Bulletin Oct Dec 2009

7/29/2019 Bulletin Oct Dec 2009

http://slidepdf.com/reader/full/bulletin-oct-dec-2009 1/23

Speech o f Execu t ive Direct o r (BPRG) P-1

Industry Progress and M arket Share P-4

Even t s & Develo pm ent s at IBD P-9

Islam ic Banking New s P-11

Bank in Focus P-14

Frequen t ly Asked Quest ions (Par t V) P-15

Islam ic Banking Branch Net w ork P-18

Cont act Det ai ls o f IBD Of f icials P-21

V ol . IV No . 4 Dece m b e r 2 0 0 9 Q u ar t e r l M o h a r ram 1 4 31



Inside th is issue:

I I I S S S LLLAAAM M M I I I C C C B B B AAAN N N K K K I I I N N N G G G D D D E E E P P P AAAR R R T T T M M M E E E N N N T T T

To ma ke Islamic Ban king the ban king of first choice

for th e pr oviders a nd users of fina ncial services

To Pr omote an d Regulat e Islamic Ban king Indu str y

in line with Best Int ern at iona l Pr actices, ensur ing

Sha ria h Complian ce And Transpa rency

Saleem Ullah sa [email protected]

Nighat Tanveer nigha t.ta [email protected]

M. Mazhar Kha n ma zha r.kh an @sbp.org.pk

Sarfraz Ahmed ah med .sar [email protected]

Umar Siddique um ar [email protected]

For soft copy and p revious issues please visit:

ht tp://www.sbp.org.pk/ibd/Bulletin /Bulletin .asp



October-December 2009

1

S p e e c h o f E x e c u t i v e D i r e c t o r ( B P R G)

SBP Contr ibution in Promoting Islamic Banking as Para llel Banking

I welcome you al l to this awareness program on Is lamic banking at the State Bank ofPakistan.

In th e last few years, Islamic f inance has taken except ion al str ides. The grow th o f Islamicf inance has been in double d ig i ts g loba ll y in the last decade. The es t imated s ize o f t heindustry is around US$ 700 bi l l ion that is expected to reach US$ 1.6 t r i l l ion by 2012.1 InPakistan, asset base of the Is lamic Banking Inst i tut ions ( IBIs) has grown by around 60percent per annum since 2005; resu l t ing in steady growt h in t he share o f Is lamic bank ingthat reached at about 5.5 percent in deposi ts, and 5.3 percent in assets in September2009. Current ly, IBIs comprise 6 ful l - f ledged Is lamic banks and 13 convent ional banks(hav ing ded i ca ted IB Bs) w i t h a ne two rk o f m ore t han 550 b ranches. 2 This iscomm endable ach ievement and is, in fact , bet ter t han som e of the lead ing count r ies in

Islamic f inance—t hat start ed Is lam ic f inance many years ear l ier th an Pakistan.

So far , our e f for ts for the pro mo t ion o f Islamic bank ing w ere large ly focused on prov id ingth e requ isi te f inan cial infrastru cture in shape o f Shariah com pl iance, legal, regulatory andsuperv isory f ram ewo rks. And w e succeeded in estab l i sh ing Islamic f inance not o n ly as aviable al ternate m eans of f inance but also as m eans to at t r act fai th sensi t ive custom ers.

Looking back, the Is lamic Banking Department was establ ished at SBP in 2003 to leadIslamic banking ef for ts in Pakistan. Here, I l ike to descr ibe som e of t he achievemen ts ofSBP:

1. A robust three- t ie red Shar iah compl iance mechanism has been deve loped wh ich

encompasses internat ional experiences and is working wel l for the last few years.The f i rs t t ie r i s the SBP Shar i ’ah bo ard th at acts a t th e to p leve l and prov idesguidance to al l s takeholders. The second t ier is th e Shari ’ah Advisers in all banksof fer ing Islamic f inance to he lp these inst i tu t ions operate st r i c t l y w i th in Shar i ’ahcompl iance mechanism. The thi rd t ier is the Shari ’ah audi t that ensures that IBsare w ork ing w i th in speci f ied boundar ies.

2 . Essent ia ls and M odel Agreements o f Islamic M odes o f Financing w ere i ssued. TheFi t and Proper Cri ter ia for Shariah Advisers of Is lamic Banking inst i tut ions wasprescr ibed that ensures object iv i ty in select ion of Shariah Advisers and redu cesconf l ic t o f in terest .

3 . SBP p layed an ins t rument a l ro le in br ing ing changes in Sa les Tax Act fo r M urabahaf inancing arrangemen t. And later o n, major tax ini t iat ives in Finance Bi l l 2007 wer etaken th at ensured that taxat ion o f Shar iah com pl iant Is lamic bank ing w ould bet reated a t par w i th convent iona l bank ing.

4 . To b r i ng standard i za t i on and un i f o rm i t y , Ri sk M anagem en t Gu ide l ines f o r I sl am icBanking Inst i tut ions, Instruct ions & Guidel ines for Shariah Compl iance, and

1The Next Chapt er in Islam ic Finance - Higher Rew ards but High er Risks , Ol iver W yman, Apr i l 2009.

2 Inc ludes stand -alone Islamic banks, Islamic bank ing bran ches of convent ion al banks and Is lamic windo woperat ions in convent ional branches of convent ional banks.




2

Essent ials of Dim inishing M usharaka w ere issued . Sho rt t erm SLR eligible Shar iahcompl iant government inst rum ent ( i .e ., GoP I jara Sukuk) was developed andissued. Guidel ines for Islamic M icrof inance Businesses and Islamic Agricul tur alFinance were issued.

5. SBP is coord inat ing and co l laborat ing close ly w i th In ternat iona l Islamic ins t i tu t ionsl ike Islamic Financial Services Board (IFSB), Accounting and Auditing Organizationfor Islamic Financial Insti tutions (AAOIFI), Islamic International Rating Agency(I IRA), Int ernat ional Islamic Financial M arket ( I IFM ), Liquidi t y M anagement Cent re(LM C), and Is lamic Developm ent Bank ( IDB) in di f feren t areas so th at w e are on t hesame wavelength in di f ferent aspects of regulat ions, standards, guidel ines, andShariah com pl iance. The pr oact ive ro le played by SBP in p rom ot ing Islamic bankingresu l ted in SBP be ing ranked second globa ll y for i t s ef for t s in year 2008.3

6. M anual for conduct ing Shar iah Com pl iance Inspect ion was deve loped andsubsequen t ly inspect ions are being done.

However , now the t ime has come to move forward and bu i ld on th is f inanc ia linfrastru cture and str ive to achieve the real pot ent ial of Islamic f inance. Accord ingly,Stat e Bank of Pakistan has chalked out a det ai led strat egy for Is lamic banking industry in2008 t hat aim s to in crease th e size of t he Islamic banking industry to 12.0 percent o f theto t a l bank ing indus t ry by 2012. The s t ra tegy has the fo l low ing s teps:

1 . Expand and extend t he out r each o f Islamic bank ing products in ex ist ing Consumerand Corporate sectors as wel l as tap M icro f inance, Agr icu lture , and SM E sec tors toful f i l l f inancial needs of t hese sectors thro ugh Islamic banking.

2 . Fur th er st rengthen ing Shar iah Com pl iance f ramew ork and Regula tory f ram ewo rkin l ine wi th int ernat ion al best pract ices.

3 . He lp develop Hum an Resource f o r t he indust r y .

4 . Be pa r t o f t he i n te rna t iona l Isl am ic banki ng com m un i t y t o app rop r i ate l y posi t i onPakistan to at t ract FDI.

5 . Create aw areness abou t I sl am ic banki ng no t on l y i n the I sl am ic bank ing com m un i t ybut also in th e pub l ic at large.

This seminar is in l ine w i th ou r strategic goal of creat ing aw areness am ongst th e externalstakeholders about Is lamic banking, i ts underpinnings, commercial v iabi l i ty and Shariahcompl iance. I t i s impor tant to acknowledge the ro le o f bus iness and academiccomm uni t ies in t he w hole process. Awareness and conf idence o f t hese comm uni t ies w i l l

fu r th er boost growt h and c red ib i li t y o f Islamic f inance. The task o f keep ing produ cts andoffer ings Shariah compl iant as wel l as commercial ly v iable is not easy. I t requirespro fessional skil ls and u tm ost care at th e banks’ level and also at th e custo m er level .

The banks have got Shariah Advisers w ho steer banks’ oper at ions careful ly and keep aneye on adheren ce to t he Shariah injunct ion s. The capaci ty of banks’ staf f is cont inu ouslybe ing upgraded. However , cus tomers , both cur rent and po tent ia l , need to be educated. Itis important, as unawareness on customers’ f ront can resul t in great Shariah compl iance

3The four th annu al Is lamic Finance News Pol l 2008.




3

risk. For instant , th e M urabah a—cost plus f inancing—n eeds utm ost care in i tssequenc ing, and m ishandl ing on par t o f custom er or bank execut ive w i l l render the w holetransact ion as Shariah non-compl iant . However, i f the customer has the basic knowledgeof th e t ransact ion, th e Shariah comp l iance r isk w i l l be redu ced substant ial ly .

Among others, there are misconcept ions that Is lamic banking is al l about chari ty or fai th.This is no t correct . Islamic banks are comm ercial ent i t ies and req uire earning comp et i t iveret urn s for th ei r deposi tors and investors. M oreo ver, Shariah is not against earningprof i ts . Actual ly , Shariah prohibi ts earning interest and i t advocates t rade—implying thatal l com m ercial t ran sact ions must be backed by som e real econom ic act iv i ty . Mer edocum ent b ased t ransact ions are not a l low ed.

There are other misconcept ions as wel l . However, the range of products and f inancialsolut ions avai lable in Shariah is vast and is expanding cont inuou sly. The range of p rod uctsencompasses almost the ent i re range of Is lamic modes of f inancing and businesssegments . The segments covered by the indus t ry include Corporate / Comm erc ia l ,Agricul ture, Consumer , Com m odi t y F inancing, SM E, Treasury & Financial Inst i tu t ion s.These are served t hro ugh var ious Shariah com pl iant m odes such as M urabah a,M udarb ah, M usharaka, I jarah, Diminishing M usharaka, Salam, Ist isna, Wakala and Is lamicExport Ref inance.

Today , we a re f o r t una te t ha t w e a re in t he com pany o f f ew o f t he m ost respected andknow ledgeable people in th e Islamic f inance indus t ry . They have d iverse backgroundsw ith vast experience on Shariah, prod uct develop m ent, legal and regulat ory issues. I hopetha t you w i ll get m axim um bene f it f r om th i s oppor tun i t y.

SBP envisages that t hro ugh emp loying th e out l ined strat egy, th e Islamic f inancial serv icesindu stry in general and Islamic Banking in part icular w ould successful ly run and f lou r ish inpara l le l w i th th e convent iona l bank ing.

In the end, I w i l l thank a l l the speakers and par t i c ipants for com ing here and hope theseminar i s an oppor tun i ty for par t i c ipants to learn basics o f Islamic f inance and c learm isconcept ions, apprehens ions , and concerns about Islamic bank ing in par t i cu lar andIslamic f inance in genera l besides prov id ing oppo r tun i ty to in terac t w i th each o th er .

(Welcom e Address by M r . Inayat Hussa in , ED (BP&RG), Sta te Bank o f Pak istan a t th e openin g

ce rem ony o f “ Aw areness Program o n Islamic Banking” he ld on December 9 , 2009 )




4

Industry Progress and M ark et Share

The Islamic bank ing indust ry m ain ta ined the grow th m om entum dur ing the quar ter ended

Decem ber , 2009 thus im prov ing i t s m arke t share t o abou t 6 pe rcen t f rom 5 .5 pe rcen t as a t

the beginning of the quarter. The total assets of Is lamic banking in Pakistan grew by 33

percent fo l low ing 34 percent growt h last year , w hich i s comm endable , g iven th e increasing

base over the years. The grow th i s l ike ly to cont inue a t an even h igher pace in th e near

fut ure du e largely to: (a) increasing acceptabi l i ty of Is lam ic banking as a v iable and pr uden t

m odel par t i cu lar l y a f ter th e recent c r i ses in g loba l f inancia l markets, and (b) the hu ge

unt apped m arket par t i cu lar l y the agr icu lture and SM Es sec tors which are large ly out o f the

bank ing system , both convent iona l and Islamic . The increased SBP focus on impro v ing

Islamic bank ing l i te racy w i l l a lso t ransla te in to fur th er grow th and expansion o f the sector .

The cont inuat ion o f the growth momentum wi l l however be cont ingent on capac i ty

bui lding in the sector. The dearth of properly t rained and qual i f ied Is lamic bankers has

been on e o f the m ost ser ious cha l lenges faced by t he indus t ry . In order t o successfu l l y

conver t th is cha llenge in to an oppor tun i ty , SBP is co l laborat ing w i th nat iona l and

inter nat ion al inst i tut ions to f i l l the ski l l gaps in the indu stry.

The cont inuat ion o f growth momentum wi l l a lso be cont ingent on Is lamic bank ing

inst i tut ions’ ( IBIs) capaci ty and w i l l ingness to tap n ew avenues l ike agr icul ture, SM Es etc.

w i th innovat ive produ cts. Th is w ould no t on ly d iversi fy the po r t fo l io m ix o f IBIs, but w ould

also cont r ibut e signi f icant ly in im pro ving the f inancial inclusion.

Assets and Financing

Total Assets of Islamic Banking in Pakistan grew by 10 p ercent t o Rs 366 bi l l ion du r ing th e

quar ter end ed December 2009. The net f inanc ing and investm ent po r t fo l io a lso grew by 13

percent dur ing the quar ter to Rs 225 b i l l i on . In terms of market share, to ta l assets ,

f inanc ing & investm ent , and depos i ts reached to 5 .6 percent , 4 .5 percent and 5 .9 percent

Table 1: Industry Progress and market share

Rupees in bi l l ion & industry share in percent

Dec. 09*P

Dec.08 Dec.07 Dec.06 Dec.05 Dec.04 Dec.03

Total Assets 366 276 206 119 71 44 13

Share in industry 5.6 4 .9 4 2 .8 2 1 .5 0.5

Deposits 283 202 147 84 50 30 8

Share in industry 5.9 4 .8 3.8 2 .6 1.8 1 .3 0.4

Net F inancing & Investm ent 226 186 138 73 48 30 10

Share in industry 4.5 4 .4 3.5 2 .3 1.7 1 .3 0.5

Total Islamic BankingInst i tut ions

19 18 18 16 11 11 4

Total No. of Branches* * 649 515 289 150 70 48 17

* Source: Annual Accounts except for Dec 09, data f or w hich is based on Unaudit ed Quarterly Accounts

* * numb er includes sub-branches P: Provisional Data



respec t ive ly as at en d Dece

Af te r a dec l ine o f 4 .7 perce

p r ec ed ing qua r t e r , t he

ac t iv i t ies rev ived w i th

i n cr e ase o f 14 .8 p er ce

O c t obe r - D ec em ber 2009 (

2) . The ne t inves tment

shown pos i t i ve chan

s im u l t aneous g r ow t h

f inanc ing and ne t inves tm

t he qua r t e r i s enc ou r a

r e f l ec t s t he im p r ov ing

sen t im en t s b esid es

f inanc ing o f f - t ake .

The lack of d ivers i f icaf inanc ing por t f o l io , h

cont inued as re f lec ted b

t han 80 pe r c en t c onc en t r

t h r ee f i nanc ing m odes ,

M ur abaha , D im

M usharakah and I ja rah ( se

1) . The f inanc ing m ix , h

w i tnessed some changes

the quar te r . As oppose

dec l ine o f 13 percent Qo

M ur abaha po r t f o l i o i

p reced ing quar te r , M

f inanc ing inc reased by 33

dur ing Oct -Dec 2009 wh i l

w a s a n a lm o st m a t c h in g d e

4 The sum f igures , shares , ano f f .

Table 2: Assets classifications

Cash and ba lances w i th t reasury ban

Ba lances w i th o t her banksDue f rom f inanc ia l inst i tu t ions

N e t I n v es tm e n ts

Net F inancing

Opera t ing f ixed assets

Other asse ts

Total Assets

P: Provisional Da ta

October-D

m ber 200 9. (see Table 1 & 2). 4

n t Q oQ in

f inanc ing

a Q oQ

t d u r i n g

se e Table

has also

e. The

in ne t

n t d u r i n g

g ing and

business

seasonal

t i on i no w e v e r ,

y m o r e

a t i on i n

tha t is ,

in ish ing

e Figure

o w e v e r ,

du r i ng

d t o a

in t h e

n t h e

u r abaha

pe r c en t

le t here

c l ine ( in percentage te rm s) in Ija rah f inanc ing (see

perc en tage i n t ab les m ay no t m a tc h b ec ause o f separa t

R i i ll i

Sep - 09 Dec - 09P

Qo Q

l i s 26 30

30 2937 46

65 72

134 15 3

12 13

20 22

323 366

Table 3: Financing M ix

Sep - 09 Dec - 09

M u rab ah a 50.6 67.1

Ijarah 29.8 22.6

M u sh ar akah 3.6 2. 8

M u d arab a 0.5 0. 6

Dim in ish in g M u sh ar akah 3 8 48.2

Salam 1.7 1. 9

Ist isn a’a 6 .1 9. 8

Ot h er s 7 .9 5. 7

Tot al 138.7 158.6

A m o u n t o f N o n p e r fo r m i n gFin an cin g 8.9 10.0

Provis ion against Non

Per fo rm in g Fin an cin g 4.9 5 .2

Net Non per fo rm ing Fin . 4 4.8

Net Financing 133.7 153.5

P: Provis ional Dat a

ecember 2009

5

able 3) . This

e r o u n d i n g

upees in b i l l ion

% Change

15.1

-0.222.8

11.6

14.8

12.9

9 .8

9. 8

Rupees in bi l l ion

P% Chan ge

32.7

-24.2

-22.8

17.0

26.9

9 .3

59.8

-27.2

14.4

12.4

5 .6

20.8

22.5




6

is an oppos i te t rend compared to the prev ious quar ter , where there was a dec l ine in

M urabah a and a correspond ing r ise in Ijarah.

The r ising t rend in non-per form ing f inanc ing (NPF) seems to have moderated dur ing the

quar ter . The NPF increased by 12.4 percent dur ing th e quar t er as com pared to increase o f

23.3 percent in preceding quarter (see Table 3) . The NPF sto od at Rs. 10 bi l l ion as of end

Decemb er 2009. The mod erat ion in NPF t rend m ight a lso have cont r ibuted to p ickup in the

f inancing act iv i t ies. Neverth eless, th e slow dow n in r ising t rend of NPF w as expected w i th

the recovery in econom ic ac t i vi ty .

Sector -w ise f inanc ing m ix ( for quar ter ended December 2009) shows that the major

por t ion o f f inanc ing i s ex tended to the corporate sec tor fo l lowed by consumer sec tor

(Table 4) . W hi le , the num ber o f bor ro w ers i s the h ighest in consum er sec tor fo l lowed by

SM Es.

Sou rces of Fun ds

Total l iabi l i t ies of Islamic banking inst i t ut ions increased by 14.5 percent d ur ing t he quart erw hi le the net assets /equ i ty increased by around 4.5 percent (see Table 5) . Encourag ing

growth in deposi ts cont inued as deposi ts increased by 15.5 percent QoQ, which is

substant ial ly higher th an preceding quart er grow th of 2.8 per cent. The depo sit base of IBIs

stood at Rs 282.6 bi l l ion as at end-December 2009 compared to Rs 244.8 bi l l ion in the

prev ious quar ter -end.

Table 4: Sector-wise breaku p of f inancingAm ount (Rupees in b i ll ions) N um ber o f bo rrow ers

Sep - 09 Dec - 0 9P

% Share

%

Change Sep - 09 Dec - 09P

% Sh ar e % Ch an ge

Co rpo rat e Sect o r 84.0 103.5 65.2 23.2 2,014 2,321 7.1 15.2SM Es 11.8 12.3 7 .7 3.8 2,497 2,529 7.8 1.3Agr icu lt u re 0.1 0.1 0.03 (22 .4) 128 129 0.4 0.8Co nsum er Fin an ce 31.6 31.7 20.0 0.3 26,723 25,244 77.4 (5.5 )Co m m o dit y Financing 6.9 7.6 4 .8 8.7 14 13 0.04 (7.1)St aff Lo an s 2.8 3.0 1 .9 5.8 2,223 2,349 7.2 5.6Ot hers 1.4 0.6 0 .4 (58 .2) 19 17 0.05 (10.5)

Total 138.6 158.6 100.0 14.4 33,618.0 32,602.0 100.0 (3.0)

Table 5: Deposits and ot her l iabi l i t ies (selected i tem s)

Rupees in bil l ion

Sep - 09 Dec - 09P

% Chan ge

Bills payab le 4.3 3.1 -27.0

Dep osits and o t her accou nt s 244.8 282.6 15.5

Ot her l iab ili t ies 20 19.5 -2.6

Tot al l iab il i t ies 283.2 324.4 14.5

Net assets 40.1 41.9 4.5

Equity (selected item s)

Paid-up cap it al/ Head o f f ice cap it al account 36.9 37.7 2.1Unapprop r iat ed / Un rem it t ed pro f it 1.3 1.4 7.6

Equ it y 40.1 41.9 4.5

P: Provisional Dat a




7

The Fixed and saving deposi ts

c onst i t u t e t he bu l k o f depos it s w i t h

36.7 percent and 32 .2 percent

sha r e , r espec t i ve l y ( see Table 6).

On the convent iona l s ide , t he

comparab le shares (o f f i xed and

sav ing) in depos i t s s tood a t 32 .9 ,

and 34 .5 percent , respec t ive ly . Th is

sugges ts t ha t a l t hough the I s lamic

bank ing depos i to rs have re la t ive ly

grea ter p re fe rence fo r f i xed

depos i t s , however t he overa l l

p re fe rences o f t he depos i to rs a re

more or less the same in I s lamic

and conv en t i ona l bank ing . I n t e r m s

of g row th ra t es, t he sav ing depos i t shave main ta ined re la t ive ly h igher

g r ow t h c om pa r ed t o f i x ed deposi t s:

12 . 2 pe r cen t Q oQ r i s e in t h e f o r m e r

w h i l e t he l a t e r g r ew by 10 . 6

pe r c en t Q oQ . O n t he o t he r hand ,

t he g r ow t h i n c u r r en t ac c oun t s

r e m a i n ed h e a l t h y , a t 2 2 .6 p e r ce n t .

Gro w th in fo re ign cu rre ncy

acco un t s w a s at a m u ch slo w er

pace a t 3 .5 percent QoQ (prev ious

qua r t e r g r ow t h w as 28 pe r c en t

Q oQ ) , w h i l e t he g r ow t h i n l oc a l

cur rency depos i t s was s t rong a t

16 . 4 pe r c en t Q oQ c om pa r ed t o a

m er e 1 . 4 pe r c en t Q o Q last q ua r t e r .

Nonethe less , t he I s lamic bank ing

depos i t s g row th has cons is ten t ly

been h ighe r t han c onv en t i ona l

banks ’ depos i t g row th fo r t he las tfew quar t e rs (see Figure 2).

Earning and Prof i t abi l i ty

Both income and expense accounts have shown subs tan t ia l g row th dur ing Oct -Dec 2009

w i t h i nc om e i nc r easing a t a m a r g ina l ly h i ghe r r a t e . The ne t m a r k up i nc om e has inc r eased

by 37 .6 percent dur ing the quar te r ( see Table 7).

Table 6: Deposi ts and Other Account s ( se lec ted i tems)Rupees in bi l l ion

Sep - 09 Dec - 09P

% Chan ge

A) Cust om ers 231.2 263.5 14.0Fixed d ep o sit s 9 3 .8 103.7 10.6Savin gs d ep o sit s 8 1 .1 90.9 12.2Cu r ren t acco u n t s 5 4.3 66.6 22.6O t h ers 2 .0 2 .0 0 .4B) Financial inst it ut ions 13.6 19.2 40.9

FI-Rem u n erat ive d ep o sit s 1 3 .5 18.4 36.4Par t iculars o f deposi t s 244.7 282.6 15.5

In Lo cal Cu r ren cy 2 28.5 266.1 16.4In Fo r eign cu r r en cy 1 6.3 16.6 3 .5

P: Provisional Da ta

Table 7: Income and expenses (selected i tem s)

Rupees in bi l l ion

Sep - 09 Dec - 09P

% Chan ge*

M a r k -u p /R e tu r n

Earned 23 .0 31 .6 3 7.2

M a r k -u p /R e tu r n

Expenses 12 .6 17 .2 3 6.9

Net mark up

incom e 10.4 14.3 37.6

Fees Com m ission

& Brokerage 1.1 1 .4 2 8.2

O t h er In co m e 0.3 0 .6 10 0.3

Tot al Incom e 10.6 15.0 41.2

Admin is t ra t ive 8 .8 12 .6 4 3.3

To ta l N o n - M a r k

u p / Re tu r n 8 .8 12 .7 4 4.1Profi t / ( loss) after

i1.5 1.8 18.2

P: Provisional

-4 .0%

-2.0%

0 . 0 %

2 . 0 %

4 . 0 %

6 . 0 %

8 . 0 %

1 0 . 0 %

1 2 . 0 %

1 4 . 0 %

1 6 . 0 %

1 8 . 0 %

M

a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

Figure 2: Dep osits of Islamic and Convent ionalBanking Indu str y

I sl am i c Ban ki n g Co n ve n t i on al Ban k s




8

In absolute terms, the ROA, ROE and

NM M have decl ined marg inal l y

compared to the prev ious quar ter .

The s l ight increase in the

in termedia t ion cos t m ight have

suppressed pro f i tab i l i t y and re turns

(see Table 8 ) . Nonetheless, the

ind icators o f re turns and pro f i tab i l i t y

remained stable.

Expansion and Ou tr each

The branch network o f Is lamic

Ba n ki n g In d u st r y re ac he d t o 6 4 9 a t

end-December 2009, f rom 551 at t he end o f pr eced ing quar ter ; th e cumulat i ve increase in

the branch network dur ing the 2009 was 98. The geographical presence of IBIs improved

sl igh t ly t o 81 c it i es across t he coun t r y f rom 78 as a t t he beg inn ing o f t he qua r te r .

Encouragingly, the pace of branch network expansion is very c lose to that envisaged for

2009 in the strategic plan for Is lamic banking industry in Pakistan at 655 and this gives

opt im ism about ach ieving the overal l ta rget set out in the st ra teg ic p lan for 2012.

W hi le the grow th in IBIs branch netw ork i s encouraging, how ever , 45 percent o f Islamic

Banking branches are in tw o biggest c i t ies, Lahore and Karachi and need s to be diversi f ied

to enable the bank ing consumers in smal ler tow ns and c i t ies to access Islamic bank ing

faci l i t ies.

The province wise detai ls , reveals that Punjab has major share of 45 percent (290

branches) fo l lowed by Sindh 28 percent (218 branches) . Whi le the bank w ise pos it ion o fbranches re f lects that M eezan bank w i th 201 and Bank A l falah w i th 60 branches are a t t he

top i n fu l l f ledged Islamic banks and Islamic banking branches of convent ional banks,

respect ively.

Table 8: Var ious Per formance Indicators

Sep - 09 Dec - 09P

Earnings

ROA Aft er Tax 0.70% 0.57%ROE Af t er Tax 5.40% 4.59%Net Markup M arg in( N M M )

5.70% 5.57%

Int erm ed iat ion Cost 4 .90% 5.04%Assets Qual i t y

NPFs t o Finan cing 6.50% 6.31%Net NPFs t o Net Fin an cing 3.00% 3.15%

Earnings and Profi tabi l i t yNet M arkup Income toGross Incom e

79.00% 79.38%

Non-markup Income toGross Incom e

21.00% 20.62%

Operat ing expense toGross Incom e

67.20% 70.33%

Personnel Expense toOperat ing Expense

29.10% 29.48%




9

Policy Initiatives

Events & Developm ents at IBD

Promotional Init iativesAwareness p rogram on Islamic banking

The IBD as a par t o f i t s e f f o r t s t o im prove Isl am ic banki ng li t e racy (understand ing)organized an aw areness program at Learning Resour ce Cent er (LRC) SBP on December 9,

2009. The program w as a t tended by a la rge num ber o f bankers , bus iness comm uni ty ,

w om en ent repreneurs , academ ia, indus t r ia l assoc iat ions , t raders e tc . The Execut ive

Director (BPRG) SBP M r. Inayat Hu ssain inaugurated th e program w i th h is key not e

speech/ad dress. He highl ighted t he ef f ort s being m ade by SBP for f aci li tat ing develop m ent

of a soun d and stable Islamic banking indu stry. He also u nder l ined th e key issues faced by

the sector and possible strategies to address the same. The other key speakers included

M uf t i M uneeb U r Rehm an , M u f t i I r shad A hm ad Ij az, Om ar M usta fa A nsar i and M uham m ad

Faisal Shaikh .

The program a lso em phasized t he need fo r greater pub l i c awareness in m ak ing Islamicbanking a success. The speakers discussed th e Is lamic Banking pr odu cts being of fered by

IBIs, the Shariah com pl iance levels in t he indu stry and also m ade cr i t ical assessment th at

whether the current IB paradigm is purely Is lamic. The program concluded on a posi t ive

not e that desp i te the need for imp rovement in Shar iah comp l iance leve ls in the indus t ry ;

the cur rent p arad igm is a good so l id source for deve lopment of a sound IB Indust ry .

Adopt ion of Shar iah Standards Issued by Account ing and Audit ing Organizat ion for

Islam ic Financial Instit ut ions (AAOIFI)5

Standardizat ion and harmonizat ion of Shariah pract ices wi thin the Is lamic BankingInst i tut ions ( IBIs) in Pakistan is a key object ive of Islamic Banking Departm ent . In t hisregard ‘Essent ia l o f Islamic mo des o f f inanc ing’ and re lated M odel agreements6 in 2005 asm in imum requ i rement s for Shar iah com pl iant produ cts. These genera l gu ide lines werela ter on m ade compulsory in 2008 7 w i th th e adv ice that “ For th e Islamic modes for w hichessent ials have no t been prescr ibed; AAOIFI Shariah stand ards m ay be u sed as guidel inesby IBIs in consu l tat ion w i th the i r SA” . Dur ing the quar ter four AAOIFI Shar iah Standardswere adopted. These include AAOIFI ’s Shariah Standards No.3 (Defaul t in Payment by aDebtor ) , No.8 (M urabaha to t he Purchase Orderer ) , No.9 (I jarah & I ja rah M untah iaBi t tam leek) and No .13 (M udaraba). These stand ards wi l l be ef fect ive f rom July 01, 2010.

5 The Account ing and Audit ing Organizat ion for Islamic Financia l Inst itut ions (AAOIFI) is an internat ional autonomous body

that prepares account ing, audit ing, governance, eth ics, and Shariah standards for Islamic f inancia l inst itut ions. AAOIFI was

established on February 26, 1990 in Alg iers and registered on M arch 27, 1991 in Bahrain. As an independent int ernat ional

organizat ion, AAOIFI is supported by inst itut ional mem bers (approx 200 memb ers f rom 45 countr ies, so far) including centra l

banks, Islamic f inancia l inst itut ions, and other part icipants f rom the internat ional Islamic banking and f inance industry,

wo rldw ide. (AAOIFI website)

6ht tp : / / w ww .sbp.org.pk/press/Essent ia ls/ Essent ia ls-M od-Agreement .htm

7h t t p : / /www.sbp .o r g .pk / i bd /2008 /C2.h tmht t p : / /www.sbp .o r g .pk / i bd /2008 /Annex- c2- 1 .pd f




10

Other developm entsNew Director of Islamic Banking Departm ent

These AAOIFIs’ Shariah Standar ds are adopt ed af ter a th oro ugh review pr ocess w hichincluded consultation with IBIs, Shariah Adviser Forum (SAF), SBP Shariah Board, anddi f ferent SBP departments. In the next phase, Shariah Standards on Guarantees,Conversion of a Conventional Bank to an Islamic Bank, Salam and Paral lel Salam, Istisna’aand Paral le l Is t isna’a, Sharika (M usharaka) and M oder n Comp anies, and Investm ent Sukuk

w i l l be adopted.Commodity Operat ions Financing (COF) of the Government and their Agencies

Depar tments

The Governm ent t hrough i ts a f f il ia ted agenc ies car r ies out f inancing to fac il i ta te

commodi ty operat ions. The SBP plays an important role in the whole process. The banks

are adv ised to prov ide f inance for comm odi ty o perat ions . Islamic bank ing inst i tu t ions are

now being encouraged t o take part in COF, as w el l .

Accordingly, IBD & SM EFD are ini t iat ing joint ef fo rts to h arm onize the Shariah com pl iance

structures and procedures for COF. The concerned Publ ic Sector Procurement

Agencies/Departments l ike PASSCO, TCP, Food Department of Punjab and Sind are alsocol laborat ing. I t is hoped that these ef forts wi l l resul t in enhancing the share of Is lamic

ban king in COF.

M r. Saleem Ul lah has recent ly jo ined t he Islamic Banking Departm ent as i ts Director. He

has more than 15 years of central banking experience, pr imari ly in the areas of banking

supervis ion and d evelopm ent f in ance. Start ing his career in SBP as Bank examin er in

1995 he served a t d i f fe rent po si t ions in bank ing exam inat ion and superv ision depar t ment s.

He served as Head M icrof inance Div ision (M FD) SBP from 2001 t o 2005 . As Head M FD, hep ioneered the deve lopment o f regu la tory and superv isory f ramework for M ic ro f inance

Banks in Pakistan, which is considered as one o f t he m ost pr ogressive in the w orld. He also

served as Head Strat egic M anagemen t, SBP for about s ix mo nt hs before assum ing the

charge of Director Agricul ture Credi t Departm ent in 2006 . Basical ly an M BA from Bahaudin

Zakariya Universi ty M ul tan , he has th e rare dist inct io n of stud ying at Harvard Universi ty.

He com pleted h is M asters in Publ ic Pol icy f rom Kennedy School of Gover nm ent , Harvard

Universi ty in June 2007 as a mid career student. Before his appointment as Director IBD,

he w as serving as Director Developm ent Finance Supp ort Depart m ent , SBP-BSC Karachi ,

w here h e mo bi l ized SBP-BSC f ield net w ork t o pr opagate SBP ini t iat ives for develop m ent o f

an “ Inclusive F inancial System” in the country. He has plans to make “Is lamic Banking” a

bet ter cho ice for t he users of banking services in the coun tr y.




11

Islam ic Banking News

SBP Chief lauds Islam ic banks pe r forma nce

h t tp : / /www.dawn .com /wps /wcm /connec t /dawn-con ten t - l i b ra ry /dawn /news /bus i ness /09ww w.dawn.com/ wps / wcm/ connect / dawn- con ten t -l ib r a r y/ dawn/ news/bus iness/09sbp- ch ie f -l auds-

islamic-banks-performance--szh-04

Stat e Bank of Pakistan Gover nor Sal im Raza has said that t he pe rform ance of Islam ic banks has beenimpressive compared to thei r convent ion al count erpar ts dur ing the last tw o years.

Speaking at a opening ceremony o f 10 m ore branches of Dubai Islamic Bank here on W ednesday,the SBP governor said due t o act ive suppo r t of the cent ra l bank t he to ta l assets of Islamic bankingindust ry had grow n to Rs323 b i ll ion up t o Septem ber 2009 w hi le thei r deposi ts reached to Rs245bi l l ion. M r. Raza said th at in term s of m arket share th e tot al assets and dep osi ts of Islamic banksaccount for 5.3 per cent and 5.5 per cent of t he convent ional banking indust ry, respect ive ly . He saidcumu lat ive grow th rate o f Islamic banking indust ry had rem ained above 55 per cent s ince incept iondespi te a heal thy growt h in convent ional banks. The growth rate had slowed d ow n dur ing 2008 and2009 due t o g l oba l economic down t u r n , however , when compar ed w i t h t he i r conven t i ona lcounterpar ts i t w as imp ressive by a l l coun ts, he remarked.

The SBP governor said that last year the central bank had unvei led i ts Strategic Plan for Islamicbanking that broadly out l ined the future d i rect ion of Is lamic banking unt i l 2012. ‘Our target i s toincrease the share of Islamic banking to 12 per cent of to t a l assets of the banking sector , ’ he add ed.

He pointed ou t that branch netw ork of s ix fu l l -f ledged Islamic banks and 13 convent ional banks w i thdedicated Islamic banking branches increased to 560 branches. Raza said that the central bank wasdeterm ined to ensure a level -p lay ing f ie ld for t he Islamic banking indust ry and i t had put in p lace arobust regulatory f ram ewo rk w i th a st rong focus on Shar iah com pl iance and comp et i t i veness.

He said State Bank played a key role in issuance of I jara Sukuk, which has paved the way foref fect ive liqu id i ty m anagement o f Islamic banks. ‘We h ave also ensured a tax neut ra l regime forIslamic banking t ransact ions through amendments in tax laws, ’ he said. He said that the SBP hadint roduced a comprehensive Shar iah compl iance f ramework which inc ludes inspect ion of Is lamicbanks coupled wi th jo int audi t o f prof i t d is t r ibut ion to deposi tors by the external audi tors and

Shar iah Adviser of th e bank. Each bank is also requ ired to pu bl ish report of th eir Shar iah Adv iser onIslamic banking operat ions in annual accounts, he added.

Best Islamic Ban k in th e UK

h t t p : / /www.eyeo fduba i . com/v1 /news/newsde ta i l - 38313 .h tm

Bank of London and The M iddle East p lc (BLM E) , the London based w holesale, Shar i ’ah comp l iantbank, anno unced t hat i t h as been vo ted Best Islamic Bank in t he UK, Best Leasing Provider in t he UK,as w el l as for UK Deal of th e year, by th e Islamic Finance New s (IFN) Annual Pol l 2009.

Par t i c ipants in the p ol l , which is considered th e m ost comp rehensive and d ef in i t i ve indust ry survey,nom inated BLM E to w in the aw ard of Best Is lamic Bank in th e UK in recogni t ion of th e bank’sexpert ise in pro viding bespoke f inancing to a signi f icant cro ss sect ion of inst i tu t ion s, bu sinesses andindividu als. The aw ard for Best Leasing Provide r w as w on by BLM E fol low ing a year in w hich th ebank completed a large number of innovat ive leasing t ransact ions compet ing d i rect ly wi thconvent ional banks. Throughou t 20 09 BLM E provided £102 m i l lion o f lease f inance inc luding $68m il l ion in the US lease m arket.

The IFN Annual Awards Pol ls are seen as the most t ransparent and compet i t ive awards in Islamicf inance, based on a unique pol l which is a highly qual i tat ive ref lector of the global Islamic f inancialm arkets. The award recognizes the b est pro viders of Islamic f inancia l serv ices across a ser ies ofmarkets and sectors as voted by readers of IFN, who include Islamic f inance issuers, investors,non-banking f inancia l in termediar ies and government bodies f rom around the wor ld. The resul tsw ere announced af ter 2,657 votes w ere cast o ver a mo nth - long per iod across 45 categor ies. The




12

w inners wi l l receive the prest igious awards at t wo specia l awards ceremonies: the f i r s t w i l l takeplace on t he evening of the 25th February 2010 at the M andar in Or ienta l Hote l in Kuala Lum pur ,f o l lowed by ano ther a t t he Gr and Hya t t Duba i on t he 8 th M ar ch 2010

Thomson Reuters unvei ls r isk m anagement so lut io n fo r Is lam ic banking

ht tp: / /www. is tockanalyst .com/ar t i c le/v iewiStockNews/ar t i c le id/3791379Thomson Reuters announced the launch of a r i sk management system speci f i ca l l y ta i lored forIslamic banking. Kondor+ Sui te for Islamic Banking is a real t ime trade and r isk managementsolut ion, which wi l l provide ful l f ront- to-back and cross-asset coverage for Islamic banks as wel l asIslamic windo w s in convent ional banks.

Thom son Reut ers is th e largest pro vider of Trade and Risk M anagem ent solut ions global ly servingover 750 f inancial inst i tut ions. Thomson Reuters Risk solut ions of fer sophist icated, tai loredfunct ional i t y at every step of the t rade - f rom STP enabled f ront - to-back t rading system s toenterpr ise wide r isk management - a l low ing customers to ef f i c ient ly manage thei r market , credi t ,operat ional and l iqu id i ty r i sks. The company has the g lobal s t rength th at i s requi red of a long termst rategic par tner wi th more than 900+ r isk professionals in 83 count r ies. Thomson Reuters wasrecent ly recognized as the "# 1 Overal l Risk Vendor" in the ASIA RISK Annual Technology Survey,voted the "Best Risk M anagement Vendor " by W ATERS magazine and received t he " Best Trading

System Vend or " in RISK magazine s RISK20 aw ard s.

M oro cco seek Islam ic f inancial system

ht t p: / / w ww .yacout . in fo/ M orocco-seek- Is lamic- f inancial -system _a1107.html

M oroccan banks may int ro duce t he concepts and pract ices of shar ia (Islamic law) f inance andbanking to th e pub l ic, thanks to recent tax rate changes, M er ieme Add ou repo r ts for Af r i can New s.

The new tax rates mean that shar ia-approved a l ternat ive banking products wi l l be charged the sametaxes as t radi t ion al banking produ cts and loans.

As of January 2010, the VAT on a l ternat ive banking products l i ke M ourabaha and I jara w i l l be 10%,as opposed to t he 20% that w as previously charged.

Lenders wi l l o f fer leasing ( Ijara) products, w hereby t hey rent an asset to a custom er w ho may laterbe able to buy i t a t a f i xed date, wh i le M ourabaha wi l l a l low a lender to bu y an asset and re-sel l it t oa c l ient at a m argin decided in advance.

M any M oroccan welcom e th is a l ternat ive banking pract ices especial l y the ones w ho re ject theconcept of b ank interest . Thought M oroccans wh o had reservat ions about accept ing t radi t ionalbank loans wi l l be able to f inance a loan.

Lending companies wi l l market these products via their subsidies. These services are regulated by"the Account ing and Audi t ing Organizat ion for Islamic Financial Inst i tut ions", a Bahrain-basedorganizat ion that inc ludes 130 mem bers f rom 29 count r ies.

Islamic or Shar ia banks d if fer f rom regular banks in tw o m ajor ways. As comm anded in t he Quran,the charging of in terest i s prohib i ted in a l l monetary t ransact ions. The other def in ing feature ofIslamic banks is that th ey are supervised by a board of Islam ic scholars and cler ics w hose job i t is to

ensure that t he ban ks’ act ivi t ies com ply w i th Is lamic law.

Islamic banking system requir es im provem ents

ht tp: / /www. thenews.com.pk/dai ly_deta i l .asp?id=220208

The present Is lamic banking system requi res im provem ents to br ing i t w i th fu l l conform i ty wi th theShar iah, sa id M uham mad Ayub, a g lobal ly recognized scholar in Is lamic econom ics.

He stated th is w hi le present ing a paper o n ‘W hat i s Islamic Banking and W here does i t Stand?’ at aseminar on ‘Understanding of Islamic Banking and Finance’ organised by the Riphah Centre of




13

Islamic Business, a const i tuent inst i tute of Riphah Internat ional Universi ty, Islamabad, here onFr iday.

Professor Dr. Anis Ahm ed, vice Chancel lor of t he un iversi ty, was the chief guest on t he occasion.

M uhamm ad Ayub said the State Bank of Pakistan has a Shar iah Board to look af ter the af fa i rs ofIs lamic banking in the count ry but i t has to be made more proact ive to achieve the purpose of

prom ot ing Islamic banking system .

He said that t he system is not fu l l y prepared to p lay a signi f icant ro le in ensur ing the heal th andstabi li t y of th e nat ional and int ernat ional banking system . The Is lamic banking ensures that t here isno ‘Riba’ which is in terest , ‘Gharar ’ which is the un cer ta in condi t ions and ‘M aysi r and Qim ar ’ , w hichis gambl ing. In Islamic banking, there is a f ixed stature which is based on Holy Quran and Sunnahand everyth ing is based on t hem .

Professor Dr . Anis Ahmed, in h is remarks, said th at the sem inar wo uld help expla in t he fact th atIslamic pr inciples of business and f inance provide checks for al l factors that have corrupted thenat ional and g lobal economy and f inance. These pr inc ip les need to be adopted for re l ie f to them ankind. Islamic banking has become a hal lmark of today’s f inancia l w or ld.

Islamic ban king to br ing lot of chan ges in world econom ic system : KU VC

ht tp: / /www.brecorder .com/epaper /br_155424_580.html?t i t le= Is lamic%20banking%20to%20br ing%20lot%20of%20changes%20in%20world%20economic%20system:%20KU%20VC

Professor Dr Pirzada Qasim, Vice Chancel lor of Karachi Universi ty said that the purpose ofunivers it ies and research cent res were not o nly to g ive educat ion but to develop and m ake easyaccess to enhance modern kno w ledge of the students.

He was del iver ing president ial address in the seminar on " Islamic Banking" here on Saturday at alocal hote l He said due to t hose scholars , teachers, s tudents and Ulema w ho st ruggled for therecent system of the Is lamic banking, which we are enjoy ing now, th is system depicts the bet tersolut ion of our tod ay 's econom ical problems, but there is a need to develop the system to m eet them odern age chal lenges and t o f ram e laws in th is respect .

The Chief Execut ive Uni ted Char tered Bank of Amer ica Asi f Aslam to ld the audience that the

banking sector of that k ind got 15 percent t o 20 percent growt h in the past one decade among 500Is lamic f inancia l and moni tor ing inst i tu t ions in 51 count r ies of the wor ld af fect ing 1.39 b i l l ionM uslims. He a lso descr ibed in d eta i l the target and goals for the bet term ent of the system.Professor M asroor Qu reshi f rom the Shar iah Depar tmen t o f the Uni ted Char tered Bank Amer icasaid that Is lamic banking system wi l l br ing v i ta l changes in t he present b anking system bu t t here is aneed for m uch mo re research in that respect .

In the end Professor Saleem M emo n said Karachi Universi ty w i l l cont inue that t ype of p rogramm esin the future as wel l in col laborat ion with Standard Chartered Bank. Dr Shahbaz Gaza and Dr Aimercompared the programme as wel l . Senior bankers, execut ives of var ious f inancia l inst i tu t ions,research scholars, Ulema, teachers, professors of Karachi Universi ty and Urdu Universi typar t i c ipated in the sem inar .-

Disclaimer: The news sect ion of Is lam ic Banking Bul let in is based on infor m at ionobta ined f rom local and in ternat iona l pr in t and e lec t ron ic media and i t may no t re f lec t

SBP view s and p olicy.




14

Bank in FocusMCB Islam ic Bank ing Division 8

Overview of company

M CB bank star ted Islam ic bankin g in 2003. M CB has th edist inct ion to enter Is lamic banking market in the very f i r st yearof Islamic ban king in Pakistan.

Branch netw ork

Current ly branch n etw ork o f M CB IBD consists of 11 branchesspread in 9 ci t ies, ensur ing presence in al l provinces of thecount ry. M CB IBD plans to expand i ts branch netw ork by 45percent in the year 2010 extending tot a l branch netw ork to 16.

Product s/ services range

M CB IBD is of fer ing wide range of Shar iah com pl iant p roductsand services on bo th assets and l iabi l i ty side.

DepositsM CB IBD o f f e rs bo th non- r emuner a t i ve and r emuner at i vedepo si t products nam ely Ianat (current ) account, Al M akhraj Saving Account and ten ure baseddeposi ts wi th m atur i ty per iod ranging from 1 m onth t o 5 years w i th var ious prof i t rates.

Assets

M CB IBD provid es Corp orat e, SM E, and Consum er banking pr odu cts. W orking capi tal faci l it ies areprovided under M urabaha mod e of f inancing to cater to t he requi rement s of it s custom ers inc ludingim port ers and expor ters. Curren t ly fol low ing produ cts on asset side are of fered :

M urabaha t o f i nanc e v a r ious t y pes o f bus iness sec to r s f o r t h e i r d i v e r s if i ed need s l i k e im por t s,l oc a l pu r c hase , and te rm f i nanc e

Islam ic Expo r t Ref inan ce Schem e Co n s u m e r & Co r p o r a t e f i n a n c in g p r o d u c t s a r e o f f e r e d u n d e r I j a r ah f o r m e d i u m t o l o n g t e r m

w h ich i nc ludes :o Car I j arah Faci l i t a tes t o p rov ide no n-c om m e rc ial o r s em i c om m erc ia l v eh i c le on ren t f o r

I nd i v idua ls, c o rpo ra te and SM Es .o Equ ipm en t I j a rah f ac i l i t y f o r p rov id ing i ndus t r i a l m ac h ine ry and a l l t y pe o f equ ipm en ts

requ i r ed by i ndus t r i a l and c om m erc ia l o rgan iz a t i ons aga ins t r en ta l s t o be pa id onm o n th l y , qua r t e r l y o r a t an ag reed i n t e r v a l basi s. The fac i l it y i s o f f e red f o r a pe r iod o f 1 t o5 y ea rs. Equ ip m en t f i nanc ing i s a l so be ing o f f e r ed und er t h e D im in i sh ing M us harak ah fo rpu rc has e o f equ ipm en t / m ac h ine r y by SM Es and Corp o ra te .

Shar iah Adviser Profile

M C B- IB i s bene f i t i ng f r om se rv i c es o f D r . M uh am m ad Zuba i r U s m an i as Shar iah Ad v i se r s ince i t ses tab l ishment . Dr . Zubai r ho lds a Ph.D. in Is lamic F inance f rom Karachi Univers i ty . He has a vas tex per ienc e i n t he f i e ld o f Shar iah Adv i s o r y and i s a l s o w e l l k now n fo r c onduc t i ng

t r a in ing / aw arene ss on I slam ic bank ing bo th l oc a l ly and i n te rn a t i ona l l y .

8 The sect ion is inc luded t o create aw areness about Islamic bank ing inst i tu t ions and t hei r pro ducts . Thewr i te -up i s based on i n format i on prov ided by M CB Bank

Table: Bank’s Perform ance at a Glance

(Rs in bill ions)

% of Islamic Banking Industry

Deposits 1.9 0.7

Financing 3.5 2.3

Total Assets 8.2 2.2

BranchN etw or k

11 1.8

Posit ion as of December 31, 2009




15

Frequen tly Asked Questions9 (Part V)

Q. No.24: What is Mura baha used for in Islamic banks?

Answe r: M urabaha is typical ly used to faci l itate th e short - term f in ancing requirem ents of the

custome r. The fol lowing are the uses of M urabaha:

1. Purchase of raw m ater ial , goods and merchandise of a l l kinds and descr ipt ion2 . Pu rch ase o f eq u ip m e nt s3 . Im p o r t o f g oo d s an d m e r ch a n dise4 . Expor t f inancing ( p r e- sh ipment )5 . O ther f i nanc ing o f wor k i ng cap i t al natu r e

Present ly , the m ajor i t y of f inancing extended by Islamic banks is based u pon M urabaha.

Ques tion No. 25). What is Bai Mua jjal?

Answer: Bai ' Mu aj jal is the Arabic equivalent o f "sale on deferred paym ent basis". The deferredpayment becomes a debt payable by the buyer in lum p sum o r in insta llments as may be agreedbetw een the t w o part ies. In Bai ' M uaj jal , al l tho se i tem s can be sold on deferred p ayment basis wh ichcome und er the d ef in i t ion of t angib le goods where qual i t y does not m ake a d i f ference but the in t r ins ic

value does. Those assets do not come under def ini t ion of capi tal where qual i ty can be compensatedfor by the pr ice and Shar iah scholars have an ' i jmah' (consensus) that demanding a high pr ice ondeferred paym ent in such a case is permissible. The fo l lowing are th e condi t ion s of a val id Bai ’ M uaj jal:

1 . The pr ice to be paid must be agreed and f ixed at the t ime of the deal . I t may inc lude anyamount of prof i t agreed betw een the par t ies.

2. Com plete/ tot a l possession of the object in quest ion must be given to the buyer , wh i le thedefer red pr ice is to b e t reated as a debt du e f rom him.

3. Once the pr ice is f i xed, i t cannot be decreased in case of ear l ier payment nor can i t beincreased in case of defaul t .

4 . In order to secure the payment o f pr ice, the sel ler m ay ask the buyer to furn ish a secur i tye i ther in the form of m or tgage or in the form of any other i tem.

5. I f the comm odi ty i s so ld on insta l lment s, the sel ler may put a condi t ion on the buyer thati f he fai ls to p ay any installme nt o n i ts due date, the rem aining instal lments w i l l becom edue imm ediately .

Ques tion No. 26). What is Musaw am ah ?

Answer : M usawamah is a general and regular k ind of sale in wh ich pr ice of th e comm odi ty to bet raded is bargained between sel ler and the buyer wi thout any reference to the pr ice paid or costincurred by th e form er. Thus, i t is di f ferent f rom M urabaha in respect of pr icing form ula. Unl ikeM urabaha, sel ler in Mu sawamah is not ob l iged to reveal his cost . Both th e part ies negot iate on t hepr ice. Al l o ther condi t ions re levant to M urabaha are valid for M usawam ah as wel l . Musawamah canbe used wh ere the sel ler is not in a posit ion t o ascertain precisely the costs of comm odit ies that he isof fer ing to sel l.

Question No. 27:What is Ijara h?

Answer: I jarah refers to t ransferr ing the usufruct of an asset but not i ts ownership. Under Islamicbanking, the bank transfers the usufruct to another person for an agreed per iod at an agreedconsiderat ion. The asset und er I jarah should be valuable, non-per ishable, non-consumable ident i f iedand quant i f ied. All those th ings which do not mainta in thei r corpus dur ing thei r use cannot becomethe subject matt er of I jarah, for instance mone y, w heat etc.

Question No. 28): What a re the sa lient featur es of Ijar ah t ran saction?

9 FAQs are inc luded in o rder to create aw areness about Islamic bank ing. These FAQs are al ready pu bl ished an dare avai lable o n SBP website ( h t tp : / /www.sbp.org .pk /depar tments / i bd /FAQs .pdf )




16

Answer: The customer approaches the ban k and expresses his desire for a part icular asset/p ropert y.The bank acquires that asset as per undertaking of the customer to acquire the said asset on I jarahbasis. The bank leases ( t ransfers th e use of t he asset) i t to t he custom er for an agreed per iod of t imeand against an agreed amount of rentals. An I jarah agreement, signed between the bank and thecustomer, st ipulates al l the relevant condi t ions with regard to the t ransact ion. According to thisagreement the b ank is Lessor and th e custom er is Lessee. Dur ing the I jarah per iod, th e corpus of t he

leased prop erty rem ains in the o wn ership of the ban k and only i ts usufruct is t ransferred to the lessee.The fol lowing m ain points are considered in t he I jarah t ransact ion:

1. As the corpus of the leased asset remains in the ow nership of the Islamic bank, a ll thel iabi l i t ies emerging f rom the ownership shal l be borne by the bank. I t is necessary for aval id lease that the leased asset is ful ly ident i f ied by th e part ies.

2. The lessee (custom er ) cannot use the leased asset for any purpose other than the p urposespeci f ied in the lease agreement. However, i f no such purpose is speci f ied in theagreement , the lessee can use i t for w hatever legi t imate pu rpose i t is used in the no rm alcourse.

3. The lessee is liab le to comp ensate the lessor (bank) for any harm t o th e leased assetcaused b y any m isuse or w i l l ful negl igence. The leased asset shall rem ain in th e r isk of th ebank thr oughou t th e lease per iod in the sense that any h arm o r loss caused by th e factorsbeyond th e control of t he lessee shal l be borne b y the lessor.

4 . A p r opert y j o in t l y owned by two o r mor e per sons can be leased ou t and t he r en tal sha llbe d is t r ibuted betw een a l l jo int o wners according to the p ropor t ion o f thei r respect iveshares in the pro perty . A joint o wn er of a proper ty can lease his prop ort ion ate share onlyto his co-sharer and not to any ot her person.

5 . The r en tal mus t be de ter m ined a t t he t ime o f con t r act f o r t he wh o le peri od o f l ease . I t i sperm issible that di f feren t amo unt s of rent are f ixed for di f fer ent ph ases dur ing th e leaseper iod, provided th at th e amou nt of rent for each phase is speci f ica ll y agreed upo n at thet im e of execut ing a lease. If th e rent fo r a subsequent phase of th e lease per iod h as notbeen det ermin ed or has been lef t at the opt ion of th e lessor, the lease is not val id.

6 . The de te r m inat i on o f r en tal w i t h r egar d t o t he aggr egate cost i ncurr ed i n t he pur chase o fthe asset by the lessor, as normal ly done in f inancial leases, is not against the rules ofShar iah, i f both part ies agree to i t , provided that al l other condi t ions of a val id leaseprescr ibed by t he Shar iah are ful ly adher ed to .

7. The lessor cannot increase the rent uni la tera ll y , and any agreement to t h is ef fect i s vo id.8. The lease per iod shal l comm ence f rom t he date on which the leased asset has been

del ivered to the lessee.9. I f the leased asset has tot a ll y lost the funct ion for w hich it w as leased, the cont ract w i ll

s tand t erminated.10. The renta ls can be used on or benchm arked w i th some Index as w el l. In th is case the

cei l ing and f loor rentals would speci f ical ly be ment ioned in the agreement for val idi ty oflease.

11. At the end of the lease per iod, the ow nership of the proper ty may be t ransfer red to thelessee against a nominal pr ice through a separate sale deed to be executed af ter theexpiry of th e lease.

Question No. 29 What is the differ ence bet ween conventional mor tgage financing

an d Islamic Mor tgage finan cing?

Answer: There are several key di f ferences between convent ional mortgage f inance and Islamicmortgage f inance. Under convent ional mortgage, in order to purchase a property the customerbor rows m oney and repays i t w i th an addi t ional amou nt over a per iod of t ime. The addi t ional amou ntis th e amo unt o f inter est w hich is against th e Shar iah rul ings of Islam. Under Islam ic mort gage f inancefaci l i ty, Islamic bank shares with the customer in purchasing his desired property. Accordingly, thecustom er and the bank becom e the jo int ow ners of the proper ty in propor t ion to t hei r share inpurchasing the proper ty. In order to ow n and use the ent i re proper ty, the custom er purchases theshare of b ank’s proper ty o ver a per iod of t ime and a lso pays the rent for using the bank’s share of theproper ty. Over a per iod of t ime, the customer m anages to purchase the ent i re share of bank in t heproper ty. Ul t imate ly, the custom er becomes the sole ow ner .




17

Further, in case of Islamic mortgage f inance, the rent wi l l be charged af ter the lessee has takendel ivery of the property and i t is in workable/usable condi t ion. Rent cannot be charged from the daythe pr ice was paid to acquire the property/asset. I f the suppl ier has delayed the del ivery af terreceiving the ful l pr ice, the lessee should not be l iable for the rent of the per iod of delay. In case ofconvent ional mortgage f inance, normal ly the lease rentals star ts f rom the date the bank makepayment for pu rchasing the proper ty/ asset .

Question No. 30): The r ental am ount un der Ijara h tr ansaction is norm ally linked

to interest based benchmark like LIBOR or KIBOR. Is not it an interest based

financing?

Answer: The di f ference between an interest based f inancing and a val id lease does not l ie in theamo unt to b e paid to t he lessor. The basic di f ference is th at in the case of Islamic I jarah, the ow nershipand t i t le in the asset/ prop erty rest w i th the lessor who assumes the ful l r isk of the corp us of the leasedasset. I f the asset is destroyed dur ing the lease per iod, t he lessor wi l l suf fer t he loss. Simi lar ly, i f theleased asset loo ses i ts usufruct w i thou t any m isuse or n egl igence on t he part of t he lessee, the lessorcannot claim the rent, whi le in the case of an interest-based f inancing, the f inancier is ent i t led toreceive interest , even i f the debt or did not at al l benef i t f rom the m oney bor row ed. So far as this basicdi f ference is maint ained, ( i.e. the lessor assum es the r isk of th e leased asset) th e t ransact ion canno t b e

categor ized as an interest-bear ing t ransact ion, even though the amount of rent claimed from thelessee m ay be equal to t he rate of int erest .

Therefore, the use of the rate of interest merely as a benchmark does not render the I jara contractinval id as an in terest-based t ransact ion. I t is, how ever, advisable at al l t im es to avoid using interesteven as a benchmark so that an Islamic t ransact ion is total ly dist inguished from an un-Islamic one,having no resemb lance of interest wh atsoever.

Excerpt fro m FAQs pub lished by IBD, SBP and available atht tp: / /www.sbp.org.pk/depar tments/ ibd/FAQs.pdf




18

Annexure: IIslamic Banking Branch Network

(As of December, 31, 2009)

Type Nam e o f Bank No o f Branches10

Full Fledge Islamic Banks

Al Baraka Islamic Bank 29

BankIslami Pakistan Limited 70

Dawoo d Islamic Bank Limi ted 42

Dubai Islamic Bank Pakistan Ltd 35

Emirat es Global Islamic Bank Ltd 58

M eezan Bank Ltd 16 6

Sub Total 40 0

Islamic Branches of Conventio nal Banks

Askari Bank Limi ted 29

Bank Alfalah Ltd 60

Bank Al Habib 6

Faysal Bank Limit ed 6

Habib Bank Ltd 1

Hab ib Met ropo l i tan Bank 4

M CB Bank Ltd 11

National Bank of Pakistan 8

Soner i Bank Ltd 6

Standard Chartered Bank 11

The Bank of Khyber 18

The Royal Bank of Scot land 3

Uni ted Bank Ltd 5

Sub Total 16 8

Sub Branches

Askari Bank Limi ted 2

BankIslami Pakistan Limited 32

Dawoo d Islamic Bank Limi ted 8

Dubai Islamic Bank Pakistan Ltd 1

Emirat es Global Islamic Bank Ltd 2

M eezan Bank Ltd 35

The Bank of Khyber 1

Sub Total 81

Grand Total 649

10

Source: Banking Policy & Regulat ions Departm ent, State Bank o f Pakistan.




19

Annexure: II

Province wise Break-up of Islamic Banking Branch Network (As of December, 31, 2009)

Type Bank Nam e AzadKashmir

Balo ch ist an Fed eralCapital

Nor thernAreas

NW FP Pun jab Sindh GrandTotal

IB. Albaraka IslamicBank B.S.C. (E.C.)

1 2 3 15 8 29

BankIslami PakistanLimi ted

1 8 2 1 5 30 23 70

Dawoo d IslamicBank Limi ted

1 2 1 18 20 42

Dubai Islamic BankPakistan Limited

3 2 3 16 11 35

Emirat es GlobalIslamic BankLimi ted

3 2 6 27 20 58

M eezan Bank

Limi ted

2 4 8 15 78 59 166

IB. Tot al 4 19 18 1 33 184 141 400

SAIBBs Askar i Bank Lim it ed 2 1 5 14 7 29

Bank AL HabibLimi ted

1 1 2 2 6

Bank AlfalahLimi ted

1 3 3 39 14 60

Hab ib Ban k Lim it ed 1 1

Hab ib Met rop o l i tanBank Limi ted

1 3 4

M CB Ban k Lim it ed 1 1 1 5 3 11

National Bank ofPakistan

2 1 3 2 8

Soner i Bank Lim it ed 1 1 1 1 2 6

Standard CharteredBank(Pakistan) 1 1 3 3 3 11

Th e Bank o f Khyber 1 12 3 2 18

The Royal Bank ofScotland

1 2 3

Unit ed Bank Lim it ed 1 3 1 5

Faysal Bank Lim it ed 1 1 3 1 6

SAIBBs To t al 2 9 7 29 78 43 168

Sub

Branches

Askar i Bank Lim it ed 1 1 2

BankIslami PakistanLimi ted

1 3 3 2 9 14 32

Dawoo d IslamicBank Limi ted

3 5 8

Dubai Islamic BankPakistan Limited

1 1

Emirat es GlobalIslamic BankLimi ted

1 1 2

M eezan BankLimi ted

1 1 4 16 13 35

Th e Bank o f Khyber 1 1

Sub Branches To t al 1 4 6 8 28 34 81

Grand To tal 7 32 31 1 70 290 218 649




20

City wise Break-up of IslamicBanking Branch Network

As of December, 31, 2009)

S. NoProvince Cit ies

No of

Branches

1

Sindh

Bad in 12 Hyd erab ad 173 Karach i 1804 Larkan a 15 M at iar i 16 M irp u r Kh as 37 Naw ab shah 48 Sakran d 19 San gh ar 2

10 Su kku r 511 Tan do Adam 112 Tan do Allah yar 2

Sindh To t al 218

13

Punjab

Ar ifw ala 114 At t ock 415 Bah aw alp u r 316 Ch akw al 217 Daska 118 Dera Gh azi Khan 219 Faisalab ad 2620 Go jra 121 Gu jar Kh an 122 Gu jran w ala 1023 Gu jrat 924 Haf izab ad 225 Jaran w ala 226 Jh an g 327 Jh elum 428 Kam o ki 1

29 Kasu r 230 Kh anew al 131 Kh u sh ab 432 Laho re 109

33M a n d iBahauddin

1

34 M ian Ch an n u 235 M ian w ali 136 M u lt an 2337 Okara 238 Pakp at t an 139 Pin d i Ghaib 140 Rah im Yar Kh an 641 Raw alp in d i 3142 Sad iq ab ad 2

43 Sah iw al 344 Sargo d h a 645 Sh eikh up u ra 346 Sialko t 1247 Texila 148 To b a Tek Sin gh 149 Veh ar i 450 W ah Can t t 2

Pun jab To t al 290

Annexure: III

S. NoPro vince Cit ies

No o fBranches

51

NWFP

Ab o t t ab ad 11

52 Ban u 1

53 Bat kh ela 1

54 Ch arsad d a 1

55 Ch it ral 1

56 Dera Ism ail Kh an 3

57 Han gu 1

58 Har ip u r 3

59 Ko hat 2

60 M anseh ra 6

61 M ard an 4

62 M in go ra 1

63 N ow shera 3

64 Pesh aw ar 28

65 Sw ab i 2

66 Tank 1

67 Tim ergara 1

NW FP To t al 70

68Northern

AreasGilgi t 1

Nort hern Areas Tot al 1

69FederalCapital

Islam ab ad 31

Feder al Cap it al Tot al 31

70

Balochistan

Ch am an 1

71 Gaw ad ar 1

72 Hu b Ch ow ki 1

73 Kuch lack 1

74 Lo ralai 3

75 M uslim Bagh 1

76 Pish in 1

77 Qilla Saifu llah 1

78 Qu et t a 21

79 Zh o b 1

Baloch ist an To t al 32

80 Azad

Kashmir

M irpu r AJK 4

81 M uzaf farabad 3Azad Kashm ir To t al 7

Grand To t al 649




21

Sr.

No.

Nam e Designat ion Cont act Det ai ls

Off ice Phone

n u mb e r

Em ail Addr ess

1. Saleem Ul lah Director 9 22 1 -3 24 5 3 74 2 Sa le em u l la h@ sb p .o r g.p k

2. M uh am m ad Yo usaf P.A t oDirector

9 22 1 -3 24 5 3 74 3 m u h am m d . yo u su f @sb p .o r g.p k

3. Zu lf ikar Kho khar Sen io r Jo in tDirector

9 2 21 -3 2 45 3 7 41 zu l fi ka r. kh o k h ar @ sb p .o r g.p k

4. N ighat Tanveer -d o- 9221-3245 3711 n ighat .t an veer@ sbp .o rg.pk

5. M un ir Ah m ed Jo in tDirector

9 22 1 - 3 2 4 5 3 73 6 m u n ir .a hm e d @ sb p .o r g.p k

6. Ghu lam Shab b ir -d o- 9221- 3245 3773 sh abb ir@ sb p .o r g.pk

7. M uh am mad M azharKhan

-d o- 9221- 3 245 3736 m azhar .kh an@ sb p.o rg.p k

8. Aslam Navaid -d o- 9221- 3245 3757 aslam .navaid@ sbp .o rg.pk

9. M . Islam Ahm ed Deput yDirector

9 22 1 - 3 2 4 5 3 74 4 i sl am . ah m e d @sb p .o r g.p k

10. Far id Khan -d o- 9221- 3245 3757 far id .khan@ sb p .o r g.pk

11. Sar f raz Ah m ed -d o- 9221- 3245 3772 ah m ed .sar f r az@ sb p.o rg.pk

12. Am jad M er aj Assist an t

Director

9 22 1- 3 24 5 37 72 am j ad .m e raj@ sb p .o rg.p k

13. M ud assar Saleem -d o- 9221- 3245 3724 m udassar .saleem @ sbp.o rg

14. Yasm een Abd ul Ghan i Of f icer -IBD 9221-3245 3744 yasm een.ghan i@ sb p.o rg.p k

15. Sagh ir Ah m ad -d o- 9221-3245 3776 sagh ir .ahm ad@ sb p.o rg.pk

Contacts Details of Islamic Banking Department Officials

Islamic Banking Department, 7th Floor,

State Bank of PakistanI.I. Chundrigar Road, Karachi.

Fax No. +92 21-9921 2472

UAN: +92 21 111 727 111

E-mail: [email protected]

Documents

Bulletin Oct Dec 2009