INTRODUCTION• Islam was the basis of creation of Pakistan therefore theinception of Pakistan should have been marked by the lawsand legislation to put Islam to practice.• However, this was not the case. there was a stark differencebetween words and actions.• Just after an year, the SBP came into being andunfortunately our central bank stared working on the un-islamic principle of Riba.
INTRODUCTION• To make the situation worse, Pakistan started taking loansfrom IMF and WB.• The vicious circle of the interest based loans made thesituation worse.• The promised war of Allah and His Messenger was eminentin the past and is eminent today
TOPICS TO BE DISCUSSED…1. Steps towards the Islamic Financial Movement2. Problems faced by Islamic Financial Sector3. Challenges for the Islamic Financial Sector4. Solutions and Guidelines
HISTORY OF ISLAMIC MOVEMENT• Efforts for economy wide elimination of Ribastarted during 1970s• Most of the significant and practical steps weretaken in early 1980s.• Pakistan was among the three countries in theworld that had been trying to implement interestfree banking at national level.
HISTORY OF ISLAMIC MOVEMENT• 1979: Elimination of interest from the operations ofspecialized financial institutions• 1981-1985: Elimination of interest from theoperations of specialized financial institutions
HISTORY OF ISLAMIC MOVEMENT• 1980: The legal framework of Pakistans financialand corporate system was amended on June 26,1980to permit issuance of a new interest free instrument ofcorporate financing named Participation TermCertificate (PTC).• An Ordinance was promulgated to allow theestablishment of Modaraba companies and floatationof Mudaraba certificates for raising risk capital.
HISTORY OF ISLAMIC MOVEMENT• 1981: Separate Interest-free counters startedoperating in all the nationalized commercial banks tomobilize deposits on profit and loss sharing basis.• 1985: No bank in Pakistan was allowed to accept anyinterest-bearing deposits and all existing deposits in abank were treated to be on the basis of profit and losssharing.
HISTORY OF ISLAMIC MOVEMENT• The efforts and practical steps undertaken in the 1980’s toIslamize the economy at national level are consideredsignificant in the Muslim world.• 1991: The procedure adopted by the banks in Pakistanwas, declared un-islamic by the federal shariat court inNovember 1991 since it was largely based on Markuptechniques.
HISTORY OF ISLAMIC MOVEMENT• After 2000, the SBP formulated the Commission forTransformation of Financial System (CTFS) and TaskForce was set up in the Ministry of Finance to suggestthe ways to eliminate interest from government financialtransactions• After 2000 many conventional banks have establishedseparate branches for Islamic financing. Moreover, someIslamic Banks have also come into existance
CURRENT SITUATION• The industry has shown tremendous growthrate of 55% since inception.• The ever‐increasing share of Islamic Bankingin the local Banking system stands at 5.9%.
Short Term Liquidity Management•Islamic Financial Institutions (IFIs) in Pakistan cannot investin conventional interest‐based instruments.•Sukuk which was introduced in 2008 to provide liquidity. Butdue to limited supply and high demand, these Sukuk arerarely traded in the secondary market.•Absence of secondary market is both a problem and achallange
Lack Of Tax IncentivesIn Pakistan, the investors do not get taxconcessions for investing in Shariah compliantinvestments. Absence of tax incentive is ahurdle in growth.
Human Capital• There has always been a dearth of qualified bankerswho are well versed in Islamic laws as well ascontemporary economics and finance.• Majority of the human resource force working inIslamic finance industry comes from theconventional side. They do not have adequateunderstanding of Islamic finance which affects theirability in dealing and convincing their clients.
Investment Avenues• SBP figures indicate that Murabaha, Ijarah and DiminishingMusharakah, which are all essentially asset‐based, fixedreturn products, constitute more than 80% of the financingportfolio of Islamic banks in Pakistan.• Now It is a challenge for Islamic institutions to enter intoother modes of Islamic finacing as well
Standardization Of Contracts• All Islamic financial institutions offer the same basicproducts but the problem is that each institution has itsown group of Islamic scholars on the Shariah board toapprove the product.• The very same product has different features. Thisprevents standardization.• Lack of standard financial contracts and products becomesa source of trouble and dispute.
Perception Of Users• Many people in the Muslim and non-Muslim world do notunderstand what Islamic banking actually is.• Due to unsatisfactory experiences in the name of IslamicBanking in the past, some Pakistani customers are nowskeptical about the authenticity of Islamic bankingpractices.
Legal Support• Appropriate laws for implementation of Islamic financialcontracts do not exist.• Issues of Islamic banks and conventional banks are dealtin the same court and by the same judge. But, we know thatissues of both banks are different in nature.
Human Resource DevelopmentBoth business schools and religious schoolsshould offers specialist courses to prepare thenext generation of Shariah scholars andIslamic‐financial managers.
Tax ReformsTax laws are not very much supportive about Shariahcompliant investments.The Government needs to revamp the existing structureof taxes and duties to make them conducive to Islamicfinance.In this regard, stamp duties should be reduced and taxincentives should be provided.
Using Media to Create AwarenessCreating awareness among the masses has been oneof the greatest challenges for Islamic banks.Media can play a participative role in removing themisconceptions people have regarding Islam.
Investment In Sectors Ignored ByConventional BanksAvenues missed out by conventional financialinstitutions are a great opportunity for Islamic Banks.In Pakistan, agriculture and SME sectors are ofparamount importance but these remain largelyignored. Islamic banks can excel by investing in thesesectors.
PRE-REQUISITES• The taxation system and the legal system should support theIslamic Investments.• Efforts are needed at changing the general perception.Through a comprehensive campaign, people must be made tounderstand that Islamic banking does not mean free loaningto the business and industry and that the savers canjustifiably take return on the basis of results of the businessactivity undertaken with help of their funds• Commitment and determination that are pre-conditionshould be visible to the general public.
Guidelines & Proposals1. Good governance in terms of enforcement of law and controlover the corporate and private sectors need to be ensured.2. Curbing informal (black) economy and documentation ofeconomy by banning all bearer instruments like prize bondsand rupee traveler cheques that have become major vehicle ofblack economy.3. A shariah board needs to be set-up to establish countrywideuniform shariah interpretation of financial transactions and toreview and supervise the activities of banks includingdocuments and transactions to ensure that they are incompliance with its rulings.
Guidelines & Proposals4. The disputed cases of the Islamic banks cannot behandled by the conventional banks. To ensure a proper,speedy and supporting Islamic legal system, separateIslamic banking courts should be established.5. Providing an effective penal code for willful defaulters,dishonest clients and corrupt bank officials6. Separate prudential regulations should be established forIslamic Banks.
Guidelines & Proposals7. The edifice of financial system needs to be restructured.The structure should be based on profit/risk sharing i.e asa whole the system must be equity based and not creditbased.8. Unit trusts, investment funds, mutual funds, etc should beestablsihed to replace the interest based fundmobilization schemes.
Guidelines & Proposals9. Treatment of Deposits:– Deposits of the risk-averse clients should be accepted either incurrent accounts that will be guaranteed with no share in returnfrom financing operations of the banks or by establishingMurabhaha funds wherein they will be treated as Rabbulmal andget the quasi fixed return out of profits or rentals earned by therespective funds.– Risk-prone deposits will become part of bank’s equity involving aweight age system (longer the maturity, higher the weight) ondaily product basis (DPB).
Guidelines & Proposals10. Transactions relating to imports, exports andworking capital requiraders/businesscommunity can be financed throughMusharakah or Mudarabah modes. Similarly,working capital and project financing can beoffered through participatory modes.
Guidelines & Proposals11. Provisioning for bad debts should be replaced bysharing in possible losses.12. Credit system needs to be reformed to drastically sothat the credit creation capacity of the banks islargely reduced.13. To develop the Islamic financial system in its purestform and to bring about a structural change, thegovernment should make the use of participatorymodes compulsory for specified types of transactions