serve is higher among
bankers and staff due to
religious value.
4. Huge amount of savings
can be mobilized and thus
boosting the deposit base of
banks using charities and
Zakat fund schemes, etc.
5. Less use of money for
speculative purposes thus
chances of investment failure
and much volatility in
investment is reduced.
6. Innovative aspect is also
found in it, using phone
banking, e- banking, etc. a
blend of tradition and modern
life can be easily served to
customers.
7. Location wise &
geographically, it is feasible
and operational all across the
country, as Pakistan is 98%
Muslim population country
scattered in all nooks of
would be a hesitant and new
thing not fully accepted /
suited to World Bank, ADB,
and other multinational donor
agencies to invest through
banking sector in country.
3. A lot of capital is needed to
boost it in front of
conventional banking, and
also huge reserves have to be
maintained, to meet any loss
sharing situation in Islamic
finance modes of investment.
4. Time/season factor
becomes a major problem in
case of Islamic banks, as
people would like to shift their
money from zakat deductible
accounts or they wish to pay
their zakat from “Halal” funds
during Ramadan or on Eid
festivals, etc. creating short
term liquidity problems for
the banks.
5. There are differences in
theory and practice of
Islamic banking in Pakistan to
some extent creating an
inherent weakness.
ISLAMIC BANKING IN PAKISTAN 15

16. national territory.
8. Quality of services will not
less than conventional
banking services so a
competitor to established
banking (interest based) in
same market.
9. All Banks all over the world
have opened a Islamic
window offerinf wide range of
Islamic products and to deal
with Islamic operations
6. Management and staff
need further training to
serve Islamic financial
services and relevant
experience as well to done
their job efficiently.
OPPORUNITIES THREATS
1. More opportunities now lie
in Islamic banking as it has
been accepted by BASEL, WB,
ADB, international agencies,
multinational corporations,
non Muslim governments, etc.
with creation of big sukuk and
Islamic deposit base in Gulf
and Malaysian regions.
2. Traditional interest based
banking will have to
defend through heavy
marketing and advertising in
Muslim countries which off
course reduce their
1. A lot of legislation is
required for Islamic banking
world wide and especially in
non-Muslim countries; even in
Pakistan some legal loopholes
are present in its proper
implementation.
2. Comprehensive Islamic
economic and banking
models have yet to develop
or they are not in their
maturity stage to provide a
blueprint of economic
development and prosperity.
3. IT developments and
Research in latest Banking
ISLAMIC BANKING IN PAKISTAN 16

17. profitability.
3. Islamic banking is a
complete solution to
economic and to some extent
social needs of Muslims from
House building to education in
addition to conventional help
in commerce, business and
industry.
4. Modern Islamic banking
emerged in late 20th
century
with more or less advent of
internet and information
age, thus it is naturally
blended with tools of internet,
and computer based banking,
and will witness a sharper
growth than traditional
banking growth of last 500
years.
5. New markets have been
emerged with growth of
Islamic banking as well:
Islamic mortgage, Islamic
insurance, new investment
projects etc.
6. In non-Muslim countries, like
France where Muslim are in
minority (around 10%) of
are in non-Muslim countries
where conventional interest
based banking have a very
strong position thus Islamic
banking will enjoy latest tools
of IT, but lesser than
conventional banking.
4. Environment for Islamic
banking in west has been
declined after 9/11 attacks on
WTC, New York and later
Prophet Mohammad
(P.B.U.H.) protests in Muslim
world, widening the gaps
between the western
investors and Islamic banking
markets.
5. Market demand is good but
very less as compared to
conventional interest based
banking through out the
world, i.e. beyond some
countries.
6. Sustainable financial
backing by large
multinational firms,
investment banks, and World
major economic powers is
lacking.
ISLAMIC BANKING IN PAKISTAN 17

18. population, Islamic banking
will enjoy the benefit of niche
marketing and if properly
targeted will obtain better
results.
Problems
• The problem with these shariah boards is that they give conflicting
opinions that result in confusion and doubts.
• They approve 1 product and the other may reject
• Jorban a Muslim scholar disapproved the penalty imposed on
defaulting.
• Britain had rejected Islamic mortgage as it based on interest based
structure.
• Malaysia has proposed to setup standards for both IB and IF. such
standards would result in consensus instead of confusion or conflict.
ISLAMIC BANKING IN PAKISTAN 18

19. Future
• Replace conventional Banking system with Islamic banking System.
• Expand their Branch Network.
• 2012 total share in Banking sector will be 12%.
• This is evident not only from the growing number of banks
established specifically for practicing shariah compliant finance, but
also from the increasing number of conventional banks such as
Citibank, HSBC, RBS, Standard Chartered, UBS, etc engaging in
shariah compliant operations.
ISLAMIC BANKING IN PAKISTAN 19