Islamic Banking Industry

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islamic banking in pakistan a complete overview of the industry (april 2009)

Transcript of Islamic Banking Industry

Page 1: Islamic Banking Industry
Page 2: Islamic Banking Industry

Presented by:



Page 3: Islamic Banking Industry


- What is Islamic Banking

- Terminologies

- Principles

- History

- How it is Different ?

- Overview

- Performance of various Banks

- Islamic Banks in Pakistan

- Business Model of a Conventional Bank

- Business Model of a Islamic Bank

- SWOT analysis

- Future- Key Challenges- Problems- Recommendations

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What is Islamic Banking

A system of financial activities consistent with Shariah, based on Islamic principles which at the core refuses collecting interest, transactions involving uncertainty and speculation.

It is based on the Islamic economic system.

It is not restricted to Muslims only.

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• Takaful (Islamic Insurance) Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes.

• Sukuk (Islamic Bonds) the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond.

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Islamic Modes of Finance

Trade Based Modes

Partnership Based Modes

Rental Based Modes


Murabaha Ijarah

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• MurabahaIt is a contract for purchase and resale and allows the customer to make purchases without having to take out a loan and pay interest. Bank purchases the goods on behalf of the customer, and re-sells them to the customer on an agreed profit margin and the customer pays the sale price for the goods over installments.

• MusharakaIt means partnership. It involves you placing your capital with another person and both sharing the risk and reward with profit sharing ratio, but losses must be proportionate to the amount invested.

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• MudarabaIt refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise and who agree to the division of any profits made in advance. The Bank would make Sharia’a compliant investments and share the profits with the customer, in effect charging for the time and effort. If no profit is made, the loss is borne by the customer and Islamic Bank of Britain takes no fee.

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• Ijarah Ijara is a form of leasing. It involves a contract where the bank buys and then leases an item. For example auto ijarah is simply an agreement under which the vehicle shall be given to you on rent for a period, agreed at the time of the contract. Bank purchase the vehicle and it out to the consumer for a period upon completion of the ijarah period the consumer get owner ship of the vehicle through a separate sale agreement.

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• It works on Islamic set guidelines consisting of Risk Sharing, Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, Transparencies & Fair Deals.

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• Any predetermined payment over & above the actual amount of principal is prohibited (interest) the only loan it allows is qard-ul-hassna whereby lender does not charge any interest.

• The Islamic financial system employs concept of participation , utilizing funds on a profit-and- loss-sharing basis.


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• The pioneering effort, led by Ahmad Elnaggar,

took the form of a savings bank based on profit-

sharing in the Egyptian town of Mit Ghamr in

1963. This experiment lasted until 1967 by which

time there were nine such banks in the country.

• In 1973, the Islamic Development Bank was set-



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• The first Islamic bank in Malaysia was established

in 1983. In 1993, commercial & merchant banks

were allowed to offer Islamic banking products

and services under the Islamic Banking Scheme

(IBS). These institutions however, are required to

separate the funds and activities of Islamic

banking transactions from that of the

conventional banking business


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• The Islamic Summit of Lahore, Pakistan held in 1974

recommended the creation of Islamic Banks and Islamic

Development Bank.

• On 14 Ramadan 1420, the Shariah Bench of the Supreme

Court of Pakistan gave its landmark decision banning

interest in all its forms and by whatever name it may be

called. The court also specified a step by step approach to

rid the country of the evil of interest. (The Historic Judgment on

Interest by the Supreme Court of Pakistan)

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• After 55 years after its creation in the

name of Islam, Pakistan became the first

Muslim country to officially declare

modern bank interest as ar-riba, declared

haram by Qur'an


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How it is Different ?

• Islamic Orders not to use Money as a commodity.

• They operate under the concept of lender-borrower relationship and the profits generated through this relationship are divided between the two parties as per agreement.

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How does it works ?

• The bank entirely depends upon the fixed deposits and does not borrows money from the central bank.

• Bank gives loan on basis of mutual agreement.

• Marjorly focuses on sales transaction.

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• Islamic Banking is growing rapidly in Pak it has been expected that by 2012 total share in Banking sector will be 12%.

• Present Islamic Banking share is 5%

• Growth rate is 50%

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• Assets Rs 276 Bn (asset base of entire Banking System Rs 5,653 Bn)

• Profit Rs 1.8 Bn dec-08

• Deposits Rs 201.7 Bn (17.7%)


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Performance of various Banks

Bank Name Profit (March 30, 2009) (Millions)

Allied Bank 4,157

Bank Islami (53)

MCB 15,375

National Bank 15,459

Meezan Bank 621

Standard Chartered 630

UBL 8,333

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Islamic Banks in Pakistan

• Dubai Islamic Bank Pakistan Limited • Meezan Bank • Dawood Islamic Bank Limited • AlBaraka Islamic Bank• Bank Islami • Emirates Global Islamic Bank Limited

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Branch Network

• Dubai Islamic Bank Pakistan Limited branches 25 in 10 cities

• Meezan Bank 166 branches in 40 cities• Dawood Islamic Bank Limited 19 branches in 9

cities• BankIslam102 branches in 49 cites• Emirates Global Islamic Bank Limited (EGIBL) 41

branches in 24 cities

• Total branch network of combine islamic banks 353 Branches in almost all big cities of Pakistan.

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Business Model of a Conventional Bank

Creditor (Depositor)

Individuals Corporate FI’s SME’s Public Sector

Funds Lent

Debtor PLS Saving Account Term DepositEquity

Mode of




Interest based pool managed by bank


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Business Model of a Islamic Bank

Investment Account Holders (Depositors)

Individuals Corporate FI’s SME’s Public Sector

Income Profit Rent Dividend

Islamic Banking Business (Shariah






PLS Saving Account




Mode of Deposit & Funding

Islamic Banking Institution

Mudaraba (Shariah compliant) pool managed by bank


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Key Challenges Facing Islamic Banks:

• Shariah interpretations

• Shariah experts

• Product development and execution

• Competition from conventional banking

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SWOT analysis

• S: religious appeal, Zakat, Innovative aspect, all bigger banks carry a Islamic portfolio because of its success.

• W: Lack of standardization, There are differences in theory and practice, Misinterpretation of Islam

• O: fastest growing religion in the world, Traditional interest based banking losing its value, New markets have been emerged in non Islamic regions.

• T: loopholes are present in its proper implementation, Research in products, Environment for Islamic banking in west has been declined after 9/11

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• The problem with these shariah boards is that they give

conflicting opinions that result in confusion and doubts.

• They approve 1 product and the other may reject

• Jorban a Muslim scholar disapproved the penalty imposed

on defaulting.

• Britain had rejected Islamic mortgage as it based on

interest based structure.

• Malaysia has proposed to setup standards for both IB and

IF. such standards would result in consensus instead of

confusion or conflict.

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• Replace conventional Banking system with Islamic banking System.

• Expand their Branch Network.

• 2012 total share in Banking sector will be 12%.

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• This is evident not only from the growing number of banks established specifically for practicing shariah compliant finance, but also from the increasing number of conventional banks such as Citibank, HSBC, RBS, Standard Chartered, UBS, etc engaging in shariah compliant operations.


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Product Innovation- Ensuring innovative Shariah compliant


Service and product Differentiation.

Top quality service to ensure that service standards of IB

Institutions is at par with conventional.

Aggressive Marketing to ensure that Islamic Banking reaches

the tipping point in quickest possible time.

To remove conflicting confusions and doubts from the mind of

a general customer

Islamic Banking rules should be uniform worldwide.


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Thank you