Islamic finance

1. ISLAMIC FINANCE:
GROWTH POTENTIALS
AND BOTTLENECKS
Under the supervision of
Ms. Saira Shahzad
Presented to
SBP-BSC, NNO, Karachi
June 2015
Research Project

2. Islamic finance: Growth Potentials and Bottlenecks
1 | P a g e
ISLAMIC FINANCE: GROWTH POTENTIALS AND
BOTTLENECKS
Abdul Baseer
Abdul Haseeb
Aliha Azhar
Amir
Aurangzeb Alamgir
Irfan ul Haq
Ramsha Ali
Shehriyar Khan
Sarfaraz Shahbuddin
Ms. Saira Shahzad
ACM (IMU)
Supervisor
SBP-BSC, NNO, Karachi
Abstract
During the last twenty years, Islamic banking has shown a tremendous growth, both, locally as well as
globally. In fact, it did not collapse even in the period of economic recession and showed a consistent
growth. Currently the market share of Islamic banking in the banking industry of Pakistan is 10%, which is
expected to rise by 100% in the next five years (Ahmed, 2014). This purpose of this research is actually to
provide the analysis of Islamic banking by highlighting its growth potential factors and obstacles that
hinders its growth. Rather than just to examine its features, this study focused on the impact that Islamic
banking is leaving on the economy, as this area is not taken into consideration for research. After detailed
examination, the study concluded that Islamic banking could be very beneficial and secure in the upcoming
future and that is why, majority of the countries in the world are now opting for Islamic finance rather than
conventionalbanking.

3. Islamic finance: Growth Potentials and Bottlenecks
2 | P a g e
1. Introduction
The majority of the world's Muslims are not very genuine that they completely repudiate normal trust: even
in Saudi Arabia, the upsides of Islamic banks address barely 50% of every keeping money resource.
Muslim account-holders have a tendency to be more concerned with the things and association on offer
than with the strictures of sharia (essentials in context of Muslim blessed substance). Notwithstanding,
Islamic money, he says, has find the opportunity to be sufficiently present to offer on both numbers.
Humphrey Percy, who heads the eight-year-old Bank of London and the Middle East, recognizes that the
greater part of his clients came not out of savage devotion,yet rather "totally as a quality proposal".
Slighting the way that the benchmarks covered Islamic trust are as old as the religion itself, current banks
did not begin offering sharia-unsurprising things until the mid-1970s. The interest made by this quickly
making pool of Islamic capital has influenced the headway of sharia -solid things. These take different
structures, however none may pay or charge premium, nor would they have the ability to place resources
into things that Islam disallows (so no liquor, pork, wagering or obscenity). In an Islamic home credit, for
occasion, a bank does not offer cash to a man who purchases a property; rather, it purchases the property
itself. The client can then either purchase it back from the bank at a higher cost paid in parts (murabahah)
or make much of the time booked bits to the bank including both a reimbursement of the sticker and rent
until he affirms the property general (ijara).
In like way, a holder of sukuk has not really loaned the patron cash; rather, he affirms a clear offer of
whatever the cash was spent on and gets pay not from premium but rather either from the point of interest
made by that purpose of premium or from rental bits made by the supporter. Toward the end of the sukuk's
term, the supporter gives back the way to the budgetary ace by getting his offer of the purpose of
inclination. Skeptics may call attention to that the refinement between these structures and a standard bond
or home credit is, basically, rather slight: both give evident remuneration to the individuals who make their
capital open.
On the other hand, that does not appear to have hosed their appeal. Most sukuk are named in the cash of the
guarantorand expected for close-by fiscal experts.
Western firms are in like way starting to utilize sukuk to raise cash. Despite solid late headway for Islamic
budgetary things, there still is space for further growth, both in generally unbanked Muslim nations really
taking shape scene and in the West.
2. Research Methodology
This is a secondary research i.e. descriptive. Its type with respect to data is qualitative that is based on the
philosophy of social constructivism (The science of drawing patterns based on knowledge and experiences,
applied by the society). The data and vital discoveries are extracted from the existing literature that is
research papers, theories, blogs, and existing ways of conventional banking and Islamic banking. First, the
existing procedures that are used by Islamic banking and their impact are discussed. Next, this paper
explores the benefits and viability of those procedures, and the loopholes that restricts the organization to
use different methods for respective situations.
This study also focuses on realistic market practices that well-known organizations are following today. By
this methodology, the study will be able to conclude by giving the best reasons whether Islamic banking
should be used or not.
3. Literature Review
In the saving money piece, the ampleness of banks is thought to be a fundamental issue. Generally, keeping
money ability can be measured in two ways, (i) Technical Efficiency; and (ii) Cost Efficiency (CE). A
maker is considered really productive if, and in the event of some unforeseen issue, it is difficult to make a

4. Islamic finance: Growth Potentials and Bottlenecks
3 | P a g e
more unmistakable measure of any yield without making less of some other yield or utilizing a more
conspicuous measure of two or three inputs (Koopmans, 1951). Enhancing the ability of the managing a
record zone has been seen as an essential issue in Pakistan. The Government encompassed the national
commission on cash, saving money, and credit recalling the last target to discover responses for able
operation and association of the managing a record framework. Likewise, a taskforce was shaped to shape
systems to impel the change of the managing a record and money related region (Shameem, 1995). To gage
feasibility of Islamic banks in Pakistan, We took a gander at the execution and operational ability of
Islamic banks and endorsed that Islamic banks can survive even inside of a standard managing a record
structure. Islamic banks offer things and associations, which are in a wide sense the same to routine banks.
Notwithstanding, the procedures of Islamic banks are unmistakably not precisely the same as the ones of
ordinary banks. On another matter, there is an unfortunate insufficiency of interbank currency market
which besides affects the execution of the Islamic keeping money. Real store prerequisites have
additionally been seen. As indicated by Ahmad and Hassan (2007), the autonomous saving money act
ought to be constituted to control, arrange and direct the operations and practices of Islamic banks. From
the exact studies that have been driven, there is solid confirmation to recognize that ability increments can
be secured through rivalry. Appropriately, regulation, if really finished, will improve dispute and make the
bank more attainable in the business centerstructure.
The change effect of Islamic saving money and huge sending of her amidst the most recent two decades has
highlighted the essential for financing examinations and imaginative Islamic contracts were not astounding
at the early Muslims, for occasion, rent, finishing with possession and the parallel peace, Diminishing
"Musharaka" and Takaful protection association. These contraptions and assorted contraptions used to
relate to a weight unmistakable certifiable that fall delineation, budgetary building, yet it is not right the
depiction of subordinate contracts in light of the way that the understanding are not stay particular
contracts. Among the most fundamental sorts of financial instruments faulty in the money showcase all
around:
"Ijara" is an assention whereby the less or proprietor to the assigned "Baijarha" eye for get-together (social
affairs) keep going for a particular rental costs to be settled upon in the lease contract. Moreover, supplant
the relationship is not propel bosses and duties between property proprietor and inhabitant, however are
identified with the buy and offer of the advantages ofthe first store lease.
Considering this, the "Ijarah" is a security corresponding quality issued relates to the estimation of the
rented property permits the holder access to rental pay to the obligations, which pushed the instrument
holder in thankfulness to particular assistants. (Kharufa, 2000)
Changed lease securities: They relate to relentless rent where the Islamic Bank to issue these securities and
a brief while later purchase cash guaranteeing building arrangement, for case the rent for the individuals
who wish to do in that limit should be the cost of rent is the passage toward the end of every period to
holders of these securities as the proprietors of this property. (Iqbal, 1998)
Securities lessening rent: Like as before however the bit of trusts for the buy of mechanical assembly
dedicated for rent way. The guided Finance House Tunisian Saudi time back to issue affirmations of this
kind as a result of offer and proposition supervision certifiable and he had acquired fro m Tunisian renting
and operation is as indicated by the going with, increment Tunisian hardware rental and rented to its clients
at rental specific and the change of commitment in regards to gear to the client toward the end of the
decade and pay all rent bits, and for the compass of the lease issued Tunisian Company for rental
presentations for specific purchasers quality relating to an offer of the sticker of the device, and purchasers
get offer backings of rent pay. (Khan, 2002)
Theoretical instruments: "Muqarada" or speculative means a seeing between two parties which offers one
of the get-togethers of capital, and called the Lord of the cash while the other work to be part benefits by
this try and as indicated by degrees. Upon by the social events beginning in both spots of the
comprehension. It varies from usury, in the truth, that the arrival is a foreordained rate of capital, yet a rate

5. Islamic finance: Growth Potentials and Bottlenecks
4 | P a g e
of points of interest and likewise is variable and may not be understands it. (Kamel, 1998)
Hypothesis Funds: Collection of stores through the IPO: the instruments with the choosing target of putting
resources into the field of try completely ID in the diagram. Location open-finished backers after genuinely
adjusted on the reason of prohibitive equation speculation, mother scientific articulation for one another
sort of instruments that are exchanged the Islamic money market. (Ramadan, 2005)
Murabaha: "Murabaha" Islamic scientific proclamation proposes the offer of a stock data at spreads
expenses despite a general pay concurred between Seller (bank, for case) and the purchaser. The likelihood
of issuing instruments "Murabaha" conceivable due to the imperative business and especially by ideals of
broad estimation of the favorable position or try replaces "Murabaha" (air transport, for case, or a change
significant undertaking). While exchanged the associate business is illegal in light of the way that
"Murabaha" course of action may be surrendered. (Saleh, 2005)
Musharaka: Rely fundamental on contract joint effort might genuinely, an all that much vague instruments
Muqarada' or speculative portrayed above yet the guideline capability is that the instruments theory that all
the cash from the party, while in 'Musharaka', we find that the dissension (which are issued instruments for
financial experts) is an embellishment of the social gathering analysts bondholders in a dish association and
in a relative way to what is the condition in an open shareholding affiliation. Issuing bonds can take an
eagerness on several photos as takes after:
Voting Shares: consolidate property rights and the advantage ofassociation,voting and race.
Non-Voting Shares: relate to just the advantages of enthusiasm for the upsides of the attempt without the
proprietors the advantage to interrupt in the association or voting or race. (Kharufa, 2000)
Pakistan utilized this kind of security, after the saving money framework entire year 1981 the banks to
issue affirmations of support for a vehicle disclosures as demonstrated by the assention structure tune in for
a most convincing of 10 years and locations participation between the monetary foundation and masters .
Pakistan used this sort of security, after the sparing cash system whole year 1981 the banks to issue
confirmations of backing for a transport presentations as demonstrated by the assention structure tune in for
a most compelling of 10 years and identifies with cooperation between the financial establishment and
specialists.
4. Data Findings and Analysis
There is a great part of the time need of transient financing for securing of inclination. Subsequently, it is
irrational to issue new regard all the time and when held compensation are missing for the buy of knotty
resources financing, bank financing is utilized as a wellspring of brief trusts. Murabaha serves the transient
financing needs. Routinely, it is speaking to lever the advantage when opportunity drops by. Keeping
uneven resources all the time will oblige stock reinforce expense and may accomplish underemployment of
points of interest now and then. It will hose liquidity and turnover degrees and thus affect stock cost of
affiliations. Henceforth, not all favorable circumstances can be gotten from paidup capital instantly. Along
these lines, it is engaging utilization brief bank financing than to utilize rich wellspring of value financing.
Quality financing may not be fitting in running tries in which ventures and pay sources cannot be
effectively disengaged. In such a case, Murabaha is a simple to utilize transient financing arrangement.
Habitually, the cash related aces with bank (the store holders) are risk negated and need persevering
returns. With quality financing, the working cycle of two or three meanders perhaps long and may not bring
strong money streams needed by such budgetary aces. In light of current circumstances, Murabaha
financing is gainful for budgetary experts. Murabaha connects with financing of harsh materials
furthermore completed stock. This enhances the store framework association and lessens bottlenecks
brought because of pay issues or bobble. Offer Murabaha can enhance liquidity in quality markets and keep

6. Islamic finance: Growth Potentials and Bottlenecks
5 | P a g e
the business meet towards huge estimations of stocks. Occasionally, for the value business to achieve
friendliness and soundness, liquidity is a vital issue. Murabaha financing keeps the huge exchanges going
and from this time, forward more exchanges will lead the business to exchange close or at basic qualities.
Quality financing assistants in foundation of affiliations. Notwithstanding, once settled, affiliations have
essential for financing and coordinating money streams intermittently. Murabaha financing permits a
Shariah unfaltering unmistakable decision for trust brief resources buy needs and subsequently makes
generation of stock and associations in an economy, which can comprehend budgetary progression and its
noteworthy purposes ofhobby.
From the danger point of view, Murabaha financing keeps the Islamic money related structure fluid and
less inclined to risk because of good position sponsorship. From this point forward, with Murabaha,
liquidity comes yet not to the drawback of stretched out monetary danger to the framework. From the
welfare and worth perspective, with each extra financing gave, favorable position is acquired. The usage on
resource levels with pay got by variables of time utilized as a bit of the creation process. Also, the
representing body finds the opportunity to get time and game plans related commitments which it can use
to give open stock and other welfare associations for masses.
As frequently as could be allowed, in business financing, tremendous financing is needed for unmistakable
tries that oblige basic dare to be done; for occasion, progression of plant, interstate, dams and so on. The
firm offering associations to attempt and execute such errands may have limit, however need stores to
handle such activities. Money related intermediation can bring pivotal financing, liquidity and risk adjusts
that empowers the dull counterparties to handle such tries. Giving trusts for harsh material buy especially
by the customer will identify with particular difficulties of affiliation clash and awesome risk. In such a
case, the money related focus individual can help with better authenticity, standing, and economies of scale
in certifying the counterparties and the capacity to sensibly and satisfactorily execute contracts. There is as
often as possible need of making segments for asset supplies before creation is finished. To keep the period
cycle going, Istisna can be utilized to guarantee asset supplies accessibility and creation. As regularly as
could reasonably be expected, it is engaging keep low levels of stock and enhance turnover degrees.
Keeping titanic stock all the time will oblige stock upkeep expense and may understand underemployment
of inclinations sporadically. It will hose liquidity and turnover degrees and therefore affect stock cost of
affiliations. Utilizing Istisna right when financing is required for new interest will reduce operational and
budgetary inefficiencies. Much of the time, headway and arranging affiliations go into goliath volume,
however changed contracts with institutional customers. Keeping stock early is neither monetarily
conceivable nor operationally real. Henceforth, financing the try essentials after try arrangement is checked
will empower firms to work with less money tied up. From the danger and proficiency point of view,
Istisna financing keeps the Islamic financial framework fluid and less inclined to peril in light of favorable
position backing. Islamic money related go-between connects with credit accessibility to guarantee that
accommodating exchanges are executed furthermore, it diminishes the exchange and checking expenses
which acknowledge more profitable exchanges happening in the economy. Regularly, the scholars with
bank (the store holders) are danger hesitant and need predictable returns. Regardless, little savers don't have
enough subsidizes to back huge volume increases direct. Regardless, utilizing investors‟ pool of trusts to
give financing through Istisna, the inspectors can partake in purpose of inclination of such cash related
exercises. Financing colossal attempts without budgetary intermediation will be an exceptionally
troublesome undertaking. Quality financing is in like way absurd in a few courses due to high floatation
cost, risk of under enlistment and determination in altering capital structure when required. Yet, utilizing
investors‟ pool of stores to give financing through Istisna, the banks can adequately store such enormous
activities that host positive central focuses to direct social events included furthermore positive externalities
expanded in worth by masses in the general society.
5. Conclusion
Amidst this steady time of energetic change in Islamic record, market people need to keep up the method
for their associations and swear off letting veritable practices skim a long way from center rules of Islamic
money. As down to business previous in this note, these stress evading of riba and gharar; adherence to the
models of danger sharing; regard for property rights and contractual obligations; and voyage for good

7. Islamic finance: Growth Potentials and Bottlenecks
6 | P a g e
association. Taken together, these will manage the relationship between the monetary domain and the
confirmed division. A basic change of the showing of Islamic money will oblige surrendering the
mechanical duplicating of standard instruments and bundling them as obviously Islamic cash related
instruments. Interests in human capital and examination and progression are likewise discriminating to
engage the change of Islamic record arrangements and things to react to budgetary needs and financing
necessities. By watching out for the difficulties noted above, Islamic money could sensibly meet the
inclinations of near to social requests and help budgetary joining and intermediation. Islamic money could
correspondingly help gather financing for little and medium endeavors, and besides entire arrangement
supporting for base and other change meanders, which are isolating for energizing sensible and
comprehensive headway. Appropriately, Islamic trust has been driven redominantly by supply-side
segments and examinations. Regardless, as highlighted above, there are fundamental parts from the
premium side that are slanted to change the development of the showing of Islamic money. One of the
variables justifying observing soon is the making excitement for Islamic money related things by business
visionaries crosswise over domains and with grouped sizes of operations. The second portion is a potential
ascension unmistakable by sovereign and semi sovereign parts in getting to Islamic capital markets. This
would help drive some Islamic store things that were made on a principal level; however had irrelevant shot
of being executed in every practical sense, for occasion, mudarabah and musharakah. Additionally, with
unmistakable supplement on danger sharing, Islamic store could contribute genuinely to budgetary quality.
6. Bibliography
Ahmed, S. (2014, August).Retrieved from thenews.com.pk.
Ali, S. (2011). Discussion on Textile Sector. Textile Journal,10(2), 10-12.
Iqbal. (1998). Challenges facing Islamic banking. Institut Islamique de Recherché et de Formation.
Kamel. (1998). Development of Islamic banking activity: Problems and prospect. IDB Prize Winners’
Lecture series – No12.
Khan. (2002). Fiqh foundations of the theory of Islamic economics. A survey of selected contemporary
writings on economics relevant subject of Fikh, in Ahmed, H. (ed), Theoretical foundations of
Islamic economics.
Kharufa. (2000). Shari’ah and its contribution to the science of contemporary law. Centre Islamique de
Recherche.
Koopmans. (1951). An analysis of production as an efficient combination of activities. New York, NY.:
Wiley Press.
Ramadan. (2005). Islamic law, structuring Islamic finance transactions. Euromoney Books, London.
Saleh. (2005). The development of Islamic banking in Lebanon. Prospects and future challenges, Review of
Islamic economics, 77-91.
Shameem. (1995). Impact of Flexible Interest Rate on Savings and Investment. Bangladesh Journal of
Political Economy Vol. 13 No. 2, 62-78.