International Conference on Islamic Business 2016icib.riphah.edu.pk/sites/default/files/files/Warda...

20
International Conference on 4 th 2016 Islamic Business Quaid-e-Azam Auditorium, IIUI Faisal Masjid Campus, Islamabad, Pakistan 20 - 22 February, 2016 ICIB Islamic Economics, Finance, Entrepreneurial Development & Public Policy for the Ummah’s Socio-economic Wellbeing Under the above theme, the speakers / paper presenters will discuss the vision of Islamic economics, business and finance, public policy for entrepreneurial development and to enhance social inclusion and good governance, meaning how to develop Islamic countries’ economies giving fair opportunity to all segments of the society and provide them not only suitable jobs / employment but also dignity and respect in the society and falah in this world and the Hereafter. As it is possible only through application of the principles of the Shariah, in letter and spirit, in all socio-economic disciplines and business and finance affairs, Shariah compliance of all institutions, products and activities would also be covered in the Theme of the ICIB-2016 event. Organized By: Collaborators: Ministry of Planning Development & Reform riphah international university centre of islamic business riphah Conference Secretariat: Riphah Centre of Islamic Business (RCIB) Riphah International University, 274-Peshawar Road, Rawalpindi. Mr. Ikram Ullah Khan ([email protected]; +92 (333) 5949 907) Mr. Ehtesham Rashid ([email protected]; +92 (345) 2569 620)

Transcript of International Conference on Islamic Business 2016icib.riphah.edu.pk/sites/default/files/files/Warda...

International Conference on4th

2016Islamic Business

Quaid-e-Azam Auditorium,IIUI Faisal Masjid Campus,

Islamabad, Pakistan20 - 22

February, 2016

ICIB

Islamic Economics, Finance, Entrepreneurial Development & Public Policy for the Ummah’s Socio-economic WellbeingUnder the above theme, the speakers / paper presenters will discuss the vision of Islamic economics, business and finance, public policy for entrepreneurial development and to enhance social inclusion and good governance, meaning how to develop Islamic countries’ economies giving fair opportunity to all segments of the society and provide them not only suitable jobs / employment but also dignity and respect in the society and falah in this world and the Hereafter. As it is possible only through application of the principles of the Shariah, in letter and spirit, in all socio-economic disciplines and business and finance affairs, Shariah compliance of all institutions, products and activities would also be covered in the Theme of the ICIB-2016 event.

Organized By:

Collaborators:

Ministry of PlanningDevelopment & Reform

riphahinternational

university centre of

islamic business

riphah

Conference Secretariat:Riphah Centre of Islamic Business (RCIB)

Riphah International University, 274-Peshawar Road, Rawalpindi.Mr. Ikram Ullah Khan ([email protected]; +92 (333) 5949 907)Mr. Ehtesham Rashid ([email protected]; +92 (345) 2569 620)

MAQASID AL SHARIAH INDEX (MSI) FOR ISLAMIC BANKS

Dr. Sajjad Zaheer Ms. Warda Rasool

Disclaimer: The views expressed here are those of the authors and do not necessarily represent or reflect the views of their employer.

1

OUTLINE

Objectives of Islamic Law

Islamic Banking in Pakistan

Methodology of Index

Findings

Limitations

Conclusion and Way Forward

2

OBJECTIVES OF ISLAMIC LAW

Five fundamental Maqasid al Shariah mentioned in the books of Islamic Jurisprudence: Protection of Faith, Life/Self, Intellect, Progeny, Wealth

Islamic banking is Shariah based and we believe it fulfils objectives of Shariah directly or indirectly

Rationale for creating MS Index: Analyze performance of IBs in terms of meeting objectives of Shariah

Alfalah – objective of Islamic Economics is closely aligned with Maqasid al Shariah.

3

BRIEF HISTORY OF ISLAMIC BANKING IN PAKISTAN

Part of vision of founding father

Constitutional Support

Process started since 1970s

Major initiatives taken in 1980s

- Islamic modes of Finance and PLS Deposits Methodology

- Modaraba Management Companies

- Banking Laws

Mixed results

- Ownership

- Shariah Compliance Mechanism4

RE-LAUNCH OF ISLAMIC BANKING IN PAKISTAN IN 2001-02

Parallel Banking

Institutional Approach – three pronged strategy

Robust Outreach 6 full-fledged Islamic banks and 16 conventional banks having IBBs

Branch network - over 1,700 branches with presence in over 110 cities & towns

Market share - 13%, starting from scratch in 2001, likely to be doubled by 2020

Shariah Compliance Framework

Policy and Regulatory Support and Enabling Environment

5

MOVING BEYOND THE TRADITIONAL

PERFORMANCE MEASURES

Our paper draws inspiration from the work done by Mohammed, Razzak & Taib (2008) who also address the need to have Islamic banking performance measures that complement the traditional financial measures.

Sekeran’s Method

Three ideal objectives:

Educating individual

Establishing Justice

Public Interest

In our paper, we have directly linked performance measures to the core objectives of Shariah

6

INDEX METHODOLOGY

Index has been constructed by employing four objectives of Shariah (hifzul mal, hifzul iman, hifzunnafs, hifzul aql) on which we measure performance of Islamic banks

The objectives have been assigned weights in the index subject to their importance, linkage and relevance with Islamic banks operations.

Within each objective, individual weights have been assigned to performance indicators (both quantitative and qualitative)

7

FORMULA

Weights () Assigned:

50% Hifzul Mal

35% Hifzul Iman,

10% Hifzun Nafs and

5% Hifzul Aql

MS Index is defined as:

0.5*hifzul mal rating + 0.35*hifzul iman rating + 0.1*hifzun nafs rating + 0.05*hifzul aql rating

8

DESCRIPTION

Lower value of the index means better compliance of maqasid al-shariah.

For indicators showing increase in value for better compliance with any objective of shariah, its reciprocal is used to maintain consistency.

9

DETAILED METHODOLOGY

10

11

Largest weight Directly linked to financial performance, stability, asset

quality, cost efficiency of the bank Protection to non-remunerative deposit holders Return to P&L sharing depositors Utilization of pool funds

HIFZUL MAL

12

Quantifying shariah related issues highlighted by:

1. External evaluators and bank’s own Shariah Advisor in the Annual Report

2. Stakeholders grievances reported to the regulator/service quality

Reported issues are grouped into broad categories:

Shariah committee composition and relations with management

Compliance of banking products / agreements with Shariah approved documents,

Disclosure of relevant information,

Review of policies by bank’s Shariah Advisor

Nature and frequency of consumer complaints. The major categories of complaints are

Account Operations and Deposits

ATMS,

Auto Finance

Fraud and Forgeries

House /Mortgage Finance

Misbehaviour / Misconduct

Miscellaneous Complaints

Remittances.

HIFZUL IMAAN

13

APPLICATION OF MS INDEX TO ISLAMIC BANKS OF PAKISTAN

Data / information is taken from published financial accounts, published Shariah compliance reports, Shariah Inspection Report and complaints received by Central Bank

Covers 32 quarters starting from June 2002 to March 2010.

Due to unavailability of data on indicators of hifzulaql, performance is tested on other three objectives of MS.

In absence of benchmark, banks are categorized on comparative basis 14

FINDINGS

Based on Simple Additive Weighting Method, following values are obtained against individual objectives for 5 Islamic Banks* of Pakistan:

According to MS index:

*Banks have been renamed due to data confidentiality issues

Objective A B C D E

Hifzul Mal 8.52 11.57 10.95 17.64 7.49

Hifzul Iman 0.57 1.27 1.04 0.93 0.62

Hifzul Nafs 0.11 0.04 4.73 0.01 0.01

A B C D E

9.22 12.89 16.74 18.6 8.13 15

FINDINGS

In absence of benchmark, banks are evaluated on a comparative basis

Banks outperform each other in meeting individual objectives

On an overall basis Bank E is doing better job than it competitors by getting the minimum value (or highest rank) on MS index

16

LIMITATIONSAvailability of data and general information on qualitative aspects of bank’s performance. These may be addressed through:

Annual/quarterly published accounts

Disclosures on bank’s websites / annual reports / reports submitted to regulator

Bank’s management response through interviews and questionnaires.

Use of information collected / received by central bank.

Customer / Clients surveys on different aspects of bank’s performance

Weightages can be assigned through a survey based statistical method e.g. principle component analysis

17

CONCLUSION AND WAY FORWARD..

Islamic Banking Industry which is moving from niche to mainstream, necessitates development of MS index / criteria.

The model may be extended to entire local and global Islamic banking industry

Defining Range of MS Index and Scales of performance

Designing and setting minimum benchmark

Customization of Index w.r.t nature of banks

(Full –fledged IBs vs. Islamic Banking Windows)

Role of External Audit

Role of thematic inspection by the regulator18

Thank You!

19