ISLAMIC BANKING IN PAKISTAN
At present, Islamic Banking is available through 71 branches in 14 cities of four provinces of Pakistan
By KHALIL AHMED
Jan 30 - Feb 05, 2006
Muhammad Ayub, Head of Islamic Banking NIBAF State Bank of Pakistan, perceives that there will be problems if the dual system, Islamic Banking and Conventional Banking, persists. Speaking as the keynote speaker during the seminar on 'Islamic Banking in Pakistan' at the Institute of Business Management organized by the Economics Society of the Institute on January 26, he laid emphasis on adoption of Islamic Banking. He believes that the concept of Islamic finance is better so it should be implemented which will be better for the economy and society.
Quoting the present SBP's finance policy. which reveals that the parallel functioning should continue, Mr. Ayub emphasised that parallel functioning would not provide any benefit. He concurred that complete transformation in one go was not at all viable so it was a prudent plan by the policy makers to start with dual functioning which would eventually lead to complete transformation. He stressed the national and comprehensive approach for the implementation of the system. According to him Sudan has the purest system of Islamic Banking followed by Iran whereas in Pakistan the concept of Islamic Banking has not got the popularity as expected.
Pakistan ventured into Islamic Banking when many countries had already obtained magnificent success. We should have launched the system long ago with prudent policies and mass awareness. The system of Islamic Banking is prevalent in over 75 countries across the world comprising non-Muslim countries as well. Its clientele transcending the boundaries of the Muslim world is spread over Europe, United States of America and the Far East. In Malaysia, there are two full-fledged Islamic banks and Bahrain is considered the hub of Islamic banking hosting 30 IFIs. Bahrain is successful because of less tax issues whereas we are in the quagmire of tax issues. Pakistan needs to expedite trading which is sine qua non for Islamic Banking. In Germany, 75% banking is merchant banking and Pakistan can benefit from the Islamic banking in case it looks into this option. There is dire need to create awareness regarding the benefits of Islamic Banking in Pakistan.
Mr. Ayub gave a few reasons for failure of early efforts. Some of the reasons are: i-absence of Shariah compliance mechanism in financial institutions, ii-ineffective code of conduct for professionals, iii-lack of continued research and development in the field of Islamic finance and economics, iv-inadequate training to the staff of SBP and banks and v-lack of awareness about Islamic economic system.
He appreciated the growth of Islamic Banking in Pakistan in recent years. Islamic banking continues to grow at a rapid pace because of its value-orientated ethos. At present, Islamic Banking is available through 71 branches in 14 cities of four provinces of Pakistan. DIB, EGIB and BIP may start business within a couple of months. NoCs have been issued to Crescent and First Daud. Twelve conventional banks with 35 operative branches are offering products in Islamic Banking and all major banks are making preparations in this regard. SBP has provided a regulatory framework to banks that ensures that banks offer Islamic Banking. Quoting the policy for Islamic Banking, he said that every bank was supposed to appoint the Shariah Adviser and a bank had to maintain IBF capital of Rs.50 million or 8% of the risk weighted assets of IBB(s) whichever was higher. He apprised the participants of the regulations of SBP. The regulations are: i-license from SBP u/s.27 of BCO,1962, ii-all business transactions be Shariah compliant, iii-Shariah adviser be approved by SBP, iv-products and services be cleared by Shariah adviser and v- working procedures and risk management policies be in place. Replying to a question he said that time value of money was allowed in Islam and in Islamic Banking interest was not charged rather time value was added. He concluded by giving industry progress and market share:
% of banking industry
% of banking industry
Financing and Investment
% of banking industry
Profit After Tax
Mr.Shahjehan S. Karim, the President of the Institute of Business Management, appreciated the efforts made by the faculty members and the student body for arranging the seminar and he emphasised the need for such seminars about the current issues on regular basis so that the students of today may acquaint themselves with the contemporary happenings in Pakistan and across the world.
Muhammad Ashraf Janjua, acting Dean CBM, Professor Rahat Aziz and Professor Sharique Ayubi of the Institute of Business Management also expressed their points of view regarding the growth of Islaming Banking in Pakistan.
Mr.Sohail Khan, Head of Car Ijarah Meezan Bank presented the historical perspective of Islamic finance. He started with the historical aspects, and the evolution of riba (interest), and also the emergence of Islamic Banking. He explained the key drivers of wealth generation in early civilizations through a research from Cambridge Economic History of Europe. It showed the earliest concepts of wealth generation emerged from Greek, Roman, Christian and Islamic civilizations. He explained that the Greeks considered land ownership and agriculture as their main occupations. Trade was considered lowly as trade was done on the goods which were acquired by theft. Hermes, one of their gods, was the god of trade as well as of thieves. So, naturally the word trade brought the thought of theft in people's minds, and so was the traders' profession.
He said that Islam was indeed an expert religion in economy and the track record proved it. Islam tells you not to charge interest. Before Islam, the last three civilisations prohibited trade but Islam changed the focus and allowed trade and also changed the status of trade from undesirable activity to the occupation of the elite. Islam introduced trade as an acceptable profession. Trade between cities flourished under Musharika and Mudarba and concept of limited companies is driven from Musharika and Mudarba. Islam's economic revolution introduced trade and at the same time prohibited interest to ensure justice because interest results in inequitable distribution of wealth. Allah has permitted trading and prohibited usury. Riba is prohibited in Islam and every loan that draws a benefit is Riba. There are two types of loans; consumption loan and commercial loan. In past there was no concept of commercial loan since people got loans for consumption. Consumption loan is attained by a poor man who needs to meet his obligations so interest is prohibited in this case whereas commercial loan is received by a person who wants to do business and this person will pay from the profit which he earns. There is nothing wrong incase profit on goods and services is charged.
He said that time has value, which could not be discounted through interest, but only through price. Mr. Khan said that there was strong need for Riba free banking as all forms of Riba are prohibited in Islam. In the end he said that Islamic Banking was not a religious or legal issue rather it was a management change issue.