Islamic Financial Institutions in Pakistan

8/6/2019 Islamic Financial Institutions in Pakistan

1/37


2/37

2


3/37

3

LETTER OF TRANSMITTAL

December 17, 2008

Ms. Shehnaz Meghani

Institute of Business Management

Korangi Creek, Karachi, Pakistan

Respected Madam:

Here is the Report pertaining to the Gaps in Service at Service Stationsyou asked us to prepare. We, Syed Zaid-Bin-Javed, Omer Mirza and Arshilasubmit this report to you on December 17, 2008. The purpose of thisreport is to get an insight on the current state of service provided at theselected PSO Service Station and the gaps in service and how they can beremoved.

We have made this report using different sources, such as floatingquestionnaires and having informal interviews with the service managerand random customers. One week were devoted to the above

investigations.We hope that the report is acceptable as per your requirements. We found

the report making process interesting, challenging and most of all,

enabling us to get an in depth knowledge on the state of service provided

at the PSO service station.

Sincerely,Syed Zaid-Bin-Javed ID: 2006-1-64-6222

Omer Mirza

Arshila


4/37

4

ACKNOWLEDGEMENT

I would first like to thank Almighty Allah who gave me thestrength to complete this report. This report assignment hasenabled me to get an insight on where the Islamic mode of banking stands in Pakistan. All credit goes to our respected course instructor Mr. Sharique Ayubi who is conducting theFinancial Institutions Course and who not only encouraged us tolearn about the course but also helped us out at our weaknesses.I thank him again for providing his valued guidelines in not only the completion of the report but also his pragmatic insight intothe course.


5/37

5

TABLE OF CONTENTS

Letter of Transmittal ................................................................................... 3

Acknowledgement ....................................................................................... 4

Table of contents ........................................................................................ 5

Executive Summary .................................................................................... 6

PRINCIPLES OF PAKISTAN ECONOMIC SYSTEM ............................................ 9

ISLAMIC BANKING IN PAKISTAN ................................................................. 14

ISLAMIC BANKS IN PAKISTAN ..................................................................... 18

CHALLENGES FOR GROWTH ...................................................................... 33

CONCLUSION/RECOMMENDATION ............................................................. 35bibliography .............................................................................................. 36

Gulf economist .......................................................................................... 36

References ................................................................................................ 36


6/37

6Financial Institutions / Term Report

EXECUTIVE SUMMARY

The report Islamic Banking in Pakistan evaluates the current state of theIslamic banking industry in Pakistan. The report emphasizes on how theIslamic banks affect the banking sector as a whole.

From the report we come to know that although that although the Islamicmode of banking is relatively new in Pakistan but despite of it, it hasshown commendable progress over the last few years. Especially in thelast couple of years there has been a great boom in the business of Islamic banks

In depth analysis of the topic leads us to the fact that Islamic banking isthe only type of banking that is Halaal in the eyes of God and that allother types of banking systems that involve Riba are prohibited in Islam.

There is huge appetite for Islamic financial services. The growth, ishowever, constrained by the lack of infrastructure support & dearth of professional Islamic Bankers.

Currently, there are 6 licensed full fledged Islamic Banks with 145branches 12 conventional banks with standalone Islamic BankingBranches with the total branch network of 86 branches operating indifferent cities of all the four provinces in the country, Applications for afew more banks are under consideration.

The Government of Pakistan intends to continue promoting IslamicBanking in the country while keeping in view its linkages with the globaleconomy &existing commitments to local & foreign investors.

However there is a great need to develop instruments for liquiditymanagement by banks & monetary management by the SBP. There isneed for innovative products i.e., development of financial instruments on

the basis of Musharika, Mudaraba, Leasing, & Salam related to widespectrum of maturities, projects & issuing entities if one wants to seeIslamic banking progress in Pakistan.


7/37


INTRODUCTION TO ISLAMIC ECONOMICSYSTEM

Introduction

One of the forms of capitalism, which has been flourishing in non-Islamicsocieties, is the interest-based investment. There are normally twoparticipants in such transactions. One is the Investor who provides capitalon loan and the other Manager who runs the business. The investor has noconcern whether the business runs into profit or loss; he automaticallygets an interest (Riba) in both outcomes at a fixed rate on his capital.Islam prohibits this kind of trading and the Holy Prophet enforced the

ruling, not in the form of some moral teaching, but as the law of land.It is very important to know the definition and forbiddance of Riba and theinjunctions relating to its unlawfulness from different angles. On the onehand, there are severe warnings of the Qur'an and Sunnah and on theother, it has been taken today as an integral part of the world economy.

The desired liberation from it seems to be infested with difficulties. Theproblem is very detail oriented and has to be taken up in all possibleaspects.

First of all we have to deliberate into the correct interpretation of theQuranic verses on Riba and what has been said in authentic Ahadith andthen determine what Riba is in the terminology of the Quran and Sunnah,what transaction it covers, what is the underlying wisdom behind itsprohibition and what sort of harm it brings to society. We will start fromlooking at the economic philosophy of Islam vis--vis interest.

Definition of Riba or Intere st

The word "Riba" means excess, increase or addition, which correctlyinterpreted according to Shariah terminology, implies any excesscompensation without due consideration (consideration does not includetime value of money).

This definition of Riba is derived from the Quran and is unanimouslyaccepted by all Islamic scholars.

INSTITUE OF BUSINESS MANAGEMENT


8/37


Types of Riba

There are two types of Riba, identified to date by these scholars namely'Riba An Nasiyah' and 'Riba Al Fadl'.

'Riba An Nasiyah' is defined as excess, which results frompredetermined interest (sood) which a lender receives over and above theprinciple (Ras ul Maal)

'Riba Al Fadl' is defined as excess compensation without anyconsideration resulting from a sale of goods. 'Riba Al Fadl' will be coveredin greater detail later.

During the dark ages, only the first form (Riba An Nasiyah) was consideredto be Riba. However the Holy Prophet also classified the second form(Riba Al Fadl) as Riba.

Explanation through Quran:

The meaning of Riba has been clarified in the following verses of Quran:

"O those who believe fear Allah and give up what still remains of the Ribaif you are believers. But if you do not do so, then be warned of war fromAllah and His Messenger. If you repent even now, you have the right of the return of your capital; neither will you do wrong nor will you bewronged." Al Baqarah 2:278-9

These verses clearly indicate that the term Riba means any excesscompensation over and above the principal which is without dueconsideration. However, the Quran has not altogether forbidden all typesof excess; as it is present in trade as well, which is permissible. The

excess that has been rendered haram in Quran is a special type termed asRiba. In the dark ages, the Arabs used to accept Riba as a type .



9/37


PRINCIPLES OF PAKISTAN ECONOMICSYSTEM

Islamic banking has the same purpose as conventional banking exceptthat it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamicbanking is the sharing of profit and loss and the prohibition of riba (usury).Amongst the common Islamic concepts used in Islamic banking are profitsharing ( Mudharabah ), safekeeping ( Wadiah ), joint venture ( Musharakah ),cost plus ( Murabahah ), and leasing ( Ijarah ).

Islamic banking is restricted to Islamically acceptable deals, whichexclude those involving alcohol, pork, gambling, etc. Thus ethicalinvesting is the only acceptable form of investment, and moral purchasingis encouraged. Islamic banking is an example of full-reserve banking, withbanks achieving a 100% reserve ratio. However, in practice, this is notalways the case.

Islamic banks have grown recently in the Muslim world but are a verysmall share of the global banking system. Micro-lending institutions

founded by Muslims, notably Grameen Bank, use conventional lendingpractices and are popular in some Muslim nations, especially Bangladesh,but some do not consider them true Islamic banking. However,Muhammad Yunus, the founder of Grameen Bank and microfinancebanking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent withthe Islamic prohibition of usury (riba).

Shariah Advisory Council/Consultant Islamic banks and banking institutions that offer Islamic banking productsand services (IBS banks) are required to establish Shariah advisorycommittees/consultants to advise them and to ensure that the operationsand activities of the bank comply with Shariah principles.



10/37


Investments through principles

Bai' al-Inah (Sale and Buy Back Agreement)

The financier sells an asset to the customer on a deferred-payment basis,and then the asset is immediately repurchased by the financier for cash ata discount. The buying back agreement allows the bank to assumeownership over the asset in order to protect against default withoutexplicitly charging interest in the event of late payments or insolvency.

Bai' Bithaman Ajil (Deferred Payment Sale)

This concept refers to the sale of goods on a deferred payment basis at aprice, which includes a profit margin agreed to by both parties. This issimilar to Murabahah, except that the debtor makes only a singleinstallment on the maturity date of the loan. By the application of adiscount rate, an Islamic bank can collect the market rate of interest.

Bai muajjal (Credit Sale)

Literally bai muajjal means a credit sale. Technically, it is a financingtechnique adopted by Islamic banks that takes the form of murabahamuajjal. It is a contract in which the bank earns a profit margin on thepurchase price and allows the buyer to pay the price of the commodity ata future date in a lump sum or in installments. It has to expressly mentioncost of the commodity and the margin of profit is mutually agreed. Theprice fixed for the commodity in such a transaction can be the same asthe spot price or higher or lower than the spot price.

Bai salam

Bai salam means a contract in which advance payment is made for goodsto be delivered later on. The seller undertakes to supply some specific

goods to the buyer at a future date in exchange of an advance price fullypaid at the time of contract. It is necessary that the quality of thecommodity intended to be purchased is fully specified leaving noambiguity leading to dispute. The objects of this sale are goods andcannot be gold, silver, or currencies. Barring this, Bai Salam covers almosteverything that is capable of being definitely described as to quantity,quality, and workmanship.



11/37


Hibah (Gift)

This is a token given voluntarily by a creditor to a debtor in return for aloan. Hibah usually arises in practice when Islamic banks involuntarilypay their customers interest on savings account balances.

Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means sellingbenefit or use or service for a fixed price or wage. Under this concept, theBank makes available to the customer the use of service of assets /equipments such as plant, office automation, motor vehicle for a fixedperiod and price.

Ijarah Thumma Al Bai' (Hire Purchase)

These are variations on a theme of purchase and lease back transactions. There are two contracts involved in this concept. The first contract, anIjarah contract (leasing/renting), and the second contract, a Bai contract(purchase) are undertaken one after the other. For example, in a carfinancing facility, a customer enters into the first contract and leases thecar from the owner (bank) at an agreed rental over a specific period.When the lease period expires, the second contract comes into effect,which enables the customer to purchase the car at an agreed price.

In effect, the bank sells the product to the debtor, at an above market-price profit margin, in return for agreeing to receive the payment over aperiod of time; the profit margin on the lease is equivalent to interestearned at a fixed rate of return.

Ijarah-Wal-Iqtina

A contract under which an Islamic bank provides equipment, building, orother assets to the client against an agreed rental together with aunilateral undertaking by the bank or the client that at the end of the

lease period, the ownership in the asset would be transferred to thelessee. The undertaking or the promise does not become an integral partof the lease contract to make it conditional. The rentals as well as thepurchase price are fixed in such manner that the bank gets back itsprincipal sum along with profit over the period of lease.

Mudarabah (Profit Sharing)

Mudarabah is an arrangement or agreement between the bank, or acapital provider, and an entrepreneur, whereby the entrepreneur canmobilize the funds of the former for its business activity. The entrepreneurprovides expertise, labor and management. Profits made are sharedbetween the bank and the entrepreneur according to predetermined ratio.



12/37


In case of loss, the bank loses the capital, while the entrepreneur loses hisprovision of labor. It is this financial risk, according to the Shariah, that

justifies the bank's claim to part of the profit. The profit-sharing continuesuntil the loan is repaid. The bank is compensated for the time value of itsmoney in the form of a floating rate that is pegged to the debtor's profits.

Murabahah (Cost Plus)

This concept refers to the sale of goods at a price, which includes a profitmargin agreed to by both parties. The purchase and selling price, othercosts, and the profit margin must be clearly stated at the time of the saleagreement. The bank is compensated for the time value of its money inthe form of the profit margin. This is a fixed-income loan for the purchaseof a real asset (such as real estate or a vehicle), with a fixed rate of profitdetermined by the profit margin. The bank is not compensated for the

time value of money outside of the contracted term however, the assetremains as a mortgage with the bank until the Murabaha is paid in full.

Musawamah

Musawamah is a general and regular kind of sale in which price of thecommodity to be traded is bargained between seller and the buyerwithout any reference to the price paid or cost incurred by the former.

Thus, it is different from Murabaha in respect of pricing formula. UnlikeMurabaha, however, the seller in Musawamah is not obliged to reveal hiscost. Both the parties negotiate on the price. All other conditions relevantto Murabaha are valid for Musawamah as well. Musawamah can be usedwhere the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell. musawah.

Joint Venture

Musharakah is a relationship between two parties or more, of whomcontribute capital to a business, and divide the net profit and loss prorata. This is often used in investment projects, letters of credit, and thepurchase or real estate or property. In the case of real estate or property,the bank assess an imputed rent and will share it as agreed in advance.All providers of capital are entitled to participate in management, but notnecessarily required to do so. The profit is distributed among the partnersin pre-agreed ratios, while the loss is borne by each partner strictly inproportion to respective capital contributions. This concept is distinct fromfixed-income investing (i.e. issuance of loans).

Qard Hassan (Good Loan)

This is a loan extended on a goodwill basis, and the debtor is only

required to repay the amount borrowed. However, the debtor may, at hisor her discretion, pay an extra amount beyond the principal amount of the



13/37


loan (without promising it) as a token of appreciation to the creditor. Inthe case that the debtor does not pay an extra amount to the creditor,this transaction is a true interest-free loan. Some Muslims consider this tobe the only type of loan that does not violate the prohibition on riba, sinceit is the one type of loan that truly does not compensate the creditor forthe time value of money.

Sukuk (Islamic Bonds)

Sukuk is the Arabic name for a financial certificate but can be seen as anIslamic equivalent of bond. However, fixed-income, interest-bearing bondsare not permissible in Islam. Hence, Sukuk are securities that comply withthe Islamic law and its investment principles, which prohibit the chargingor paying of interest. Financial assets that comply with the Islamic law canbe classified in accordance with their tradability and non-tradability in the

secondary markets.

Takaful (Islamic Insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the ideathat what is uncertain with respect to an individual may cease to beuncertain with respect to a very large number of similar individuals.Insurance by combining the risks of many people enables each individualto enjoy the advantage provided by the law of large numbers.

Wadiah (Safekeeping)

In Wadiah , a bank is deemed as a keeper and trustee of funds. A persondeposits funds in the bank and the bank guarantees refund of the entireamount of the deposit, or any part of the outstanding amount, when thedepositor demands it. The depositor, at the bank's discretion, may berewarded with a hibah (gift) as a form of appreciation for the use of fundsby the bank. In this case, the bank compensates depositors for the time-value of their money (i.e. pays interest) but refers to it as a gift because itdoes not officially guarantee payment of the gift.

Wakalah (Agency)

This occurs when a person appoints a representative to undertaketransactions on his/her behalf, similar to a power of attorney .

Islamic Equity Funds

Islamic investment equity funds market is one of the fastest-growingsectors within the Islamic financial system. Currently, there areapproximately 100 Islamic equity funds worldwide. The total assetsmanaged through these funds currently exceed US$5 billion and is



14/37


growing by 1215% per annum. With the continuous interest in the Islamicfinancial system, there are positive signs that more funds will belaunched. Some Western majors have just joined the fray or are thinkingof launching similar Islamic equity products.

In short Islamic bank deals with Asset management for purpose of incomegeneration Depositors will receive halal income against the trading beingdone by bank on halal basis.

ISLAMIC BANKING IN PAKISTAN

History of Islamic Banking in Pakistan

Islamic finance incepted in Pakistan in 1977-78, which included theelimination of interest from the operation of specialized institution andcommercial banks.Soon after Financial and corporate system was amended on June 26, 1980to permitissuance of new interest-free instrument of corporate financing namedParticipation Term Certificate (PTC). In the same time Ordinance waspromulgated to allow the establishment of Mudarabah companies andfloatation of Mudarabah certificates for rising risk based capital.

On July 1, 1985, all commercial banks in Pak Rupee was made interestfree which

was mark-up technique with or without buy-back agreement. This washoweverdeclared un-Islamic by the Federal Shariat Court (FSC) in Nov 1991.

Commission for Transformation of Financial System (CTFS) wasconstituted in

January 2000 in the State Bank of Pakistan. It introduced Shariahcompliant modes of financing which included creating legal infrastructuresconductive for working of Islamic financial system, launching a massiveeducation and training program for bankers and their clients and aneffective through media for the general public to create awareness aboutthe Islamic financial system.



15/37


It also dealt with major products of banks and financial institution , bothforassets and liabilities side.

In September 2001 it was decided by Government that the shift to interest

freeeconomy would be made in a gradual and phased manner and withoutcausingany disruptions and was also agreed that state bank Pakistan wouldconsider for:

o Setting up subsidiaries by the commercial banks for the purpose of conducting Shariah compliant transactions

o Specifying branches by the commercial banks exclusively dealing inIslamic products, and Setting up new full-fledged commercial banksto carry out exclusively banking business based on proposed Islamicproducts.

o Eventually In January, 2002 State Bank of Pakistan gave first IslamicBanking License to Meezan Bank Ltd.

Present state of Islamic banking in Pakistan

Islamic Banking has come a long way since 2002 when it started with asingle bank and has now grown to six full-fledged Islamic Banks (IBs) and12 conventional banks operating Islamic Banking branches. As a result of continuous growth over the last 5 years, size of Islamic banking systemhas grown to 3.6 percent of the total assets of the banking sector in

September, 2007. Major development regarding the Islamic bankingsector has been the shift from the Murahaba financing, which is still themajor type of financing, to other modes like Diminishing Musharika. Withimproving asset quality and profitability coupled with capital adequacyabove the required ratio and expanding branch network, the IBs appear tobe firmly placed to gain further share in the banking system.

Around 90 per cent of the Pakistani population is Muslim, and the

provision of Shariah-compliant banking products is an important area to



16/37


help people comply with their faith. The provision of Islamic banking hasin turn led to an increase in the branch network for Islamic banks.

The most favoured form of Islamic financing in Pakistan is murabaha. Thismirrors a global trend where murabaha leads the field with the majority of Islamic banks. In Pakistan it accounts for almost 40 per cent of the totalfinancing done by Islamic banking institutions. The second most widelyused form of financing is ijara. With this accounting for 30 per cent, thesetwo financing models represent nearly three-quarters of the financingfrom Islamic banks in Pakistan.

A sset and Liability structure

The expansion of the Islamic banking industry is complemented by aconsiderable growth in its assets and liabilities .Expanding at an annualgrowth rate of 67 percent, the industrys assets have increased to Rs.119billion in CY06 (and to Rs. 159 billion by end-June CY07), from Rs.71 billionin CY05. The deposit base has increased from Rs. 50 billion in CY05 to Rs.84 billion in CY06 (and further to Rs. 108 billion by end-June CY07). Withthis expansion, the share of the Islamic Banking industry in the overallassets of the financial sector increased to 3.4 percent by end-June CY07.

The expansion also gives an indication of the sustainability of theseinstitutions.

Regulation of Islamic capital and money market

Currently, Islamic Banking Sector operates under the existing laws andregulations for conventional banks. The State Bank of Pakistan (SBP)



17/37


established the Islamic Banking Department on 15 September 2003. TheDepartment was given the task of promoting & developing the ShariahCompliant Islamic Banking as a parallel & compatible banking system inthe country. Currently, the Islamic Banking Department (IBD) consists of the following three divisions:

o Policy Divisiono Shariah Compliance Divisiono Business Support Division

To regulate & supervise the Islamic Banking Sector SBP is working on theareas of Risk Management, Corporate Governance, PrudentialRegulations,Accounting & Shariah Standards etc.

P erformance of Islamic Banks

The Islamic Banking industry which started with two dedicated institutionsnow comprises of 6 full fledged banks offering a range of shariah

compliant services, with a combined network of 1 45 branches, and 86Islamic Banking branches of conventional banks, reflecting an extendeddegree of outreach of Islamic banking in comparison with previous years.Initially , 2 new Islamic banks with 10 branches each started operations.First Dawood Islamic Bank is the latest entrant in the field In terms of strength of players; Meezan Bank is the oldest and biggest player in themarket, while Dubai Islamic Bank and Emirates Global denote foreignpresence in the sector.



18/37


ISLAMIC BANKS IN PAKISTAN

AlBaraka Islamic Bank (AIB) has the honor of being the pioneer of Islamic banking in Pakistan and has been operating in the country asbranches of AlBaraka Islamic Bank Bahrain since 1991. Over the years,the bank has successfully developed and maintained its identity as one of

the leading providers of a host of banking products and services in strictcompliance with Shariah principles.



19/37


Currently operating with 18 branches in 10 major cities of the country,AIB offers a wide array of Islamic financing products such as Murabaha,Ijara, Musharaka and Islamic Export Refinance, catering to a diverse cross-section of the economy, including the Corporate, SME and Consumersectors. Moreover, various Shariah compliant deposit schemes areavailable for customers to invest their funds in, along with a variety of other ancillary services such as online banking, ATM/debit card, safedeposit lockers and utility bill payments etc.

AlBaraka Islamic Bank is a member of Albaraka Banking Group (ABG)which is a Bahraini Joint Stock Company listed on Bahrain and Dubai stockexchanges and one of the well-known leading international Islamic banks.ABG is the biggest Islamic banking group listed on the Bahrain StockExchange in terms of capitalization. It has been rated by Standard &Poor's as BBB- with a short-term rating of A-3. ABG offers retail, corporateand investment banking and treasury services strictly in accordance withthe principles of the Shari. The authorized capital of ABG is US$1.5billion, while the total equity amounts to about US$ 1.5 billion. The Grouphas a wide geographical presence in the form of subsidiary banking Unitsin 12 countries, which in turn provide their services through more than240 branches. These banking Units are Jordan Islamic Bank/ Jordan, AlBaraka Islamic Bank/ Bahrain, Al Baraka Islamic Bank/ Pakistan, Banque AlBaraka D'Algerie/ Algeria, Al Baraka Bank Sudan/Sudan, Al Baraka BankLtd/ South Africa, Al Baraka Bank Lebanon/Lebanon ,Bank Et-Tamweel Al-

Tunisi Al Saudi/ Tunisia,The Egyptian Saudi Finance Bank/Egypt, Al Baraka Turk Participation Bank/Turkey, Albaraka Bank Syria (under

establishment), and representative office, Indonesia.

ABG is committed to expanding its presence in Pakistan, which is evidentfrom the rapid growth being undertaken by AlBaraka Islamic Bank in thecountry. Building on the expertise and experience of its workforce and thegrowing awareness of Shariah compliant banking solutions among themasses, AIB has successfully developed itself as a major unit of ABGoperating in the region, capitalizing on the Groups geographical presenceand high quality research and development in Islamic financial productsfor its business expansion in the country. Faced with growing challengesin this rapidly developing market, AIB strongly relies on its ability to be aneffective and efficient market player through renewed focus on superiorcustomer service, development of Islamic alternatives to conventionalfinancing facilities, and strict adherence to Shariah rulings and principles.

AlBarakas Commitment to Islamic banking

AlBaraka Islamic Bank and Albaraka Banking Group are fully committed todevelop and promote an integrated Islamic Financial System. Compliancewith the rules and principles of Islamic Shariah is the core of the bankingand financial activities and its philosophy. All its banking activities are

very closely regulated by a Board of Shariah Advisors based at the Head



20/37


Office in Bahrain and a Shariah Advisor based in Pakistan, to ensure strictcompliance with the highest standards of Islamic Banking principles

AlBarakas range of products and services

AlBaraka Islamic Bank in Pakistan offers a comprehensive range of banking products and services, to suit and serve customers in individual,retail, corporate, SME and consumer categories.

BankIslami Pakistan Limited (BankIslami) is the first bank to receiveIslamic Banking license under the new Islamic Banking policy of 2003.

BankIslami offers full range of Shariah compliant commercial bankingproducts and services including Liability products such as Current &



21/37


Saving accounts, Term deposits and Asset products such as Auto Ijarah,MUSKUN Home financing, Murabaha finance, Trade finance includingIslamic Export Refinance as well as services which include Biometric ATMfacility, Internet banking service etc The Bank's fast growing nationwidenetwork consists of 36 branches. The Bank envisages to be the firstIslamic Financial institution in Pakistan to focus on Wealth Management asits core area of business.

The following products and services are provided at BankIslami:

Deposit Products

o Islami Current Accounto Islami Bachat Accounto Islami Dollar Bachat Accounto Islami Amadni Certificateo Islami Mahana Munafa Account

Corporate Banking

o Working Capital Financeo Medium & Long Term financeo Leasing /Ijaraho Islamic Export Refinance

Investment Banking

o Advisoryo Private Placemento Sukuk Arrangemento Syndicationo Underwritingo Trusteeshipo Structured Financeo Listing on Capital Marketso Project Financingo Mergers & Acquistions

Trade Financing

o Letter of Credit (Sight & Usance)o Letter of Guaranteeo Forward Covero Bill Purchase

Consumer Banking

o Auto Ijarah

http://www.bankislami.com.pk/JSP/en/How%20DEPOSIT%20account%20work%20at%20BankIslami.pdfhttp://www.bankislami.com.pk/JSP/en/How%20DEPOSIT%20account%20work%20at%20BankIslami.pdf


22/37


o MUSKUN Home Financing

Wealth Management Services *Soon to be launched

o Integrated financial planning solutionso Proprietary productso Third party products

Services

o Biometric ATM serviceso Internet Bankingo Nationwide Online Bankingo Round the clock self service Phone Bankingo 24/7 Call Center at 111-ISLAMI (475-264)o Lockerso Interbank Fund Transfer (IBFT) facilityo eStatement Facility

Pakistan's sixth full-fledged Islamic commercial bank, Dawood IslamicBank Limited, officially commenced its operations on Friday, April 27,2007. The Bank is the result of an initiative of the First Dawood Groupwho teamed up with Islamic Corporation for the Development of thePrivate Sector (ICD) Jeddah, Unicorn Investment Bank - Bahrain, Al SafatInvestment Company - Kuwait, Gargash Enterprises (LLC) - Dubai, Mr.Azam Essof Kolia - a Singapore based entrepreneur and Shaikh Abdullah

Mohammad Al-Romaizan, an entrepreneur from the KSA.



23/37


With an initial paid-up capital of Rs. 3 billion (US$ 50 million), the Bankhas a vision of establishing a network of state-of-the-art branches all overthe country which will provide financial solutions to all segments of thesociety.

DIBL will provide its customers with Shari'ah compliant solutions at anaffordable cost and will also offer superior levels of service. The Bank ispoised to assume a leadership position through its superior technologyand unrivalled customer centricity.

In addition to the standard and innovative products in retail and corporatebanks, DIBL focuses on the growing segment of importers and exportersthat are reluctant of utilizing bank financing with the fear of breachingIslamic laws as defined in the Holy Qur'an and Sunnah. This segment isstill substantially untapped, even by existing Islamic Financial Institutionshence this will be the core focus of the Bank's marketingstrategy.

DIBL will be present throughout Pakistan wherever the institutioncan transact sustainable its retail and corporate business. This presencewill not only be achieved through full fledged branches but also throughdesignated service centres in which the Bank will also offer a limitedamount of retail products which will allow it to focus on depositmobilization and trade finance at the same time.

The State Bank of Pakistan (SBP) awarded to Dubai Islamic Bank PakistanLimited (DIBPL), the license for the establishment of its operations inPakistan on Saturday, November 26, 2005. Since then, DIBPL hasundertaken major initiatives to expand its branch network across thecountry. Under its consumer banking division, the bank is offering state-of-the-art Sharia compliant products that effectively compete with those

being offered in the market by conventional banks. This is not the Banksonly strength though. It also has expertise in providing Retail, Private,

http://www.dibpak.com/Default.aspx


24/37


Small and Medium Enterprises, Corporate, Investment Banking andAdvisory services.

The Bank has launched Pakistan's first Islamic Visa Debit Card and

introduced financial products covering Home Financing, Auto Financing,and Depository products.

DIBPL has also introduced Priority Banking and Internet Banking, both of which are being recognized as benchmark products in their respectivecategories. Besides regular banking services, the Bank is committed tobringing foreign investment to the country. DIBPL's corporate wing hasactively pursued foreign investors and convinced world renowned giantsfrom the GCC to be part of Pakistan's economy.

DIBPL is a Public Limited company. Its total worth is Rs. 5.1 billion whichwill gradually increase to Rs. 6 billion. DIBPL is 100% owned by DubaiIslamic Bank PJSC (Public Joint Stock Company) and its nominatedshareholders. The parent company is a listed company in Dubai.

Products and services

o Internet Bankingo Visa debit card

o Lockers

o Phone Banking

Emirates Global Islamic Bank Limited, a dedicated Islamic CommercialBank, commenced operations in February 2007. The bank has a networkof branches operating across all four provinces in urban and rural areas of Pakistan.



25/37


Incorporated in Pakistan and sponsored by leading investors from theUnited Arab Emirates and Saudi Arabia, Emirates Global Islamic BankLimited (EGIBL) is a major player in the rapidly growing Islamic bankingindustry, offering Riba-free yet highly competitive banking products,

based on the teachings of the Quran and Sunnah.

EGIBL believes in making a positive contribution to society bycontinuously striving to provide Halal alternatives to conventional bankingproducts, complemented with superior service and cutting-edgetechnology.

EGIBs range of products and services

Emirates Global Islamic Bank deals in the following products and services:

Deposit products

o Current account

o Basic banking account

o Saving account

http://www.egibl.com/alt_channels.htmlhttp://www.egibl.com/investment-banking.htmlhttp://www.egibl.com/corporate.htmlhttp://www.egibl.com/travel.htmlhttp://www.egibl.com/current-accounts.html


26/37


o Term deposit

Alternate channels

o ATM card

o eStatement

o phone banking

Others include

o lockers

o consumer financing

o business banking

o investment banking

Meezan Bank Limited is a publicly listed company, first incorporated on January 27, 1997. It started operations as an Islamic investment bank inAugust of the same year. In January, 2002, in an historic initiative, MeezanBank was granted the Nations first full-fledged commercial bankinglicense dedicated to Islamic Banking, by the State Bank of Pakistan

Meezan Bank, stands today at a noteworthy point along the evolution of Islamic Banking in Pakistan. The banking sector is showing a significant



27/37


paradigm shift away from traditional means of business, and is catering toan increasingly astute and demanding financial consumer who is alsobecoming keenly aware of Islamic Banking. Meezan Bank bears the criticalresponsibility of leading the way forward in establishing a stable anddynamic Islamic Banking system replete with dynamic and cutting-edgeproducts and services.

The Banks main shareholders are leading local and international financialinstitutions, including "Pak Kuwait Investment Company", the only AAArated financial entity in the country, the Islamic Development Bank of

Jeddah, and the renown Shamil Bank of Bahrain. The establishedposition, reputation, strength and stability, of these institutions addsignificant value to the Bank through Board representation and appliedsynergies.

History During 1997, Al-Meezan Investment Bank is established as the first Islamicbank of Pakistan. Mr. Irfan Siddiqui appointed as first and founding Chief Executive Officer.

During 2002, the Shariah Supervisory Board is established at Al-MeezanInvestment Bank led by Justice (Retd.) Muhammad Taqi Usmani aschairman. State Bank sets criteria for establishment of Islamic commercialbanks in private sector and subsidiaries and stand-alone branches byexisting commercial banks to conduct Islamic banking in the country.

During 2003, A Musharaka-based Export Refinance Scheme has beendesigned by the State Bank in coordination with Meezan Bank Limited, inorder to provide export finance to eligible exporters on the basis of Islamicmodes of financing. Efforts are underway to develop Islamic moneymarket instruments like Ijarah Sukuk to facilitate the banks in respect of liquidity and SLR management.

Pakistans first Shariah compliant Mortgage facility is launched by MeezanBank. Approved by the Shariah Supervisory Board, the product enableshome purchase, home construction, renovation, as well as replacement of any existing mortgage. Al Meezan Investment Management Limited(AMIM), a group company of Meezan Bank, introduces Meezan IslamicFund (MIF). MIF is an open-end mutual fund that is Shariah compliant.Meezan Banks asset management arm, Al Meezan InvestmentManagement Limited (AMIM), launches the Meezan Balance Fund (MBF).

The offering was oversubscribed 1.25 times.

In March 2005, to further strengthen & ensure strict Shariah compliance inbanks operation a dedicated and full fledged Product Development &Shariah Compliance (PDSC) department was formally setup. The role of

this research department is centralization of Product developmentactivities, new product research, Islamic banking training and Shariah



28/37


Compliance functions. The department works under the guidance &supervision of banks Shariah Advisor Dr. Muhammad Imran Usmani andthe Shariah Supervisory Board of the Bank.

PDSC now plays a very critical and vital role at the bank by activelysupporting new product development activities, refining existing productsmenu, preparing product policies & standardize agreements, impartingIslamic banking knowledge at various levels to new & existing staff members, corporate customers and general public, coordinating withbanks Shariah Board, conducting regular Shariah audits & reviews

During 2005, Meezan Bank launches the Meezan Islamic InstitutionDeposit Account (MIIDA), a unique product tailored exclusively for IslamicFinancial Institutions (IFIs). The facility is the first of its kind in Pakistan,whereby Islamic Banks (including dedicated, as well as conventionalIslamic windows) now have the opportunity to manage excess liquidity bymaintaining a checking account with Meezan Bank specifically designedfor this purpose.

Meezan Bank becomes the first customer of Islamic Insurance (Takaful) bysigning the first Memorandum of Understanding MoU with Pak Kuwait Takaful Company Limited (PKTCL). The signing of this MoU has usheredPakistan into a new era of Islamic Insurance (Takaful).

Functions

Service

o Personal Banking and Financeo Corporate Financeo Commercial Financeo Structured financeo Treasuryo Car Ijarah - Car Financingo Easy Home - Home Financingo Asset Management

Product Development & Shariah Compliance(PDSC) Department

Product Development & Shariah Compliance (PDSC) is one of theimportant departments of the bank that reflects strong commitment of thebank towards Islamic banking and research. PDSC works directly underthe supervision of banks Shariah Advisor Dr. Muhammad Imran Usmaniand is managed by Mr. Ahmed Ali Siddiqui. The function is vital inensuring strict Shariah Compliance in all area of banks operations.



29/37


PDSC role is manifold and comprises facilitating new Product Developmentactivities, refining existing products & procedures, providing IslamicBanking training to new recruits and existing staff members, conductingregular Shariah Audit & reviews of branches & departments, coordinatingwith Banks Shariah Board and providing Islamic Banking AdvisoryServices to both local and foreign financial institutions.

In the area of Product Development, the bank has initiated several newstructured Islamic Sukuk transaction, developed a new investment avenueof local Commodity Murabaha to manage excess liquidity of the bank is aShariah compliant manner. The bank is also conducting research onseveral new Islamic products in the areas of consumer, corporate & retailbanking level.

PDSC has played a vital role in imparting Islamic banking training to bankemployees, customers, Ulemas & scholars throughout Pakistan. Thedepartment regularly carries out training sessions ranging from basic toin-depth specialized workshops. During the year 2006, a comprehensiveIslamic Banker Certification (IBC) Program was successfully introduced inPakistan.

The bank has also provided Product Development Advisory services todifferent financial institutions interested in offering Islamic Bankingproducts & services around the world via its research wing. The mainobjective of Meezan Banks Advisory function is to help financialinstitutions develop Islamic Banking Products by sharing the experience,

research & success stories. The bank has successfully entered intoadvisory arrangements with Capitas Group of USA, Al Meezan InvestmentManagement (AMIM), Pakistan & other Islamic banks & financialinstitutions.

The bank has also executed MoUs with INCEIF, Malaysia & UtrujFoundation, UK to collaborate in the areas of training, research andproduct development.

Internet banking

Meezan Banks Internet Banking system puts access to your accounts atyour fingertips, anywhere in the world. Using any computer with Internetconnectivity the following facilities are available by Meezan Bank;

o Balance inquiryo Statement viewing & download (in PDF or MS Excel format)o Cheque statuso Cheque blockingo Payorder requesto Funds transfers between own accounts at Meezan Bank



30/37


o Cheque book requesto Change of address requesto Complaint logging

Shariah Supervisory Board

The Bank has an internationally renowned, very high caliber and pro-active Shariah Supervisory Board presided over by Justice (Retd.) MaulanaMuhammad TaqI Usmani, a renowned figure in the field of Shariah,particularly Islamic Finance. He holds the position of Deputy Chairman atthe Islamic Fiqh Academy, Jeddah and in his long and illustrious career hasalso served as a Judge in the Shariat Appellate Bench, Supreme Court of Pakistan. The Bank also has a resident Shariah advisor, Dr. Imran Usmani,who strictly monitors the regular transactions of the Bank. The board alsoincludes Sheikh Essam M. Ishaq (Bahrain), and Dr. Abdul Sattar Abu

Ghuddah (Saudi Arabia).

EFFORTS OF STATE BANK OF PAKISTAN TOENHANCE & DIVERSIFY THE COVERAGE OFFINANCIAL INSTITUTIONS IN THE COUNTRY

State Bank of Pakistan has introduced the Improving Access to FinancialServices Programme (IASP) in the country with the help of the AsianDevelopment Bank (ADB). One of the important clauses8 of this programme isthe provision of Islamic Microfinance Services and products by financialinstitutions including Islamic banks, commercial banks and micro finance banks.It is expected that this decision would help in enhancing the integration anddeepening of the financial sector.



31/37


State Bank of Pakistan wants to develop a progressive and sound Islamicbanking system that is in line and compatible with the global financialsector, providing innovative Shariah compliant products and services soas to achieve equitable economic growth.

One of the biggest challenges being faced by this growing industry is thedearth of professional Islamic Bankers and capacity building in this regardis one of the top most priorities for the promotion of Islamic Banking. Inorder to play our regulatory and supervisory role more efficiently we areworking on the areas like Risk Management, Corporate Governance,Prudential Regulations, Accounting & Shariah Standards etc. regardingIslamic Banking

Currently the Islamic Banking Department (IBD) consists of following fourdivisions:

1. Policy Division

2. Shariah Compliance Division

3. Business Support Division

4. Shariah Board Secretariat

1. Policy Division:

Objectives:

o Devise a vision and strategy paper and work for the promotion of the Islamic banking industry.

o Study the best international practices being applied in the field andwork upon their possible application in local market.

o To deal with legal, regulatory, taxation and accounting issues facedby IBIs.

o To steer the Task Force on R&D and deal with issues relating toIslamic economics.

2. Shariah Compliance Division:



32/37


Objectives:

o To strengthen the supervisory aspect of Islamic banking industrythrough implementation of Shariah Compliance Inspection Manual.

o To analyze the financial data received from the banks and reviewthe same.

o To coordinate with different departments in preparing various SBPpublications.

o To develop new products for liquidity management and interbankmarket

o To liaison with international institutions involved in Islamic finance

3. Business Support Division:

Objectives:

o To provide administrative support to the department.o To make arrangements for various meetingso To make arrangements for the training and video conferences

4. Shariah Board Secretariat:

Objectives:

To arrange Shariah Board meetings, preparing agenda and minutes of the meetings and conduct due diligence of Shariah Advisors of IBIs.

Policies for Promotion of Islamic Banking

In order to promote Islamic Banking in Pakistan, State Bank is following athree pronged strategy as under:

I) Establishment of full-fledged Islamic bank(s) in the private sector;II) Setting up of subsidiaries for Islamic Banking by existing commercialbanks; andIII) Allowing Stand-alone branches for Islamic banking in the existingcommercial banks.



33/37


CHALLENGES FOR GROWTHFollowing are some of the challenges faced by supervisors, regulators and

market players in the Islamic Financial Industry.

Lack of a sovereign instrument for reservemanagement

Islamic Banks generally operate in an environment where they have to competewith a parallel system of conventional banks; however they face the shortcomingof managing their liquidity without the availability of the requisite sovereigninstruments for this purpose which conventional banks have access to.Recognizing this limitation, SBP requires Islamic Banks to maintain CRR at 7 and



34/37


3 percent, and SLR at 8 percent of time and demand liabilities. Furthermore, SBPhas allowed Islamic Banks to include their cash in hand and current accountbalances with National Bank in meeting their SLR requirements.

Gradual development in standardization of practices

Shariah boards may differ in their interpretations and opinions from institution toinstitution within the same country, with considerable variations in what isconsidered acceptable by shariah standards across countries, such thatacceptability of a shariah-compliant product in Malaysia may be viewed withsome skepticism in other parts of the world. Practices in the South Asian regiondiffer from the East Asian region. These variations exist due to the prevailingschools of thought which give rise to different interpretations on the acceptabilityof shariah-compliant products. The pursuit of international consistency would notonly ease the task of supervising

internationally active institutions, but would also ultimately favor the regulatedinstitutions, as Islamic transactions become better understood. It would alsofoster integration of IFIs into the international financial community.

Possibility of Regulatory Arbitrage The disparity arising from the interpretative variation discourages the cross-border use of Islamic products. Instead of regulatory arbitrages, a level playingfield should be provided for IFIs. For instance, the FSA (UK) model follows thepolicy of no obstacles, not special favors, for Islamic Financial Institutions.

Modalities of regulatory framework with a parallel system of Islamic Finance

In most jurisdictions, IFIs have to comply with regulatory requirements applicableto conventional financial institutions, for instance with respect to MCRrequirements, Basle II implementation, Prudential Regulations, etc., despite thedistinct nature of their business activities. This is in addition to other regulatorydirectives specifically tailored for their domain. SBP in the recent past hasaddressed some of these concerns by issuing separate guidelines for shariah-compliant micro-finance services and (draft) risk management guidelines, etc.

Nature of risks / Risk Profile of IFIs



35/37


IFIs are exposed to a unique set of risks, and hence different types of regulationsare needed to manage these risks. Terming the development of Islamic financeakin to financial innovation, Iqbal (2004) points out that financial innovationoften brings with it changes in the perception of risk, and rightly argues that theemergence of a parallel system of finance presents challenges similar tofinancial innovation. There are concerns about this industrys inherent risks andtheir possible spillover on other segments of the financial sector as it is less wellunderstood than conventional finance.

CONCLUSION/RECOMMENDATION

The Islamic Financial Services segment is an increasingly importantconstituent of the financial sector in Pakistan and has grown in size anddiversity in just a few years. The participants of the Islamic BankingIndustry are all strong players with a sound capital base, compliant withSBPs MCR requirements uniformly applied to both conventional andIslamic Banks, which restricts entry into the sector without the requisitesound financials. The industry is still in a development phase and it isexpected that with time, not only will the practice of Islamic financialintermediation converge with the conceptual foundations on which it isbased, both in Pakistan and in other jurisdictions, but will also increase the



36/37


level of financial depth and penetration by providing financial services tothe unbanked segment.

Government of Pakistan should take serious actions for Islamic economicsystem because we are Muslims and its our first duty to implement theIslamic rules and regulation in our life. Awareness must be createdamong the consumers; the biggest problem of Islamic banking system isthat the consumer has no accurate knowledge about this system.

Islamic banking industry must be transparent and accountable to theirconsumers. Media should play an important role in increasing theawareness of shariah. If they will take serious actions most probably thegrowth in the evolution of Islamic banking industry will be more than now.

BIBLIOGRAPHY

GULF ECONOMIST

REFERENCESwww.wikipedia.com

www.statebank.org

http://www.wikipedia.com/http://www.statebank.org/http://www.wikipedia.com/http://www.statebank.org/


37/37


Islamic Financial Institutions in Pakistan

Documents

Transcript of Islamic Financial Institutions in Pakistan