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.

Transcript of Growth prospects of islamic banking in pakistan

  • 1. Lubna Mueen Arbi (M.Com) The Islamia University of Bahawalpur Growth prospects of Islamic Banking in Pakistan

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 worlds 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. 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 201318, 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. SBP Internship Project 4 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. 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. Current status (In Pakistan) Figure 1: Table 1 is taken from IBB March 2014 report presented by BBP SBP Internship Project 7 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. 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. Islamic mode of financing Sharia Based financing Sharia Compliance Modes of financing Range of Islamic products SBP Internship Project 10 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. 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. Meezan Bank Al Baraka Pakistan Bank Islami Burj Bank Dubai Islamic Bank Pakistan Pakistan Islamic banking financial institutions SBP Internship Project 13 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. "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. 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 Prophets uncle); it is being cancelled completely. Hadith on riba and its exclusion from Holy Prophet (peace be upon him) SBP Internship Project 16 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. 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. 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. 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