Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed, in addition to the conventional good governance and risk management rules, by the principles laid down by Islamic Shariah (SBP). Following Shariah requirements, there are six key principles driving the activities of Islamic banks (Kettell 2011, p. 33). * Any predetermined loan repayments as interest (riba) is prohibited. * Profit and risk fairly sharing between the providers of funds (investors) and the users of funds (entrepreneurs). All financial transactions must be asset-backed, making money out of money is unacceptable. * Gharar (uncertainty, risk or speculation) is prohibited. * Only Sharia’a-approved contracts are acceptable, for instance Islamic banks are not allowed to finance a wine factory, a casino, a night club or any other activity prohibited by Islam or known to be harmful to society. * Sanctity of contract, Islam upholds contractual obligations and the disclosure of information as a sacred duty in order to reduce the risk of asymmetric information and moral hazard.
Based on these features, when the economy recession dragged down all the conventional banks, there was very little impact on Islamic banks. On the contrary, Islamic banking has shown tremendous growth in the past two decades, Siddiqi (2009) stated that there are over 300 Islamic Financial Institutions spread over 75 countries and 300 Shariah-compliant mutual funds, and about $800 billion is deposited in Islamic finance products.
Currently, Islamic banks not only operate in Muslim countries but also expand to non-Muslim countries like UK, France, and Germany. Besides, the global conventional banks like HSBS, Standard Chartered Bank, Deutsche Bank etc. , have also set up separate divisions to offer Islamic financial products and services to their Muslim clients and even to those non-Muslim clients (Khan et al 2012, p. 25). Pakistan has population of over 190 million and more than 96% are Muslims, which provide a huge market for the Islamic banking (Ahmad et al 2010, p138).
This paper will survey and evaluate the development of Islamic banking in Pakistan during the past two decades. Limitations of the study Because it is hard to find the early figures of Islamic banking in Pakistan, the author will evaluate the early years according to the development of Islamic framework, and evaluate the recent years based on the figures. Literature review The author read the following three articles, and reviews the first article. Khan and Bhatti (2008) Developments in Islamic Banking: The Case of Pakistan.
SBP (2007) Pakistan’s Islamic Banking Sector Review 2003 to 2007 Ahmad (2010) Islamic Banking Experience of Pakistan: Comparison between Islamic and Conventional Banks Khan and Bhatti (2008) claimed that Pakistan tried to Islamize the economy since 1977 the president Mohammed, Ziaul Haq directed the Council of Islamic Ideology (CII) to formulate a blueprint for an interest-free economy within 3 years. In 1980 CII published a report that was recognized in the Muslim world as the first comprehensive attempt to eliminate interest from the economy and financial sector of an Islamic state.
In the early 1980s the Ministry of Finance of Pakistan advised the State Bank of Pakistan (SBP) and Pakistan Banking Council (PBC) to implement the CII’s recommendations in the economy of Pakistan (Khan and Bhatti 2008, p. 77-124). However, interest is deeply rooted in the entire economic and financial system of Pakistan, in practice due to lack of an appropriate Islamic framework and infrastructure, banks still operate under interest based. Hence, in 1991 the Federal Shariat Court (FSC) gave the verdict that the existing banking and finance practice and a number of fiscal laws in Pakistan were based on interest.
Nevertheless for their own interests, government and the financial institutions of Pakistan lodged appeals against the FSC judgment at the Supreme Court (SC), which revealed that the polity of Pakistan had no unified commitment to abolish interest from its economic and business life (Khan and Bhatti 2008, p. 126-133). The development of Islamic framework in Pakistan during 1991-2002 In 1991 the government had constituted a Commission for Islamization of Economy (CIE) to promote the economic and financial sector of Pakistan on Islamic lines.
CIE indicated the prevalent banking and financial system of Pakistan was based on interest in the garb of mark-up financing, but it did not take effective measures to solve the problems. In 1997 the CIE invited the International Institute of Islamic Economics (IIIE) of International Islamic University Islamabad, to make suggestions for the adoption of the IBF system in Pakistan, however the suggestion of IIIE was unrealistic and rely on strict regulation.
Besides, due to the incomplete quorum, the SC remained unable for some years to deal with interest petitions. This gave full freedom to the government and financial institutions to continue with their interest-bearing dealings (Khan and Bhatti 2008, p. 135-156). In 1999, after achieving its quorum SC started hearing the appeals, undoubtedly SC judged the existing banking and finance operation in Pakistan were based on interest, and ordered the government to shift current interest based system by 30 June 2001.
The government took some steps to implement the SC orders, including establishing a 12-member Commission for Transformation in the SBP; setting up a task force in the Ministry of Law and Parliamentary Affairs to develop a legal framework for the Islamic economic and financial system in Pakistan; constituted a six-member task force in the Ministry of Finance to devise a plan for the transformation of government finances on Islamic lines.
At the beginning of June 2001, these special working groups held a total of 22 meetings to devise a framework for establishing an Islamic economic and financial system in Pakistan (Khan and Bhatti 2008, p. 158-169). Nevertheless the evolution of Islamic banking system was stopped in the June of 2002. In the early June 2002 the government reshuffled the SC bench and on 6 June 2002 the government submitted to the SC that its prescribed parameters for enforcing an Islamic economy were infeasible, and may cause permanent damage to the economy of Pakistan (Khan and Bhatti 2008, p. 66-168). Current status of Islamic banking in Pakistan during 2003-2011 Recently there are a series of flexible policies regard to the operation of Islamic banking were implemented in Pakistan. SBP (2007) claimed that it has implemented three pronged strategy for promotion of Islamic banking, which are * allow new full-fledged Islamic banks in the private sector, * allow the conventional banks to set up Islamic banking subsidiaries * allow the existing conventional banks to open Stand-alone Islamic banking branches
As can be observed from table 1 and 2, owning to the flexible policies Islamic banking developed rapidly in Pakistan during the past ten years. Specifically, in 2003 only one bank operated as a full-fledged Islamic bank and three conventional banks were operating Islamic banking branches while in 2011 there were 5 full fledge licensed Islamic banks and 12 conventional banks have licenses to operate dedicated Islamic banking branches. The number of Islamic banking branches from 17 boomed to 886.
Furthermore the total assets of the Islamic banking industry were 13 billion Rupees in 2003 which accounted for a market share of 0. 5% of total banking industry assets. In 2011 the total assets increased to 641 billion Rupees which occupied 7. 8% market share. Additionally what should mention is the growth rate of total assets, deposits and financing and invests were keeping more than 30% annual growth rate between 2008 and 2011. Table 1. Industry progress and market share in Pakistan 2003-2007 (Rupees in Billion) Table 2. Industry progress and market share in Pakistan 2008-2011 (Rupees in Billion)
Conclusion In the early years, due to there is not a practical framework to guide the public to Islamize the economy and the system was too rigid and did not offer the flexibility to cater to the ever-changing needs of the dynamic markets hence the development of Islamic banking was slow even against by some group of people. In the recent years, the fast growth of Islamic banking all over the world, the government carried out a series of favorable polices to promote the Islamic products and there is a close relation with the religion hence the market share of Islamic banking growing rapidly in Pakistan.
Overall Pakistan has successfully established Islamic banking system, and it can be predicted the Islamic banking will further flourishing in Pakistan. Recommendation As the Pakistan has more than 95% Muslim, the Islamic banking should continuously promote the features of its products which are interest free, risk sharing and followed Shariah requirements to attract Muslim customers. Moreover, the Islamic banking can learn from the advantages of conventional banks such as online banking.
Ahmad, A., Rehman, K. and Saif, M. (2010) Islamic Banking Experience of Pakistan: Comparison between Islamic and Conventional Banks. International Journal of Business and Management, Vol. 5, No. 2, pp.138 http://ccsenet.org/journal/index.php/ijbm/article/view/4303 [accessed 02/052012]
Kettell, B. (2011) Introduction to Islamic banking and finance. Chichester: John Wiley and Sons Ltd.
Khan, F., Khan, B., Awan, Z., Hassnain, T. and Javed, A. (2012) Growth of Islamic Banking in Pakistan: A Comparative Study. Research Journal of Finance and Accounting, Vol. 3, No. 2, pp.25 http://www.iiste.org/journals/index.php/RJFA/article/view/1308 [accessed 02/05/2012]
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State Bank of Pakistan (2007) Pakistan’s Islamic Banking Sector Review 2003
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http://www.sbp.org.pk/ibd/faqs.asp [accessed 02/05/2012].