IB in Pakistan-Ashfaq-09-04-09

8/7/2019 IB in Pakistan-Ashfaq-09-04-09

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Mahmood Shafqat, SBP 1


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by:

ASHFAQ AHMEDAssistant Director

DFSD, SBP BSC, Karachi

* The views expressed in this presentation are those of the presenterand do not necessarily represent State Bank of Pakistan.


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y Why Islamic Banking?

y Clearing Doubts /Misconceptions

y Islamic Vs Conventional Banking

y History of Islamic Banking

y Reasons for Failure of Previous Effortsy Current Strategy

y Current Status

y Shariah Compliance Mechanism

y International Institutions

y The Challenge

y TheWay Forward

y Conclusion

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O you who believe! Be afraid of Allah,

and give up what remains (due to you) from Riba,

if you are (true) believers.


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And if you do not do it,

then be warned of war (against you) from

Allah and His messenger.


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Riba: Present day arguments

Clearing doubts


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Clearing doubts

Interest is Prohibited only on consumption loans. i.e.Loans taken for food clothing etc.

Because: It is unfair to charge a poor man for his needs;But fair to charge a rich man:

- Who borrows money to run his business

- Earns huge profit on his business

- Pays you only out of the profit he earns


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Clearing doubtsResponse

1. Validity of a transaction does not depend on thefinancial position of the parties involved

It depends on the intrinsic nature of the transaction

itselfe.g. Sale is a valid transactionProfit on sale is permitted

e.g.1. Baker sells bread to poor person

Charges profitValid transaction, not Haram

2. Taxi driver transports poor passengerCharges fareValid charge, not Haram


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Clearing doubts

Response:

Profit on goods & charge on services, both are permittedBoth may be charged to even the poor

Financial status of beneficiary not relevant to validity oftransaction

Prohibited transactions are invalidated on the basis oftheir intrinsic nature, not on the basis of financialstatus of the parties

e.g. Bribery

Gambling


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Clearing doubts

Argument:

Prohibition does not relate to commercial loans:

Response

Quran has prohibited Riba in general terms

Meaning all forms of Riba

Whether or not prevailing at the time of the prophet


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Clearing doubts

When Quran prohibits a practiceThe prohibition is not restricted to a particular form ofpracticeThe prohibition hits the basic concept

e.g LiquorGambling

No one can argue that the modern forms of these abusesare not prohibited

Similar in Riba

All forms of Riba are prohibited


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A fixed rate of return is not permitted under

Islamic Shariah

Fixed return does not make a transaction Halal or

Haram

There are many Halal transactions with a fixed return

House rent.

Profit on sale of goods.

Clearing doubts


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Islamic banking looks the same as

conventional banking

A halal meat and haram meat may look exactly

the same but one is permissible while the other is

not.

Clearing doubts


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Useof Interestrateas benchmark

People argue that profit calculated on interestrate is equivalent to interest itself

Response:

The requirement for validity of Sale/Murabaha is that

It is a genuine saleWith all its ingredients and necessary sequence

If these conditions are fulfilled, merely using the interest rate as a benchmark

for determining the profit rate does not render the transaction haram.e.g.

Same rate of return may be charged in fruit juices business as in the liquorbusiness

This does not make the Juice business HaramHowever,using interestrateto determineprofitrate isnotpreferred

inordertoavoid anyresemblanceto interest based transaction.

Clearing doubts


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Banking and finance needs

Islamic finance istheoutcomeofreligion in banking

Shariah filter

Islamic banking and finance solutions

Prohibition on:

Interest

Speculation

Gambling

Quran

Sunnah

Ijma (jurist consensus) Qiyas (analogy)

Ijtihad (reasoning)

Musharaka -Partnership

Mudaraba -Partnership

Murabaha - Purchase-resale

Ijara - Lease

Istisna - Manufacturing contract

Salam - Forward sale

Asset-backed

transactions with

investments in real,

durable assets

Fiqh al-Muamalaat contracts:Shariah sources:

Prohibition of certain investments:

Sectors (e.g.: alcohol, armaments, financialservices, gambling, pork, pornography,tobacco)

Instruments (e.g. no forward transactions,limited option use, no derivatives, short-selling)

Credit and debt

products are not

encouraged


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Profit Interest

Bank

MoneyMoney

Customer

Conventional Law

Contract

Goods

Services

Benefits

Shariah Compliant

3rd Party

Mark-up


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y Efforts for economy wide elimination of Riba started during 1970sand most of the practical steps were taken in early 1980s -pioneering work

y Banking and other relevant laws and regulations were amended

y Federal Shariah Court Decision in November 1991. The system wasbased largely on mark-up technique with or without buy backarrangements.

y Supreme Courts Riba Judgement-December 1999

y An appeal was filed in the Shariah Appellate Bench of SupremeCourt of Pakistan to review the judgment and in June 2001, afterbrief hearing, the case was remanded to Federal Shariah Court ofPakistan again to decide the matter afresh.

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y Absence of Shariah compliance mechanism infinancial institutions.

y Non-availability of Shariah compliant government

securities.y Ineffective enforcement of contracts and

inefficient system for early recovery.

y Ineffective code of conduct for professionals.

y Lack of continued research and development inthe field of Islamic finance and economics.

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y Inadequate training to the staff of SBP andCommercial banks.

y Disoriented education system devoid of Islamicprinciples.

y Lack of public awareness about Islamic economicsystem.

y Adoption of free market economic (capitalistic)policies.

y Social and cultural factors.y Weak Political resolve ofsuccessive governments

for Islamization of economy.

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Current Strategy & Statusof Islamic Banking

In Pakistan

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y Introduce, promote and implement Islamic

Banking in Pakistan

y as a parallel banking system

y comparable and compatible to conventional

banking system and

y Shariah compliant

y In the long run let people vote through their

wallets


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y Currently Islamic banking is available in over 50cities in all four provinces of Pakistan.

y Branch Network ( 384 + 130 = 514):

y Meezan Bank, 166

y Al Baraka Islamic Bank 30

y Dubai Islamic Bank Pakistan 25

y BankIslami Pakistan Limited 102

y Emirates Global Islamic Bank 40

y Dawood Islamic Bank 21

y 12 Conventional banks (MCB, HBL, NBP, StandardChartered, Bank of Khyber, Soneri, Bank Alfalah,Bank Al Habib, Habib Metropolitan, Prime, RBS andAskari bank with 130 Islamic Banking Branches(IBBs).

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Description Dec.03 Dec.04 Dec.05 Dec.06 Dec.07 Dec-08 *

Total Assets 13 44 71 119 206 276

% of Banking Industry 0.5% 1.5% 2.0% 2.8% 4.0% 4.9 %

Deposits 8 30 50 84 147 202

% of Banking Industry 0.4% 1.3% 1.8% 2.6% 3.8% 4.8%

Financing & Investment 10 30 48 73 138 187

% of Banking Industry 0.5% 1.3% 1.7% 2.3% 3.5% 4.4%

Full fledged Islamic Banks (IBs) 1 2 2 4 6 6

Branches of IBs 10 23 37 93 186 384

Conventional Banks with Islamic Bankingbranches (IBBs)

3 9 9 12 12 12

No. of IBBs 7 25 33 57 103 130

Total Islamic Banking Institutions 4 11 11 16 18 18

Total No. of Branches 17 48 70 150 289 514**

*Source: Annual Accounts except for 2008, which is based on Unaudited Annual Accounts ** Including 74 Sub branches


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y IBIs may offer the following Shariah-compliant modes of banking andfinance and products based on these modes.

Shariah Compliant Modes ofBanking and Finance

a. Participatory Modes:

i. Mudaraba

ii. Musharaka

iii. Diminishing Musharaka

iv. Equity Participation in form of shares

b. Trading Modes:

v. Ijara or Ijara wa Iqtina

vi. Murabaha

vii. Musawamaviii. Istijrar

ix. Salam/ Parallel Salam

x. Istinsa/Parallel Istisna

xi. Tawarruq in exceptional cases with

specific prior approval of SBP

c. Debt Based Modes:xii. Qard

d. Others:

xiii. Wakala

xiv. Assignment of Debt (Hawala)


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Murabaha

41%

Istisna3%

Musharakah2%

DiminishingMusharakah

30%

Salam1%

Ijarah21%

other2%

Modes of Financing


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y Instructions and Guidelines for ShariahCompliance including:

y Shariah Advisor and his responsibilities

y Report of Shariah Advisory Essentials of Islamic modes

y Joint Audit of distributed profit

y Internal Shariah Audit and Compliance

y SBP Shariah Compliance Inspectiony SBP Shariah Board


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y Accg. & Auditing Organization for Islamic Fin. Inst. (AAOIFI)

y Islamic Financial Services Board (IFSB)

y

International Islamic Financial Market (IIFM)y General Council for Islamic Banks and FIs (CIBAFI)

y International Islamic Rating Agency (IIRA)

y Islamic Development Bank (IDB)

y Islamic Research and Training Institute (IRTI)

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1. It is easy to sit back and denounce but difficult

to come in the field and face the challenge

2.

IslamicB

anking is in its infancy, so highexpectations can lead to disappointment

3. Islamic banking is not just about elimination of

Riba, but also about a just conduct.

4. We need to put into practice what knowledge

has been acquired

The Challenges:


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y we believe the newspaper but question the Quran

y we all want to go to heavens provided we DONT

have to practice all that is required of us just the

part that we find convenient

y We will have to change our attitudes

OUR ATTITUDE:


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1. Efforts required at individual level to gain knowledge

2. Constructive criticism, not cynicism

3. Businessmen should not shy away on perceiving

difficulties

4. A sophisticated system will only evolve through mutual

discussion and cooperation ofBusinessmen, ShariahScholars, bankers and regulatory authorities.

The Way Forward


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y Why Islamic Banking?

y Clearing Doubts /Misconceptions

y Islamic Vs Conventional Banking

y History of Islamic Banking

y Reasons for Failure of Previous Effortsy Current Strategy

y Current Statusy Shariah Compliance Mechanism

y International Institutions

y The Challenge

y TheWay Forward

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MAY ALLAH THE AL

MIGHTY ACCEPT OUR ENDEAVOURSAND SHOW US THE RIGHT PATH, THE PATH OF HIS

LOVED ONES (AAMEEN)

Email: [email protected]

IB in Pakistan-Ashfaq-09-04-09

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