ISLAMIC BANKING

S.KAMAL HAYDER KAZMI,
Research Analyst
, PAGE
June 23 - 29, 2008

Islamic Banking is one of the emerging field in global financial market having tremendous potential of growth all around the world.

Islamic Banking refers to a system of banking that is consistent with Islamic law (Sharia) principles and guided by Islamic economics.

The progress of Islamic Banking in Pakistan has also been commendable during the last three years. Currently, there are six licensed full fledged Islamic Banks (IB) and twelve conventional banks with Stand Alone Islamic Banking Branches (SAIBBs) with the total branch network of over 140 branches operating in twenty three cities of all the four provinces in the country. Islamic Banking is a main concern area for State Bank of Pakistan. Now, Pakistan has an exclusively Islamic banking system in the country. SBP wants to develop a progressive and sound Islamic banking system in the financial sector, providing innovative Shari'ah compliant products and services so as to achieve economic growth. The shortage of professional Islamic Bankers, capacity building and promotion are the biggest challenges for Islamic Banking system. In order to play Regulatory and Supervisory role more efficiently and working on the areas like Risk Management, Corporate Governance, Prudential Regulations, Accounting & Shari'ah Standards. It is high time that business schools in Pakistan may start offering M.B.A either in Islamic banking or offering specialization in Islamic banking.

NO, OF ISLAMIC BANKING BRANCHES

COUNT OF LICENCE DATE

LICENCE YEAR

TYPE

BANK

BEFORE 2002

2002

2003

2004

2005

2006

2007

GRAND TOTAL

.

AIB

4

1

1

1

2

2

1

12

.

BIPL

. . . . .

10

10

20

.

Dawood

. . . . . .

5

5

.

DIBPL

. . . . .

10

7

17

.

EGIBL

. . . . ..  

9

9

.

MBL

 

6

4

6

12

34

20

82

IB TOTAL

4

7

5

7

14

56

52

145

.

ABN Amro

. . . .

1

1

1

3

.

Askari

. . . . .

6

5

11

.

BAFL

. .

5

6

4

8

2

25

.

BAHL

. . .

1

.

2

.

3

.

BoK

   

1

2

1

1

12

17

.

HBL

. . .

1

. . .

1

.

HMB

. .

1

1

1

1

.

4

.

MCB

. .

1

4

.

1

.

6

.

NBP

. . . . .

1

1

2

.

SCBPL

. . .

1

2

.

3

6

.

Soneri

. . .

1

.

1

1

3

.

UBL

. . . . .

1

4

5

SAIBBs Total

. .

8

17

9

23

29

86

Grand Total

4

7

13

24

23

79

81

231

ISLAMIC INSURANCE:

Islamic Insurance (Takaful) is nearly as old as the Islamic banking system. When the concept was launched in Sudan and later in Saudi Arabia. Shari'ah scholars have raised a number of concerns about the Shari'ah permissibility of the business models employed in the industry. The two models mostly used in the industry like, the Mudarabah system and Wakala (agency) system that is now being used by most Takaful operators and has achieved tremendous popularity and acceptance in recent years even in countries where the Mudarabah model was earlier implemented. There are several Shari'ah based insurance companies established and operating today in the contemporary world, like, in Malaysia, Sudan, Brunei, Qatar and Saudi Arabia. These Islamic insurance companies have been established and operate based on the Shari'ah based performance and regulations, approved by the Parliaments of the respective countries.

PROFIT BASED SYSTEM:

According to the Islamic banking, Earning of total profit through Shari'ah compliant trading and investment activities with customers at a pre-agreed ratio and interest (Riba) can't charge. Islamic banks bear the risk and the liabilities when they involve in any transaction with the consumers. All the Islamic banks have three kinds of deposit accounts: current, savings and investment and several modes of acquiring assets or financing. But they can be categorized into three areas: investment, trade and lending.

ISLAMIC EQUITY FUNDS:

Currently, there are approximately 100 Islamic equity funds worldwide. The total Assets managed through these funds currently exceed US$5 bn and is growing by 1215% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors are thinking of launching similar Islamic equity products. Target markets for Islamic funds vary, some cater for their local markets in the Muslim communities.

ISLAMIC RETAIL BANKING:

International experts discuss strategies for Islamic retail banking and finance introduction: With conventional banks in the west opening Islamic windows to service their Islamic customers, the establishment of the first discrete Islamic retail bank in Europe, and the conversion of entire banking functions to Islamic alternatives, Islamic retail products are increasingly moving to the mainstream. Offerings of Islamic mortgages, savings, insurance and retail investment products are part of a global expansion of the financial industry which is increasingly competitive with conventional financial products.

CONCLUSION:

There has been large-scale growth in Islamic banking system in Muslim countries and around the world. The growing importance of Islamic banks and Shari'ah compliant financial innovation, it will be increasingly important to ensure sound Islamic financial institutions going forward. Supervisors must work together to encourage all Islamic banks to improve their risk management systems, controls and transparency. Such improvements will help ensure the stability and soundness of the international banking system. Islamic banks are the big threat for the conventional banks in the competitive market. Islamic banks should introduce the innovatives products in the markets. Problems and challenges relating to Islamic instruments, financial markets and regulations must be resolved. Specifically, the basic features of the Islamic finance and banking. Islamic banks offer a Shari'ah compliant solution for core banking, customer service management, card management, treasury management and risk and compliance. It is hoped that with the passage of time more countries will have IBs.