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Growth prospects of islamic banking in pakistan


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Islamic banking its products, history and analysis with conventional banks.Along with competitive advantages, barriers and suggestions for improvement in Pakistan.

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Growth prospects of islamic banking in pakistan

  1. 1. Lubna Mueen Arbi (M.Com) The Islamia University of Bahawalpur Growth prospects of Islamic Banking in Pakistan
  2. 2. Freedom of Muslim world from colonial powers was almost accomplished in the second half of 20th century and widespread revitalization of Islamic ideology took its path in Muslim societies. Whereby the people started looking at the existing social systems through Islamic perspective and recommended modifications and improvements. The Muslim scholars and philosophers challenged the world’s ruling economic and social systems and revealed their weaknesses. Capitalism system was scrutinized and criticized in depth due to its magnitude and general acceptability in majority of leading societies of the world. Evolution of Islamic Banking SBP Internship Project 2
  3. 3. QISMUT — Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey —six regional global markets along with Bahrain, which are important to the forthcoming internationalization of the Islamic banking industry. They grip a large pool of financial and intellectual capital of the industry that will drive the next wave of development across existing and new markets. Islamic banks are already serving 38 million customers globally, two-thirds of whom are located in QISMUT. QISMUT Islamic banking assets have reached US$662b in 2013.And expect a CAGR of 19.7% through 2013–18, with total assets reaching US$1.6t across these six important markets. Globally, Islamic banking assets are expected to grow to US$3.4t by 2018. Evolution of Islamic Banking (continued) SBP Internship Project 3
  4. 4. SBP Internship Project 4
  5. 5. • 1970s Some efforts started with no conspicuous results. • 1980s Bold and comprehensive initiatives were undertaken. Pakistan was ranked amongst the three countries of the world for commencing non-interest based banking. Various legislations (Companies Ordinance, 1984, Negotiable Instruments Act, 1882, State Bank Act and Recovery of Loans Laws etc. were reviewed to bring these in line with the tenants of Islam. A new interest free Instrument namely; PTC (Participation Term Certificate) for Corporate Financing was introduced and was later replaced with TFC(Term Finance Certificate). Non-Interest Based Instruments (NIB) were announced. In the Conventional Banks separate interest free counters were opened on January 01, 1981. For meeting working capital needs of trade and industry, Musharakah was introduced on July 01, 1982. Profit and loss sharing basis was introduced in Conventional Banks on April 01, 1985. Islamic Banking History in Pakistan SBP Internship Project 5
  6. 6. • 1990s In November 1991, Federal Shariah Court was established. An announcement was made on December 23, 1991 that transactions involving interest in banks would cease to have effect finally by June 30, 2001. • 21st Century Commission for Transformation of Financial System Bank of Pakistan. Task Force was set up in SBP to suggest ways and means to eliminate interest from Government financial transactions. However, parallel banking system namely; Conventional and Islamic Banking has continued till today. Islamic Banking History in Pakistan (continued..) SBP Internship Project 6
  7. 7. Current status (In Pakistan) Figure 1: Table 1 is taken from IBB March 2014 report presented by BBP SBP Internship Project 7
  8. 8.  Money is not a commodity though it is used as a medium of exchange and store of value.  Profit on trade of goods or charging on providing service is the basis for earning profit.  Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Mudarabah, Musharakah).  The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts. Difference between Islamic and conventional banking SBP Internship Project 8
  9. 9.  Islamic banking tends to create link with the real sectors of the economic system by using trade related activities.  The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller  Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al- wadiah, thus the depositors are guaranteed repayment of their funds,  The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation is being charged and these proceeds are given to charity. Difference between Islamic and conventional banking (continued) SBP Internship Project 9
  10. 10. Islamic mode of financing • Sharia Based financing • Sharia Compliance Modes of financing Range of Islamic products SBP Internship Project 10
  11. 11. •Mudarabah is a renowned type of Islamic partnership form whereby skill and money are brought together to conduct business. Profit is distributed according to agreement while loss is borne by capital provider (Rab ul maaL) only. Mudarabah • Musharakah is a joint enterprise formed conducting some business in which all partners share the profit according to pre decided ratio while loss is shared according to the ratio of contribution. Musharakah Sharia Based financing SBP Internship Project 11
  12. 12. 1. Murabaha •Murabaha is used as successful substitute product for short term loans and overdraft under conventional banking. 2. Ijara •Ijara has substituted successfully the facility of leasing under conventional financial system. 3. Diminishing Musharakah •Diminishing Musharakah is used for house financing by IFIs and has supplanted successfully conventional mortgages. 4. Bai Salam •Essentially Bai e Salam is used to fulfill financing of agricultural needs of farmers. Farmers in this contract sell their crops prior to harvesting to IFIs in order to get money for acquiring seeds and fertilizers. 5. Bai Muajjal •Literal meaning of Bai Muajjal is deferred / credit sales. Islamic financial Institutions (IFIs) are using this approach to finance the customers’ needs by supply of anticipated commodities. The modification between Murabaha and Bai Muajjal lies in cost disclosure. 6. Istasna •This tool of financing is useful for infrastructure projects. Parallel Istasna contract is allowed however performance of second Istasna contract must not be conditional on the fulfillment of first contract. Range of Islamic products SBP Internship Project 12
  13. 13. • Meezan Bank • Al Baraka Pakistan • Bank Islami • Burj Bank • Dubai Islamic Bank Pakistan Pakistan Islamic banking financial institutions SBP Internship Project 13
  14. 14. • "And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah." [Surah Ar-Rum 30:39] • "And because of their charging riba while they were prohibited from it." [Surah An-Nisaa 4-161] • "O those who believe do not eat up riba doubled and redoubled." [Surah Al-e-Imran 3- 130] Concept of Riba in Islam SBP Internship Project 14
  15. 15. • "Those who take interest will not stand but as stands whom the demon has driven crazy by his touch. That is because they have said: 'Trading is but like riba'. And Allah has permitted trading and prohibited riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah. And the ones who revert back, those are the people of Fire. There they remain forever. Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever. Surely those who believe and do good deeds, establish Salah and pay Zakah, have their reward with their Lord, and there is no fear for them, nor shall they grieve. O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged. And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you, if you really know. And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged." [Surah Al-Baqarah 2:275-281] Concept of Riba (continued) SBP Internship Project 15
  16. 16. • From Hazrat Jabir (May Allah be pleased with him): The Prophet, cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt] • Jabir ibn Abdallah (May Allah be pleased with him), giving a report on the Prophets Farewell Pilgrimage, said: The Prophet addressed the people and said "All of the riba of Jahiliyyah is annulled. The first riba that I annul is our riba, that accruing to Abbas ibn Abd al-Muttalib (the Prophet’s uncle); it is being cancelled completely. Hadith on riba and its exclusion from Holy Prophet (peace be upon him) SBP Internship Project 16
  17. 17. • Bayhaqi has also reported the above hadith in Shuab al-iman with the addition that "Hell befits him whose flesh has been nourished by the unlawful." • From Hazrat Abu Hurayrah (May Allah be pleased with him): The Prophet said: "God would be justified in not allowing four persons to enter paradise or to taste its blessings: he who drinks habitually, he who takes riba, he who usurps an orphans property without right, and he who is undutiful to his parents." Hadith Holy Prophet (peace be upon him) continued SBP Internship Project 17
  18. 18. 100 107 132 186 199 100 125 162 225 266 0 50 100 150 200 250 300 2009 2010 2011 2012 2013 HBL MBL Financial Analysis (Growth in assets) SBP Internship Project 18
  19. 19. 100 109 137 178 205 100 131 169 230 289 0 50 100 150 200 250 300 350 2009 2010 2011 2012 2013 HBL MBL Deposit Accounts Growth SBP Internship Project 19
  20. 20. 78.30% 80.50% 80.51% 82.08% 83.07% 84.73% 81.25% 86.22% 88.24% 86.94% 70.00% 75.00% 80.00% 85.00% 90.00% 2009 2010 2011 2012 2013 Chart Title HBL MBL Earning asset ratio SBP Internship Project 20
  21. 21. 8.69% 9.39% 8.78% 7.39% 7.61%7.32% 6.94% 6.64% 5.55% 5.43% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 2009 2010 2011 2012 2013 HBL MBL Equity Capital to Total Assets SBP Internship Project 21
  22. 22. 9.087 8.606 9.323 10.208 10.72611.038 12.204 12.762 14.872 16.183 0 5 10 15 20 2009 2012 2011 2012 2013 HBL MBL Deposits Times Capital SBP Internship Project 22
  23. 23. 67.40% 65.60% 53.40% 43.20% 42.70% 81.20% 54% 43.80% 40.70% 46.60% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 2009 2010 2011 2012 2013 HBL MBL Loans to Deposits SBP Internship Project 23
  24. 24. 2.475 2.924 3.012 2.208 2.107 1.401 1.374 2.322 1.875 1.713 0 0.5 1 1.5 2 2.5 3 3.5 2009 2010 2011 2012 2013HBL MBL Basic earning power SBP Internship Project 24
  25. 25. 90.20% 89.60% 90.40% 91.70% 91.80% 92.80% 92.80% 93.10% 92.40% 94.30% 86.00% 88.00% 90.00% 92.00% 94.00% 96.00% 2009 2010 2011 2012 2013HBL MBL Debt ratio SBP Internship Project 25
  26. 26. 1.55% 1.84% 1.96% 1.42% 1.34% 0.83% 1.07% 1.69% 1.26% 1.20% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 2009 2010 2011 2012 2013HBL MBL Return on assets (ROA) SBP Internship Project 26
  27. 27. 17.80% 19.60% 22.30% 19.10% 17.10% 11.20% 15.30% 25.40% 22.60% 18.90% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 2009 2010 2011 2012 2013 HBL MBL Return on Common Equity SBP Internship Project 27
  28. 28. Vision Statement To evolve a stable and distinct Islamic Banking System based on Shariah principles that creates value for all stakeholders particularly the users and providers of Islamic financial services. Role of state bank of Pakistan in Islamisation of banks SBP Internship Project 28
  29. 29. • Focal point for all Islamic banking functions, initiatives at SBP • Strengthen the legal, regulatory and Shariah compliance framework for Islamic banking Institution (IBIs) • Adopt/adapt prudential standards issued by international organizations such as IFSB, AAOIFI to harmonize the Shariah practices in Pakistan • Steer/facilitate the SBP Shariah Board meetings, and Shariah Advisors’ Forum • Shariah review of IBIs products • Coordination with other departments for IBIs’ licensing and branch licensing Departmental Objectives SBP Internship Project 29
  30. 30. • Collaborate with ICAP for adoption of AAOIFI accounting standards • Industry capacity building initiatives, Awareness and promotion program • Focused research initiatives-both empirical and theoretical • To leverage support from international infrastructure institutions dealing with Islamic finance i.e. IFSB, IDB, AAOIFI and IIFM for promotion of Islamic banking in Pakistan. • Issuance of Periodic Islamic banking bulletin and News Watch Departmental Objectives contd.. SBP Internship Project 30
  31. 31. IBD Organogram Director Policy Division Regulations Unit Prudential Standard Adoption Unit Licensing and Coordination Unit Product Dev. and Review Unit Shariah Division Shariah Board Secretariat Unit Shariah Standard Unit Shariah Compliance Unit Promotion & Dev. Division Awareness Creation Unit International Affairs Unit Capacity Building Unit Market Analysis and Research Division Research Unit Market Analysis Unit Data Unit Business Support Unit Shariah Board Director's Staff SBP Internship Project 31
  32. 32. • Issuance of Shariah Governance Framework • Issuance of Five year Strategic Plan for Islamic Banking Industry of Pakistan (2014-18) • Completion of Knowledge, Attitude and Practices Study • Awareness Creation • Constitution of Steering Committee for Promotion of Islamic Banking • Profit Distribution and Pool Management Framework • Liquidity Management Framework Recent Initiatives for Promoting Islamic Banking SBP Internship Project 32
  33. 33. • Justice and Objectivity: (equitable distribution of income and wealth) • Liquidity Ease: (because Islamic banks don’t ensure fixed return to be paid even if bank itself suffered loss) • Improved Customer Relations: (The banks are prospective to know their fund users better in order to ensure that the funds are used for productive commitments) • No Fixed Commitments: (any prearranged fixed obligations such as interest payments on deposits) • Transparency: (profit is distributed in the pre-agreed ratio) • Ethical and Moral Scopes: (strong ethical and moral magnitudes of doing business and choosing business activities to be financed) • Destabilizing Speculation: • Banking for All: Advantages of Islamic banking over conventional banks SBP Internship Project 33
  34. 34. • Shariah Elucidations (difference of opinions given by different shariah committee which create doubt in the mind of people.) • Shariah Experts and Specialists: (availability to Islamic banking customers.) • Product development and execution: . (Till now Islamic banks have altered products from conventional banking which creates doubts in the mind of a common user) • Competition from conventional banking: (History and volume of conventional banks is much more then Islamic banks so it’s not easy to compare both in same scenario.) Problems faced by Islamic institutions SBP Internship Project 34
  35. 35. • The major problem what I feel in Islamic banking is difference in international Islamic standard. And they must be synchronized throughout the globe. • Difference of opinion in religious groups should also be dissolved by having common research platforms. • Government should promote Islamic banking and give Islamic banks the relief for further promotion. • Awareness among general public about the differences between Islamic and Conventional Banking. Suggestions SBP Internship Project 35
  36. 36. • Research and development in the field of Islamic Finance for the development of new Islamic Banking Products. • Training facilities for HR in Islamic Banking is needed because only Islamic system cannot be implemented if the employees are not equipped with the required Islamic banking training. • University level courses in Islamic Banking and Finance should be introduced because there no specialized degree is yet been offered by any educational institution in Pakistan. • Islamic banking research system. Suggestions SBP Internship Project 36