ISLAMIC BANKING SHOWING IMPRESSIVE PERFORMANCE

By: ZEESHAN AHMED KHAN 
and SYED MUJTABA ZAFAR
Aug 15 - 21, 2005

Growing at the rate of 15% per annum, Islamic banking and finance has developed into a full-fledged financial system.

Islamic banking is basically a concept of banking governed by non-exploitation norms in accordance with Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions), while the conventional banking works purely on commercial grounds. The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of Riba (interest). Amongst the common Islamic concepts adopted in Islamic banking, are: profit-sharing (Mudaraba), safekeeping (Wadiah), joint venture (Musharaka), cost plus (Murabaha) and leasing (Ijarah).

Meezan Bank and the Al-Baraka Bank are the two major Islamic banks operating in Pakistan, besides the Bank Islami Pakistan is likely to commence operations by the end of this year.

At the same time, various commercial banks are participating in the Islamic banking business, with having over 60 branches all over the country.

Over a period of time, the State Bank has shown a strong inclination towards Islamization of the banking system and has adopted a three-pronged strategy for the promotion of Islamic banking in Pakistan:

I) Establishment of full-fledged Islamic bank(s) in the private sector.

II) Setting up of subsidiaries for Islamic Banking within the existing commercial banks.

III) Allowing stand-alone branches for Islamic banking in the existing commercial banks.

The SBP as the chief supervisory body scans a bank's capacity and capability before issuing a sanction for Islamic banking. The SBP has set a condition of minimum paid-up capital of Rs2 billion to carry out interest-free banking for a full-fledged bank/subsidiary and Rs50 million for a branch.

The mode of Islamic banking has performed impressively during the last 6 months which is reflected in the share of Islamic Banking System in the overall banking system which has gone up to 1.6% in March 05 as compared to 1.5% in Dec 2004.

The rapidly growing branch network has enabled the Islamic Banking System to expand in terms of holding a major portion of the asset base. The total assets of the Islamic Banking System have recorded a growth of 13.6 percent from Dec 2004 and estimated to be Rs50.2 billion in March 05.

The different modes of Islamic banking being practiced in Pakistan, are: Murabaha, Musharaka, Ijarah, Istisna, Salam, Qarz-e-hasna and Mudaraba. Among these different types of Islamic banking, Ijarah and Murabaha stand out as the most popular mode of financing by having the combined share of 81% in the total Islamic financing in Mar 05. Murabaha is a contract of sale in which a seller declares cost and profit, while Ijarah or leasing is the rent in case of hiring of assets or things and wage in case of hiring of persons.

Growing at the rate of 15% per annum, Islamic banking and finance has developed into a full-fledged financial system. Currently, Islamic banking is being practiced in more than 75 countries, with a number of Islamic countries trying to implement this system. In Malaysia, Bahrain and a few other countries of the Gulf, Islamic banks and financial institutions are working parallel with the conventional system. The pace of growth of Islamic financial system in Pakistan is picking up momentum with every passing year. Keeping all the facts into consideration, we expect that the day is not that far when a full fledged interest-free banking will start working in Pakistan.

HISTORY TIMELINE OF ISLAMIC BANKING IN PAKISTAN

Feb 1979

Process of Islamization of banking system started and president promised that interest will be eliminated from the economy within three years.

Jan 1981

Separate interest-free counters started operating in all nationalized banks.

Jun 1980

Mudaraba technique of financing was introduced as a result of enactment of the law Mudaraba Companies and Mudaraba (Floatation and Control) Ordinance.

July 1982

Banks introduced Musharaka.

Apr 1985

All finances to all entities started in the specified interest free modes.

Nov 1991

Federal Shariah Court declared all Islamic banking modes started in April 1985 to be un-Islamic.

Dec 1999

Shariah Appellate Bench directed that all laws involving interest would cease by June-2001.

Jan 2000

The Commission for Transformation of Financial System was constituted.

Jun 2002

Government promised that Riba would be eliminated and Islamic banking will be promoted.

Sep 2001

Policy of "Gradual shift towards interest free economy" was announced.

Dec 2001

State bank of Pakistan announced detailed criteria for the establishment of full fledged Islamic commercial bank.

Jan 2002

Al-Meezan Investment Bank became the first full-fledged Islamic bank of Pakistan.

Jan 2003

SBP announced detailed instruction for implementation of Islamic Branch Banking (IBB) and Islamic banking counters in regular branches.

2005

A new Islamic bank (Bank Islami Pakistan) is likely to start its operation by December.