Sep 10 - 16, 20

Islamic banks have evolved since 1970's in international markets to provide banking facilities to consumers and corporates through products structured to be Shariah complaint. The conventional banking industry has evolved in 200 years whereas Islamic banking is relatively new and in early phases of growth. Operating in an environment where conventional banks have a strong footing, Islamic banking are facing a challenge to complete with conventional banks for deposits and advances and rely on the knowledge consumers have on Islamic principals to drive the business. Islamic banks are bound to operate with a premise that services and product offered should be Riba free and that all services are in compliance with the Quran and Sunnah. Islamic banks are allowed to earn a profit through partnership and rental agreements with hope that a Riba free economy will help boost businesses and welfare of the people. Islamic banks therefore exist to promote transparency in transactions with sharing of risks and rewards making the system safer and less prune to default as compared to conventional banking.

The main challenge faced by Islamic Banks is to encourage people to shift from conventional banks to Islamic Banks. In general, those who have little to no knowledge of Islamic way of banking and finance tend to get influence from word of mouth, mainly that there is no such difference between Islamic banking and conventional banking. Those who tend to believe that Islamic banks are similar to conventional banks without further research will tend to stay with conventional banks and will influence others to stay with conventional banks. Though the business is growing and more and more consumers are reaching for Islamic banking, the pace with which banking is growing is slow as compared to expectations. It was estimated that in international markets, Islamic banking will grow by more than 15 percent in terms of deposits, however same has not been experienced through the growth overall is encouraging. When it comes to universities and Islamic schools, to impart such knowledge, it has been observed that universities in western markets do not teach Islamic finance as part of their curriculum. Even if taught, the courses and teachings are designed to focus on basics rather than communicate in-depth analysis and application how Islamic products are different from conventional banking products. In Saudi Arabia and UAE, Qatar, Lebanon, Malaysia, Yemen, Egypt, Iran, Turkey and Kuwait, universities have created specialization in Islamic banking with advance courses in its application through teaching of transactions and how they are executed versus conventional banks.

In Pakistan, Islamic banking is taught as a course in few universities, however, advance courses in Islamic finance where students could be taught implication of transactions to stretch a line between conventional and Islamic banking products is in novel stages of planning and implementation. Those currently working for Islamic banks invest time and effort to understand the sharia principals to have deep root understanding of the products offered. With the complexity of transactions, the front office staff responsible to design products find comfort in working with the current portfolio of products and stream line their knowledge with regard to the Islamic principals which govern the existing products rather than think out of the box and introduce new products as part of financial innovation. This is mainly due to the level of uncertainty involved and the discomfort whether new products will conform to Islamic principles.

A prospect in Islamic banking is to develop a bank or fixed income market which conforms to Islamic principals. Conventional banks tend to take in deposits which are lent out as advances. Any residual funds not lent are parked with treasury, later invested in Bonds, Treasury Bills and Equities for an additional return. With respect to Islamic Banks, the avenue to place residual funds is restricted since investments cannot be placed in Treasury Bills or Bonds. Islamic Sukuks are limited and seldom floated. Islamic Banks therefore have limited avenues to place investments since the Sukuk market and liquid instruments is missing and yet to be evolved. Islamic Banks are also barred from approaching the Central bank discount window as the funds disbursed carry interest.

Facilitating foreign trade for the clients is a major avenue for Islamic Banks to gain non-interest income in the form of LC commissions. LCs established in large volumes are generally secured for payment against forward covers to hedge against fluctuations in exchange rate. Shariah restricts booking of forward covers since the price for a transaction as per Islamic principles has to be negotiated on spot. Derivative structuring in Pakistan is based on Shariah is nonexistent. International Islamic Financial Market and International Swaps and Derivatives Association defines global standards for Islamic derivatives, released in 2010.

A prospect for Islamic mode of investments is taking exposure in the equity markets for which standards are defined. Currently, there are approximately 100 Islamic equity funds worldwide with assets under management exceeding US Dollar 5 billion. Looking at the market potential for managing a portfolio of stocks and Islamic equity funds, Dow Jones Islamic market index and FTSE Global Islamic Index are widely popular.

Islamic banking is gradually keeping pace in western markets, however, the core business resides in Muslim countries primarily in the Gulf States as marketing is limited. It has also been argued that if banks in western markets introduce Islamic banking and supervised by Non-Muslims, there is a possibility that banking may not be followed in its true essence.

Islamic banks are estimated to grow at a rate of 10 percent to 15 percent through CY12 globally. It is further estimated that the market potential in terms of assets is US Dollar 4 trillion of which Islamic Financial institutions have only reached 15% of the total potential. Islamic banking can grow through training and knowledge of Shariah complaint products and believe among Muslims that Riba must be avoided at all costs. Though there continues to remain a debate to the degree to which Islamic Banks follow the core principal of Shariah, such viewpoints will eventually assist in improving the overall system. Since each country has Shariah scholars and experts in Islamic principals of finance and trade, there is a dire need to establish global standards of product offering and transactions so that Islamic banking is followed without any differences between countries.