Islamic finance is a rapidly growing sector in the global financial system, with over 300 Islamic banks worldwide and significant appeal in developing economies, particularly in the Middle East and Southeast Asia. The industry faces challenges such as risk management and the integration of Sharia principles with modern financial practices, but continues to expand due to increasing demand for ethical financing. The historical roots of Islamic finance date back to the 7th century, with a modern resurgence seen in the establishment of banks and financial products that comply with Islamic law.

1. Global Acceptance and Problems Faced
By
Islamic Finance

2. Islamic finance is one of the most rapidly growing segments of the global financial system.
However, importance of Islamic finance is rapidly increasing day by day , around all over
the world. particularly in developing economies in the Middle East and South-East Asia.
Islamic Banking is also the part of Islamic Finance. Islamic finance is commercial activity
that reflect sound moral and ethical standards. There are more than 300 Islamic banks
operating worldwide and more than a fifth of the world's population are Muslims. The
development process of Islamic finance commenced at the beginning of the 7th Century
when Muhammad is professed to have received revelations directly from Allah (the God of
Islam). Moore (1997 p.3) regards the actual date as 613AD when Muhammad was about
forty years old.
SUMMARY

3. There are some problems which are faced by Islamic finance, Risk
Management in an Islamic Framework, risk speculation and gambling, financial
markets, globalization of financial markets, Prospects in the Private Corporate
Sector, Prospects at the Grass Roots and the Community Level, research and
development.

4. INTRODUCTION

5. DEFINITION OF ISLAMIC FINANCE
• Islamic finance is defined as a service the is in accordance with laws and
principles of Islam, those comply with the sayings of Holy Quran , Hadith
and Sharia. Hadith is the narrative relating the deeds and utterances of
Muhammad; Sunna refers to the habitual practice and behavior of
Muhammad during his lifetime; Ijma is the consensus among religion
scholars about specific issues not envisaged in either the Holy Quran or
the Sunna; Qiyas is the use of deduction by analogy to provide an
opinion on a case not referred to in the Quran or the Sunna in
comparison with another case referred to in the Quran and the Sunna;
and Ijtihad represents a jurists’ independent reasoning relating to the
applicability of certain Sharia rules on cases not mentioned in ether the
Quran or the Sunna.

6. ISLAMIC FINANCIAL INSTITUTIONS ARE THOSE THAT ARE BASED, IN
THEIR OBJECTIVES AND OPERATIONS, ON QURAN’S PRINCIPLES
(PRINCIPLES OF THE MUSLIMS’ HOLY BOOK)”.
ISLAMIC FINANCE IS COMMERCIAL ACTIVITY THAT REFLECT SOUND
MORAL AND ETHICAL STANDARDS.
GLOBAL FINANCIAL CRISIS CONSTRICTING THE AVAILABILITY OF
CAPITAL, BORROWERS NEED TO CONSIDER ALL OPTIONS AVAILABLE
FOR THEIR FINANCING NEEDS. THESE OPTIONS TYPICALLY TAKE THE
FORM OF CONVENTIONAL BANKING AND CAPITAL MARKETS OPTIONS
ALTERNATIVE SOURCES OF. FINANCING ARE ALSO BEING
SCRUTINIZED.
ISLAMIC FINANCE HAS THE MOST DYNAMIC SECTORS OF THE GLOBAL
FINANCIAL INDUSTRY. AS OF JUNE 2008, THE ISLAMIC FINANCIAL
INDUSTRY AND ALL ITS SECTORS WAS ESTIMATED TO BE WORTH
ALMOST US$800 BILLION.

7. EXPLANATION
1. There are more than 300 Islamic banks operating worldwide and more than a fifth of the
world's population are Muslims.
2. Globally Islamic Banking suffered less than Conventional Banking.
. Sharia is a system that disallow the payment or acceptance of
interest fees for loans of money (Riba) for specific terms.
The Islamic law prohibit interest but allow to earn profit, this practice
motivated establishment and success of number of Islamic
Financial Institutions

8. HISTORICAL AND RELIGIOUS CONTEXT
• The development process of Islamic finance commenced at the beginning of the 7th Century
when Muhammad is professed to have received revelations directly from Allah (the God of Islam).
Moore (1997 p.3) regards the actual date as 613AD when Muhammad was about forty years old.
At the time, the doctrine of financial operations during Muhammad’s era was derived directly from
the Holy Quran and the Sunna (traditions) of Muhammad. Since then, while Islamic Sharia (Quran
and Sunna) has ostensibly coordinated all financial transactions between Islamic persons, there
has been a continuing process of mutual adjustment between Sharia and the actual financial
practices of Muslim societies. In Muhammad’s lifetime, Islamic methods of finance often drew
upon examples from the Prophet’s experiences. Kahf and Khan (1993)

9. EXAMPLE
• have pointed out that Muhammad was the first to use the Mudarabah
(silent partnership) in trade with a rich women named Khadija (who latter
became his wife). At the time, Muslims used to practice Musharakah (full
partnership) when operating large commercial enterprises under a
profit/loss sharing principle. In addition, Muhammad made it permissible
for people to use sale on credit (bai salaam) which was to finance
consumption or production without usury and he encouraged Muslims to
provide benevolent loans (Quard Hassan) (Kahf and Khan 1993). The
ongoing Islamisation of Arabic countries meant that Sharia rapidly spread
to both Muslims and non-Muslims at this time.

10. • After the death of Muhammad in 632AD, a great expansion of Islam
occurred throughout the Arabic states and in large parts of the non-Arab
world. The Islamic state in this ‘golden age’ was dominant in three
continents, Asia, Africa and Europe. According to Moore (1997) the
Islamisation of economic systems during the four centuries following
Muhammad’s death reached Morocco and Spain to the west, India and
China to the east, central Asia to the north and Africa to the south. The
extension of Islamic tools of finance is also indicated by historical records
of contracts registered between businessmen at the time, including
Mudarabah and Musharakah. Islamic finance practices continued largely
unchanged until the beginning of the 19th Century (Warde 2000).

11. • From the nineteenth century, nearly all Muslim countries fell under the control of the Western
colonial powers (France in North Africa, Britain and France in the Middle East, Britain in the Indian
sub-continent and Britain and The Netherlands in South-East Asia), effectively dividing the Islamic
world into many small states. Anwar (1995) argues that by the mid nineteenth century almost all
Muslim-controlled areas fell to the Western colonial powers and thus the existing financial scheme
which complied with Sharia was effectively replaced by the capitalist system. From then until the
second half of the twentieth century, most Muslim economies were dominated by the economic
traditions and systems of Western Europe (Moore 1997). However, while commercial banks,
insurance companies and other types of intermediary firms employed conventional methods of
finance (mostly as braches or agents of institutions in the colonizing country), Islamic methods of
finance were still often practiced between individual Muslims.

12. • With the independence of the Arabic countries from the colonial powers by the
second half of the twentieth century, many Islamic economies also became more
independent. As a result, Muslim economists started reconsidering the application
of Islamic finance into a formal banking industry. Iqbal and Molyneux (2005)
suggest the first attempt to establish an Islamic bank was in 1971 when the
Egyptian government established the Nasser Social Bank. This bank provided a
number of Islamic financial products, including interest-free loans to the poor,
student scholarships and small business credit on a profit/loss sharing basis. This
was followed by the Dubai Islamic Bank in 1975 and subsequent rapid
expansion. El-Qorchi (2005) attributes the rapid growth in the last thirty years to
several key developments. First, the strong demand from immigrant and non-
immigrant Muslims for Sharia-compliant financial services and transactions;
second, the growing oil wealth found in the Middle East; and third, the increasing
competitiveness of Islamic finance products vis-à-vis their conventional
counterparts. Other factors likely include the rise of fundamentalism and
resurgence of strident Muslim practice in many communities and the incentives
offered by governments in some Muslim countries to encourage the establishment
of Islamic banks.

13. A BRIEF REVIEW OF DEVELOPMENTS IN ISLAMIC
BANKING
• The first Islamic Bank was established in Pakistan in the 1950s. In Egypt
the Bank was established in 1963. The development of Islamic Bank
start in 1975. More than 200 Islamic banks and financial institutions
operating worldwide with over $200 billion assets. The number of Islamic
banks’ is currently increasing about 15 percent per annum.
• The objective of Islamic banks is to promote economic
development in Muslim societies by mobilizing financial resources
in accordance with Sharia.

14. THE OBJECTIVES INCLUDE THE FOLLOWING:
i. Provides such services which protects people from Riba.
ii. Develop banking services and products based on Sharia.
iii. create acceptable yield as reasonable profits to the shareholders.
iv. Achieve profitable transactions.

15. WHY ISLAMIC FINANCE?
• Original impetus –religious / ethical concerns
• Subsequent wider acceptance –commercial viability & business potentials:
• Wider consumer / investor base –Islamic & conventional
• Potential universal appeal due to ethical features
• Strong fundamentals –asset-based & real economic activities
• Proven track record of competitive return on investment

16. THE RISE OF ISLAMIC FINANCE
 Islamic finance is spreading all around the world. Governments realizing its potential for profits
and jobs with each other to create the best regulatory and supportive framework for it.
 The growth and acceptance of Islamic finance is increasing day by day. For some reasons, in
Muslim countries its growth is better. The storms of Islamic Finance is increasing globally.
The ethics and morals behind Islamic finance and Shariah -compliant is to ethical investing.
Islamic finance avoid gambling style speculation and interest rates, and all trading process.

17. RESEARCH AND ANALYSIS

18. PRODUCT EVOLUTION

19. EVOLUTION OF INSTITUTIONAL FRAMEWORK (GLOBAL)

20. EXPERIENCE OF MALAYSIAN ISLAMIC GLOBAL
ACCEPTANCE

21. 1980
•Intro & market familiarization Development of markets, players &
products “Pilot project”: •BIMB –IBA 1983•STMB –TA 1984•Limited
products:•BBA, Ijarah –financing•Mudarabah, Wadiah–deposits•
1990
•Islamic windows (1993)•Accelerated growth in market size &
players Additional products features:•BBA, Murabahah, Ijarah,
Wadiah, Mudarabah•Intro of Islamic Capital Market:•Equity, bonds,
money market

22. 2000
•Broader & deeper market –esp. sukuk market:•Guthrie Sukuk al
Ijarah (2001)•1stMalaysian Global Sukuk al Ijarah
(2002)•Experimenting new product structures:•BBA, Murabahah,
Ijarah, Istisna’, Mudarabah, Musharakah
2005
•Maturing & globalization Rule on full fledged Islamic subsidiaries
Islamic bank licenses to foreigners (2005): •KFH, Al Rajhi, QIB,
etc•Moving towards globally accepted products:•Ijarah, Istisna’,
Mudarabah, Musharakah•MIFC initiatives

23. ISLAMIC FINANCE

24. ISLAMIC BANKING IN PAKISTAN
• Shariah Board established at SBP
• Islamic products available to cover 85% of the services offered by conventional banks
• Liquidity management products being developed
• Shariah audit developed by SBP

25. PRODUCTS OF ISLAMIC BANKING
 Mudarbah
 Musharka
 Murabaha
• Import Murabah
• Export Murabah
• Islamic Export Re-finance
 Istasna
 Tijarah
 Bai-Salam
 etc..

26. SHARIAH FINANCE TRAINING - LEVEL 1 LESSON 1
Islamic
Bank ClientGoods &
Services
money

27. ISLAMIC BANKING IN PAKISTAN
• Full fledged Islamic Banks-6
 Meezan Bank
 Bank Islami Pakistan
 Dawood Islamic Bank
 Al-Baraka Islamic Bank
 Dubai Islamic Bank
 Emirates Global Islamic Bank

28. ISLAMIC BANKING IN PAKISTAN
• Many conventional banks operating Islamic Banking branches.
 Bank of Khyber, MCB, Bank Al-Falah, Habib Metro Bank, Bank Al-Habib, Standard
Chartered Bank, Soneri, HBL, UBL, Askari, NBP, RBS etc.
• Expected shortly: Qatar Islamic Bank

29. THE WAY FORWARD
 Islamic banking is a viable alternate
 Islamic alternates of Banking products can be effectively developed for all types of needs
 However, there is a need for proper research and development
 Ulama, bankers and professionals need to co-ordinate more frequently

31. TARGET MARKET: MUSLIM POPULATION
• There are approximately 1.6 billion Muslims worldwide (24% of total world’s population)

32. ISLAMIC FINANCE: CURRENT POSITIONING

33. MIDDLE EAST & NORTH AFRICA
• 204 million Muslims GCC countries, UAE, IRAQ, EGYPT (13% of the total Muslims
populations)
• GCC (excluding OMAN): 17 commercial banks offering Islamic banking: Islamic AUM USD
100 Billion
• Oman: The government has discouraged the Islamic banking
• UAE: 15% (USD 37 billion) of banking assets under Islamic laws. Expected to grow to 20% by
the end of 2010
• Iran: 100% banking is as per Islamic laws, USD 35 billion
• Egypt: Prominent Egyptian Islamic Investment companies collapsed in the late 1980’s and the
concept is not encouraged by the government

34. SOUTH EAST ASIA
• 16 million Muslims in Malaysia and 195 million Muslims in Indonesia (13% of total Muslim
population)
• Malaysia: AUM USD 31 billion.
The Islamic money market in Malaysia channels funds ranging from USD 8-12 billion monthly.
Issued 60% of the world’s total Sukuk in 2006.
• Indonesia: only 1.2% of total banking assets under Islamic Finance.

35. OTHERS
• 439 millions Muslims in India, Pakistan, and Bangladesh(28% of the total Muslim Population)
• 16 Million Muslims in UK, US, Germany and France
• India: Only a few Non-Banking Financial Institutions operate on the Islamic System
• Pakistan: 11 banks offering Islamic products. AUM USD 3 billion at the end of 2006. Expected
to increase from 3% to 12% by the end of 2010
• Bangladesh: 10% of the total deposits under Islamic Banking system
• UK, US no estimates available for Islamic Finance AUM

36. PROSPECTS?
 Young but very fast growing industry –l
 Target market
 Product development
 Human capital
 R & D
 Lack of expectation with current economic & financial system:
 Potentially more interest & open-mindedness towards alternative systems, including Islamic
finance
 MIFC initiatives:
 Government incentives & supports
 Globalization& its effects

37. CHALLENGES?
 Economic & financial doubt – entire economy
 Human capital – ability & effectiveness
 Research and development
 Shariah compliance
 Globalization & its effects

38. PROBLEMS OF ISLAMIC BANKING AND FINANCE
• From the last few Eras, the period in which Islamic banking and financial institution were
involving, great changes in the financial environment.
• Investment management in modern conditions have been vary from risk management
which is underdeveloped in Islamic finance. In Islamic perception, this is one of the areas of
conventional finance in need of extreme reforms.

39. RISK MANAGEMENT IN AN ISLAMIC FRAMEWORK
 In business risk is high. But in industrialization risks brought in trade and agriculture. The
scope of the market has expanded to cover the whole world, introducing new kinds of risk.
When Islamic laws has been written, the nature and scope of risk and hesitation was
different. With the Modern experience something can still be learnt which, in combination
should enable us to realize the Shariah objectives of justice, fairness and efficiency.
 Transactions should be based on complete information, in order to ensure neither party is
under any image. But with the mutual consent, some doubt can be tolerated in order to secure
larger advantages.

40. RISK, SPECULATION AND GAMBLING
 In Islamic Finance it is important, to avoid gambling and other kinds of risk taking. Life is full of
risky situations which cannot be avoided. Business involves risk because the production of
wealth and other transactions involve the future.
 On the subject of risk management in Islamic framework in general. In currency markets the
position is the same.

41. FINANCIAL MARKETS
At the End of financial markets in Islamic finance with a above view of the situation. If we
classify financial transactions into:
Money for money
Money for equity
Money for debt
Debt for equity
Debt for debt
Equity for equity

42. IN THE EYE OF ISLAMIC ECONOMISTS THEY
THINK THAT ISLAMIC FINANCE IS GOOD
FOR SOCIETY. THE EXPAND OF THE
FINANCIAL SECTOR THE DISTRIBUTION OF
INCOME AND WEALTH IS BENEFICIAL FOR
ALL. IT ALSO MAKES IT AGREEABLE TO
GAMBLING LIKE ASSUMPTION.

43. GLOBALIZATION OF FINANCIAL MARKETS
• Money moves from one side to another side is very easy now a
days. The exceptions are more. This change should be favorable
for Islamic Finance. There are two different reasons that the
problem may arise.
• Firstly in the home Country the economies are small But in the
Financial system economies is less complicated in the developed
countries.
• Secondly, Islamic financial institutions suffer from smallness and
this is very few to operate in more than one country .Globalization
has increased the exchange rates. Every country has different
exchange rates. with the help of this money can easily be transfer.

44. PROSPECTS IN THE PRIVATE CORPORATE SECTOR
In Islamic financial institutions Progress have been made by their
respective national authorities in view of the increasing market
share of these institutions. For the better understanding of Islamic
finance by the monetary authorities and closer cooperation between
them and these institutions.

45. CONT’D
 The standards adopted the Accounting and Auditing Organization for the development of
Islamic Financial Institution. The need to standardize such basic elements of Islamic finance
as mudaraba, murabaha and Ijara is widely felt as the present lack of uniformity is baffling.
 There is a big information deficit in the Islamic financial industry for its growth and
development.
 Instead of that the industry continues to grow, especially in the Gulf countries. It has also
reached the newly independent Central Asian Islamic Republics. But these weak economic
conditions in those countries are naturally reflected in the state of their Islamic financial
institutions.

46. PROSPECTS AT THE GRASS ROOTS AND THE
COMMUNITY LEVEL
• The Islamic financial institutions are found outside Muslim countries. Many of them have
successfully completed their first session of operations. They are rapidly growing.

47. RESEARCH AND DEVELOPMENT
• R&D is the most important department for all organizations. All innovations need a base in
research and developments. Islamic finance became a subject in universities in 1980s.At the
present only a small fraction of the liquidity generated by Zakat passes through Islamic
financial institutions, a situation reflecting the distance between the poor, non-banking
population and these institutions.

48. PROBLEM SPECIFIC TO ISLAMIC BANKING IN PAKISTAN

49. ABSENCE OF ISLAMIC MONEY MARKET
 The Islamic banks cannot invest their surplus fund because there is no Islamic money market
in Pakistan. Government Treasury Bills, approved securities and Pakistan Bank Bills in
Pakistan are interest bearing. Naturally, the Islamic banks cannot invest the permissible part
of their Security Liquidity Reserve and liquid surplus in those securities. As a result, they
deposit their whole reserve in cash with state Bank. Similarly, the liquid surplus also remains
un invested. On the contrary, the conventional banks of the country do not suffer from this sort
of limitations. As such, the profitability of the Islamic banks in Pakistan is adversely affected.

50. ABSENCE OF SUITABLE LONG-TERM ASSETS
 In Pakistan there is absence of suitable long term assets for Islamic banks.

51. SHORTAGE OF SUPPORTIVE AND LINK
INSTITUTIONS
• In Pakistan there is no supportive and link institution.

52. ORGANIZING RELATIONSHIP WITH FOREIGN
BANKS
 Another important issue facing Islamic banks in Pakistan is how to organize their relationships
with foreign banks, and more generally, how to conduct international operations. This is, of
course, an issue closely related to the creation of financial instruments, which would be
simultaneously consistent with Islamic principles and acceptable to interest-based banks,
including foreign banks.

53. LONG-TERM FINANCING
 In Pakistan Islamic Banks facing the problems of long term financing.

54. CONCLUSION
 Islamic finance is defined as a financial service principally
implemented to comply with the main tenets of Sharia (or
Islamic law). In turn, the main sources of Sharia are the Holy
Quran, Hadith, Sunna, Ijma, Qiyas and Ijtihad.

55. CONT’D
 The main principles of Islamic finance include the prohibition of Riba and the removal of debt-
based financing from the economy, the prohibition of Gharar, encompassing the full disclosure
of information and removal of any asymmetrical information in a contract, the exclusion of
financing and dealing in sinful and socially irresponsible activities and commodities such as
gambling, casinos, production of alcohol, etc., risk-sharing, the provider of financial funds and
the entrepreneur share business risk in return for shares of profits and losses, materiality, a
financial transaction needs to have a ‘material finality’, that is a direct or indirect link to a real
economic transaction and justice, a financial transaction should not lead to the exploitation of
any party to the transaction.

56. CONT’D
• Islamic banks can satisfy most of the efficiency conditions if they can operate as a sole system in an
economy. Conventional banking, on the other hand, does not satisfy any of the efficiency conditions
analyzed above. However, when Islamic banks start operation within the conventional
• banking framework, their efficiency goes on decreasing in a number of dimensions. The
deterioration is not because of Islamic bank's own mechanical deficiencies; rather it is the
• efficiency-blunt operation of the conventional banking system that puts a negative impact on the
efficient operation of Islamic banks. The problems of Islamic finance and banking can be decrease
by switching over from PLS to trade-related modes of financing. Even under the conventional
banking framework Islamic banks can operate with certain level of efficiency by applying in a
reasonable percentage the PLS modes – the distinguishing features of
• Islamic banking. This has been possible in some countries of the Muslim world where the
management of Islamic banks was cautious about possible impacts of every policy measure.
Particularly, the management of these banks was judicious in selecting major sectors or areas of
their operations