islamic banking

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Transcript of islamic banking

    • Historical and Current Perspective


  • Islamic Finance The rationale
  • Brief History of Islamic Banking in Pakistan
  • Current Strategy for Transformation and Approach
  • Industry Status

3. ISLAMIC Finance The Rationale

  • The functions of financial institutions
    • 1.Financial intermediation
    • 2.Help removing budget constraints
    • 3.Remove the mismatches in size and maturity
    • 4.Financial institutions provide wide array of facility like money transfer, safe custody, ATM, Credit Cards, Agency services, acceptance of utility bills etc.
    • 5.Creating broad array of assets and liabilities of various risks and maturity profile
    • 6.Efficient resource allocation.
    • Why Islamic Banking The Rationale

4. Principles of Islamic Finance

  • In Islamic jurisprudence there are two types ofAhkam(rulings)
  • i.Ibaadaat (worship)
  • ii. Muamlaat (mutual dealings)

5. Principles of Islamic Finance

  • Ibaadaat(worship) governs the relationship between man and Allah.The general principle is thatnothing is permitted unless explicit or analogical permission by the Law Giver.
  • Muamlaat(mutual dealings) governs the relationship among mankind.The General principle is thateverything is permitted unless clearly prohibited by Allah SWT.

6. Principles of Islamic Finance

  • Islam permits the contracting parties to agree on any conditions as long as they do not violate any Shariah ruling.
  • Hadith
  • All the conditions agreed upon by the Muslims are upheld, except a condition which allows what is prohibited or prohibits what is lawful (Sunan Abu Dawood, 1981)

7. Principles of Islamic Finance

  • Few prohibitions relevant to constructing financial contracts:
  • Prohibition ofRiba
  • Prohibition ofGharar
  • Prohibition ofMaysir

8. Islamic Banking Historic Track

  • From an early stage of Islamic History there had been a system ..
  • Professor S.D. Goitein viewpoint.
  • Shift in Economic activity
  • Muslim scholars expressed serious reservations on the interest based economic system
  • Credit Societies and Cooperatives were providing the banking needs in colonial states.

9. Islamic Banking Historical Track 10. 11. Islamic Banking Global Outlook 12. 13.

  • IN

14. Brief History of Islamic banking in Pakistan

  • Islamic Provisions in the Constitution of Pakistan:
  • Islam was declared state religion (1973 constitution)
  • All the three constitutions say:
  • Steps should be taken to enable the Muslims {of Pakistan}, to order their lives, in individual and collective spheres, in accordance with the teachings and requirements of Islam as set out by Quran and Sunnah

15. Brief History of Islamic banking in Pakistan

  • Islamic Provisions in the Constitution of Pakistan:
  • Features of Islamic Provisions
  • It was further affirmed that:
  • State shall eliminate Riba as early as possible {Article 38(F)}and that
  • All existing laws shall be brought in conformity with the injunctions of Islam and no law shall be enacted which is repugnant to these injunctions{Article 227}


  • Quaid-e-Azam, the father of the nation, in his speech at the occasion of the inauguration of State Bank of Pakistan, had expressed the desire for evolving an Islamic system of banking.

17. History of Islamic banking in Pakistan

  • The process of economy wide Islamization of the banking system in Pakistan was initiated after a declaration by then president in February 1979.
  • Govt. plans to remove the interest from economy within three years.
  • The operations of HBFC, ICP and NIT were re-oriented in 1979.

18. History of Islamic banking in Pakistan

  • 1981 Ordinance promulgated for the establishment of Modaraba Companies and floatation of Modaraba Certificates.
  • Amendments were made in BCO 1962 for the incorporation of financing on Musharaka and PLS mode basis.
  • Bank of Oman (foreign bank) accepted deposits on PLS basis.

19. History of Islamic banking in Pakistan

  • 1981 -Deposit Counters on PLS basis
  • All the deposits so received would be used for financing the commodity operations.
  • The export bills would be accommodated on exchange differential basis.
  • Shifting of financing to CECP, RECP and TCP (Trading Corp. of Pakistan) to markup basis.

20. History of Islamic banking in Pakistan

  • From July 1, 1982 banks were allowed to provide finance for meeting the working capital needs of trade and industry on a selective basis under the technique of Musharaka.
  • From July 1, 1985, all commercial banking in Pak Rupees was made interest-free. From that date, no bank in Pakistan was allowed to accept any interest-bearing deposits and all existing deposits in a bank were treated to be on the basis of profit and loss sharing.

21. History of Islamic banking in Pakistan

  • The State Bank of Pakistan had specified 12 modes of non-interest financing classified in three broad categories namely:
      • Loan Financing
      • Trade Related Financing
      • Investment Mode of Financing

22. Ruling of Federal Shariah Court (November 14, 1991)

  • Procedure adopted for the Islamization of the financial system was declared un-Islamic.
  • Various operations were declared repugnant to the injunctions of Islam.
  • Govt. and some banks appealed to the Shariah Appellate Bench of Supreme Court against aforesaid verdict of FSC.

23. Supreme Court Judgment (19 thDecember 1999)

  • The SAB delivered its judgment on December 23, 1999 rejecting the appeals and directing that laws involving interest would cease to have effect finally byJune 30, 2001 .
  • In the judgment, the Court concluded that the present financial system had to be subjected to radical changes to bring it into conformity with the Shariah. It also directed the Government to set up, within specified time frame, a Commission for transformation of the financial system and two Task Forces to plan and implement the process of the transformation. The Court indicated some measures, which needed to be taken, and the infrastructure and legal framework to be provided in order to have an economy conforming to the injunctions of Islam.

24. Post Judgment Measures

  • CTFS was constituted in January 2000 in State
  • Bank of Pakistan.
  • A Task Force was set up in the Ministry of Finance
  • to suggest the ways to eliminate interest from
  • Government financial transactions.
  • Another Task Force was set up in the Ministry of
  • Law to suggest amendments in legal framework to
  • implement the Courts Judgment.

25. Composition of CTFS

  • Mr. I.A.Hanfi (former Governor SBP)
  • Mr. Muhammad Yunus Khan (Add. Secretary, MoF)
  • Chairman SECP
  • Mr. M. Ashraf Janjua (Chief Economic Advisor, SBP)
  • Mr. Salman Shah (Economist)
  • Mr. Pervez Hassan (Advocate)
  • Mr. Zakir Mahmood (President HBL)
  • Mr. Amar Zafar Khan (president UBL)
  • Mr. Ebrahim Sidat
  • Maulana Rafi Usmani (Islamic Scholar)
  • Mr. S. Muhammad Hussain (Chartered Accountant)

26. Post Judgment Measures

  • The CTFS constituted a Committee for
  • The development of Financial Instruments and
  • Standardized Documents in the State Bank
  • To prepare model agreements and financial instruments for new system.

27. Post Judgment Measures

  • First Interim report- prior actions e.g. creating conducive legal infrastructure, massive education and training program for bankers and their clients & effective campaign through media for the general public to create awareness about the Islamic financial system.
  • 2 ndInterim report-identified major Shariah compliant modes of financing, their essentials, model agreementsdraft seminal law captioned Islamization of Financial Transactions Ordinance, 2001andguidelines for conversion of products and services of banks and financial institutions.
  • Dealt with major products asset and liability


    • Absence of Shariah compliance mechanism in financial institutions.
    • Non-availability of Shariah