Islamic Banking in Contemporary World & Islamization of Banks in Pakistan

Islamic Banking in Contemporary World & Islamization of Banks in Pakistan

Table of Contents

Prologue...............................................................................................................................3Prohibition of riba in the holy Qurân...................................................................................3Prohibition of riba in the Hadith..........................................................................................4Islamic Laws Regarding Business.......................................................................................4Some Terms to Remember..................................................................................................6

Riba..................................................................................................................................6Interest.............................................................................................................................6Gambling.........................................................................................................................7Gharar..............................................................................................................................7Speculation......................................................................................................................7Hedging............................................................................................................................7

Evolution of Islamic Banking..............................................................................................7Historical overview of Islamic Financing in Pakistan:........................................................9Modes of Finance..............................................................................................................10

1. Qard-e-Hassan (good loan or benevolent loan).........................................................10Conditions of Qard-e-Hassan:...................................................................................10Usuage of Qard-e-Hassan:.........................................................................................10

2. Mudarabah(profit-sharing)........................................................................................10Conditions of Mudaraba:...........................................................................................11Usage of Mudaraba:...................................................................................................12

3. Musharaka (joint venture)..........................................................................................12Conditions of Musharakah.........................................................................................12Usage of Mudarabah/ Musharakah:...........................................................................13

3. Murabaha(cost-plus):.................................................................................................14Conditions of Murabaha:...........................................................................................15Usage of Murabaha:...................................................................................................17

4. Musawamah (Simple Sale)........................................................................................17Conditions of Musawamah:.......................................................................................17Usage of Musawamah:..............................................................................................18

5. Bai-Muajjal (Credit Sale)..........................................................................................18Conditions of Bai-Muajjal:........................................................................................18Usage of Bai-Muajjal:................................................................................................19

6. Bai-Bithamin Ajil (Deferred Payment)....................................................................197. Bai Salam (Future Delivery)......................................................................................20

Conditions of Salam:.................................................................................................20Usage of Bai Salam:..................................................................................................22

8. Bai' al-Inah (Sale and Buy Back Agreement)............................................................22Conditions of Bai-al Inah:.........................................................................................22Usage of Bai-al Inah:.................................................................................................22

9. Sukuk (Islamic Bonds)..............................................................................................22Sukuk and Bond.........................................................................................................23Conditions of Sukuk:.................................................................................................23

10. Takaful (Islamic Insurance):....................................................................................24Difference between Takaful and Conventional Insurance:.......................................24


Examples of Takaful Insurance Products..................................................................24Major Difference between Islamic Banking and Conventional Banking:.........................25Islamic Banking Vs Conventional Banking......................................................................25Industry Progress and Market Share..................................................................................27Criticism on Islamic Banking:...........................................................................................28Information and Performance Regarding A Few Islamic Banks.......................................30

Albaraka Islamic Bank:-................................................................................................30Meezan Bank Limited:-.................................................................................................30Bank Alfalah:-...............................................................................................................30

Contemporary Local & International News:-....................................................................31News in Focus:..........................................................................................................31Meezan considers new products................................................................................31Dubai Islamic Bank Pakistan’s assets reach Rs 21bn................................................32Japan banks focusing on Islamic funds.....................................................................32Kenya gets First Islamic Bank...................................................................................32Commercial Bank of Kuwait to go Islamic...............................................................33


Prologue

The objective of seeing human life blessed with justice and balance has led Muslim thinkers to focus on social relations, political organization and the economy, among other aspects of life, within the framework of Islamic teachings.

Finance has always been important. Not everyone has inherited wealth or past savings to live by while he or she engages in the time consuming task of producing new wealth. Wealth creation takes time, meanwhile consumption must continue.

Wealth creation often entails inputting goods and services from out of the wealth already available. Finance refers to money that makes it possible to acquire existing wealth for consumption and/or as inputs in the production process.

Finance is needed not only by individuals but also by institutions, private as well as public. This is more true today than it was in the earlier periods of history when the role of institutions was rather limited.

Prohibition of riba in the holy Qurân In several verses of the Holy Qur’an, Allah has mentioned the consequences of riba. The Qur’an did not declare the prohibition of riba in the early stage of revelation; rather we find that the complete prohibition of interest came sequentially. In the Qur’an Allah says:

“That which ye lay out for increase through the property of (other) people, will

have no increase with Allah: But that which ye lay out for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied”. (30:39)

“That they took riba (usury), through they were forbidden and that they devoured men’s substance wrongfully – We have prepared for those among men who reject faith a grievous punishment.” (4:161)

The Qurân condemns interest [simple & compound]:

“O ye who believe! Devour not usury doubled and multiplied; but fear Allah, that ye may (really) prosper.” (3:140)

“Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say: ‘Trade is like usury.’ But Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those who repeat (the offence) are companions of the fire, they will abide therein (forever)” (2:275)


“O you who have attained faith! Remain conscious of God, and give up all

outstanding gains from Usury, if you are (truly) believers” (2: 278)

When Islam came, it described the evils of gambling in the most effective language and prohibited it for the Muslims:

"O you who believe! Intoxicants and gambling, sacrificing to stones, and (divination by) arrows, are an abomination- of Satan's handwork: eschew such (abomination), that you may prosper."

Prohibition of riba in the Hadith

Jabir reported: The Prophet cursed the receiver and the payer of interest, the one who records it (the contract) and the two witnesses to the transaction and said, “They are all alike (in guilt).”

Abu Hurayrah (R.A) narrated that the Prophet said: “riba has seventy segments; the least serous is equivalent to a man committing incest with his own mother.”

Abu Hurayrah (R.A) narrated that the Prophet said: “”God would not allow four persons to enter paradise or to taste its blessings: he who drinks wine, he who takes riba, he who usurps an orphan’s property without right and he who is undutiful to his parents.”

Historically one of the most important cases of large scale dealing in riba is that of Abbas bin Abdul

Muttalib, the Prophet’s uncle. It is mentioned in the last sermon of the Prophet in which he declared:

“Riba of the days of ignorance stands nullified. And the first riba I cancel is our own riba, the riba owed to Abbas bin Abdul Muttalib. It stands nullified all of it”

In another verse, this was mentioned: "'They asked the Prophet about khamr (intoxicants) and games of chance (gambling). Say, in both of them there is great harm although there is some advantage as well in them for men, but their harm is much greater than their advantages."

Islamic Laws Regarding Business

Islam has permitted and in fact encouraged business. The Qurân states:


"Allah has made business lawful for you" (2: 275).

The early Muslims were not only engaged in trade but they went to distant lands in connection with business. Islam in fact reached East and West Africa, East Asia through the business people. Islam has given detail laws of business. Islam has not permitted selling and purchasing of goods which are prohibited in Islamic law. The Prophet of Islam has said:

"When Allah prohibits a thing, He prohibits (giving and receiving) the price of it as well." (Reported in the books of tradition of Ahmad and Abu Daud)

Islam has also prohibited any kind of transaction involving uncertainty (Gharar) as this could lead to quarrel or litigation. The Prophet of Islam has forbidden transaction involving unspecified quantity, acceptance of money for fish in the river or bird in the air as there is element of uncertainty. Similarly the Prophet of Islam has prohibited sale of fruit till they are ripened.

However; if the element of uncertainty is very small, the transactions are permissible. For example, it is permissible to sell root vegetables while they are still on the ground. It is primarily because of the element of perish-ability of the harvested commodity that will result in loss to the farmer.

Freedom of trade and operation of market forces are allowed in Islam subject to the limits set by Shari'ah. Islam, however, condemns hoarding to make high profit at the cost of public interest. Islam does not allow making profit by withholding the commodity from the market so that it becomes scarce. The Prophet of Islam has said,

"If any one withholds goods until the price rises he is a sinner" (Tradition of Muslim).

"The withholding of grain for 40 days out of a desire of high price is prohibited in Islam" (Tradition of Ahmad, Hakim etc).

Islamic law has prescribed measures to prevent manipulation of market, exploitation of seller or buyer and fraud. The prophet of Islam prohibited people from going out of town to buy -merchandise which was on its way to city market. The reason for this prohibition is that the market place, where the forces of demand and supply determine prices, is the best place for trading transactions. In the situation of buying on way to market, the seller may not know the real market price and he may be deprived of legitimate price.

Islam prohibits fraud in business dealings. The Prophet has said:


"It is not permissible to sell an article without making everything clear nor is it permissible for anyone who knows (about its defects) to refrain from mentioning

them" (Baihaqi).

The Prophet of Islam has also said:

"Sell the good and bad separately. He who deceives is not of us" (Muslim, Ahmad).

The sin of fraud is greater if the seller supports it by swearing falsely. The Prophet has said,

"Swearing produces ready sale but blots out blessing" (Bukhari).

In the same manner deceiving others by withholding full measure is also prohibited. The Qur’an has emphasized the giving of full measure. It says,

"And give full measure and (full) weight in justice" (6:1 52).

Islam has prohibited business transactions on interest. The Qurân is explicit about it and says,

"Allah- has permitted for you trade and prohibited interest"(2 : 275).

In the Muslim world, in the last decade a chain of Islamic Banks has come up to avoid interest in trade.

Islam has permitted and encouraged business subject to aforesaid principles and restrictions. If these principles are followed, the economy will be greatly purified from injurious practices.

Some Terms to Remember

RibaRiba means usury and is forbidden in Islamic economic jurisprudence. According to some, this refers to excessive or exploitative charging of interest, though according to others, it refers to the concept of interest itself.

InterestInterest is a fee, paid on borrowed capital and interest rate is the percentage of the principal that is paid as a fee (the interest), over a certain period of time.


GamblingGambling has a specific economic definition, referring to wagering money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money or material goods. Typically, the outcome of the wager is evident within a short period of time.

GhararThe Arabic word gharar means risk, uncertainty, and hazard. Unlike ribaa, gharar is not precisely defined. Gharar is also considered to be of lesser significance than ribaa. While the prohibition of ribaa is absolute, some degree of gharar or uncertainty is acceptable in the Islamic framework. Only conditions of excessive gharar need be avoided.

The concept of gharar has been broadly defined by the scholars in two ways:

First, gharar implies uncertainty. Second, it implies deceit.

SpeculationSpeculation is the process of selecting investments with higher risk in order to profit from an anticipated price movement.Speculation should not be considered purely a form of gambling, as speculators do make an informed decision before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average.

HedgingA hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity.

The main difference between hedging and speculation is that we try to minimize or eliminate the risk in hedging; where in speculation the risk is maximized. More sophisticated investors will also use a hedging strategy in combination with their speculative investment in order to limit potential losses.

Evolution of Islamic BankingThe landmarks events in the industry’s evolution are summarized here chronologically:


1890s Barclays Bank opened its Cairo branch to process the financial transactions related to the construction of Suez Canal. This is understood to be the first commercial bank established in the Muslim world. As soon as the bank’s branch was opened, Islamic scholars initiated the critique of bank interest as the prohibited Riba.

1900-1930 The critique also spread to Arab regions and to the Indian Subcontinent. In this debate, a majority of scholars subscribed to the position that interest in all forms constitutes the prohibited Riba.

1930-1950 Islamic economists also initiated the first critique of interest from the Islamic economic perspective and attempted to outline Shari’ah-compliant alternatives in the form of partnership.

1950s Islamic scholars and economist started to offer theoretical models of banking and finance as a substitute for interest-based banking. By 1953, Islamic economists offered the first description of interest free bank based on two-tier mudarabah.

1960s Applications and practices in finance based on Islamic principles began in Egypt and Malaysia; the landmark events include the rise and fall of Mitghamr Saving Associations (Egypt) during 1961-1964 periods and the establishment of Tabung Haji Malaysia in 1962. Tabung Haji has since flourished and has become the oldest Islamic financial institution in modern times. Operational mechanisms for institutions offering Islamic Financial Services(IFS) began to proposed and a number of books on Islamic banking based on profit and loss-sharing and leasing were published.

1970s Islamic banks emerged with the establishment in 1975 of Dubai Islamic Bank and the Islamic Development Bank (IDB). Also in 1975, fiqhi objections to conventional insurance become pronounced, laying the ground for an alternative structure. Financial Murabaha was developed as funds. Academic activities were launched with the first International Conference on Islamic Economics, held in Makah in 1976. The first specialized research institution - namely, the Centre for Research in Islamic Economics – was established by the King Abdul Aziz University in Jeddah in 1978. The first takaful company was established in 1979.

1980s More Islamic banks and academic institution emerged in several countries. Pakistan, Iran and Sudan announced their intention to transform their overall financial systems as to be in compliance with the Shari’ah riles and principles. The governors of central bank and monetary authorities of Organization of Islamic Conference(OIC) member countries, in there fourth meeting held in KHARTOUM on 7-8 March,1981 called jointly for the first time for strengthened regulation and supervision of IFS. The Islamic research and training institute (IRTI) was established by the IDB in 1981. In 1980, Pakistan passed the legislation to establish the Mudaraba companies. Other countries such as Malaysia and Bahrain initiated Islamic banking within the framework of existing framework of the existing system. The international monetary fund (IMF) published working papers and articles on Islamic banking, while PhD research and other publication on Islamic banking were on the increase in the west. The OIC Fiqh Academy and other Fiqh boards of IFS engaged in discussions and the


reviews of financial transactions. Islamic mutual funds and other non-banking financial institution emerged towards the middle of 1980s.

1990s public policy interest in the Islamic financial system grew in several countries. The Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) was established and its first standards were issued. The development of Islamic banking products intensified. Interest in Islamic finance increase in western academic circles. The Howard Islamic Finance Forum was established large international conventional bank started operating Islamic windows.

2000-2008 Sovereign and the co-operate sukuk as alternative to conventional bonds emerged and are increasing rapidly in volume. Bahrain issue Financial Trust Laws. The Government of United Kingdom and Singapore extended tax neutrality to Islamic financial services.

Historical overview of Islamic Financing in Pakistan: 1991 procedure adopted by banks in 1985 was declared un-Islamic by the Federal

Shariah at Court (FSC). The government and some banks/ DFIs made appeals to the Shari at Appellate Bench (SAB) of the supreme court of Pakistan.

1997 Al-Meezan Investment Bank was established as first Islamic bank of Pakistan. Mr.Irfan Siddique appointed as first and founding CEO.

1999 The Shari at Appellate Bench (SAB) of the Supreme Court of Pakistan rejects the appeals and directs all laws on interest banking to cease. The government sets of a high level commission, task forces and committees to institute and promote Islamic banking.

2001 State bank sets criteria for establishment of Islamic commercial banks private sectors subsidiaries and stand-alone branches by existing commercial banks to conduct Islamic Banking in the country.

2003 A Musharaka-based Export Refinance Scheme has been designed by the state bank, in order to provide export finance to eligible exporters on the basis of Islamic modes of financing. Efforts are underway to develop Islamic money market instruments like Ijarah Sukuk to facilitate the banks in the respect of liquidity and SLR management.

Pakistan first Shariah compliant Mortgage facility is launched. Approved by the Shariah Supervisory board, the product enables home purchase, home construction, renovation, as well as replacement of an existing mortgage.

2004 The State Bank established a dedicated Islamic Banking Department (IBD) by merging the Islamic Economics Division of thee Research Department with the Islamic Banking Division of the Banking Policy Department. A Shariah board has been appointed to regulate and approve guidelines for the emerging Islamic Banking Industry.

The Government of Pakistan awards the mandate for debut of International Sukuk (Bond) offering for USD 500 million. The offering is a success and establishes a benchmark for Pakistan.

2005 Pakistan Bank becomes the first customer of Islamic Insurance (Takaful) by signing the first memorandum of Understanding MOU with Pak-Kuwait Takaful


Company Limited (PKTCL). The signing of this MOU has ushered Pakistan into a new era of Islamic Insurance (Takaful).

2006 A number of new dedicated Islamic Banks, namely Bank Islami and Dubai Islamic bank, commence operations in Pakistan.

Other International banks are operating the Islamic windows to their banks. The market share of Islamic banking assets in the overall banking system rose to

4.3% as of December 31, 2007. The upcoming banks will have to operate only in Islamic Banking, according to

SBP.

Modes of Finance

Islamic banks and banking institutions that offer Islamic banking products and services are:

1. Qard-e-Hassan (good loan or benevolent loan)This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor.

Conditions of Qard-e-Hassan:

In this case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan.

Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.

Usuage of Qard-e-Hassan:

Islamic Debit Cards

2. Mudarabah(profit-sharing)Mudaraba in essence is based on the concurrence of those who have capital with those who expertise.

The investment comes from the first partner who is called "Rabb-ul-Mal", while the management and work is an exclusive responsibility of the other, who is called "Mudarib".This mode achieves the interest of both parties: the capital owner and the Mudarib (agent).

The capital owner may not have the time or the experience to turn over capital


and trade with. The agent (the Mudarib) may not have the adequate capital to put to use his

experience.

The following is an illustration of the steps of the Mudaraba contract:

Mudaraba can be broadly classified into two types:

i. Al-Mudarabah al-muqayyadah (restricted mudarabah): Here the rabb-ul-mal may specify a particular business for the mudarib, in which case he shall invest the money in that particular business only.

ii. Al-Mudarabah almutlaqah (unrestricted mudarabah): Here the Rabb-ul-Mal has left it open for the mudarib to undertake whatever business he wishes, the mudarib shall be authorized to invest the money in any business he deems fit.

Conditions of Mudaraba:

Establishing a Mudaraba project:The Bank: provides the capital as a capital owner.The Mudarib: provides the effort and expertise for the investment of capital in exchange for a share in profit agreed upon.

The results of Mudaraba:The two parties calculate the earnings and divide the profits at the end of Mudaraba; this can be done periodically in accordance with the agreement along with observance to legal rules.

The participation in capital(Profit):The bank recovers the Mudaraba capital it contributed before dividing the profits between the two parties because profit is protection of capital. In case of agreement to distribute profits periodically before the final settlement it must be on account until the security of capital is assured.

The participation in capital(Loss):In case of loss, the capital owner (the bank) bears the loss. In the event of profits, they are divided between the parties in accordance with the agreement between them with observance to the principle "profit is protection to capital".

Mudarabah is a high risk mode of finance. It is so risky because the bank ought to give capital to the client relying completely on his integrity, ability and good


management. The bank is not only risking the expected return but also the capital itself.

However many Islamic banks were able to develop a new Shari'ah based forms of Mudarabah with significantly reduced degree of risk. For example:

Mudarabah is used only with public limited companies, where a reasonable degree of transparency is possible i.e. audited accounts, and quarterly reported performance; which is not possible in privately owned companies.

Securities and guarantees are introduced in the contract, but not against profit or payment of capital, but against loss due to negligence and mismanagement.

Checking the feasibility of the project, before approving it for the Mudarabah financing.

Usage of Mudaraba:

Term Financing / Project Financing

Evidence: It was proved in the "Sira" biography of the Prophet , that before prophet hood, he traveled to Syria as a Mudarib with the capital of Khadeeja (may Allah be pleased of her) and the Messenger of Allah related that after the Message approving it.

3. Musharaka (joint venture)

The literal meaning of the word Musharaka is sharing. Under Islamic law, Musharaka refers to a joint partnership where two or more persons combine either their capital or labor, forming a business in which all partners share the profit according to a specific ratio, while the loss is shared according to the ratio of the contribution.

Note: - “It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution. In the modern capitalist economy, interest is the sole instrument indiscriminately used in financing of every type. Since Islam has prohibited interest, this instrument cannot be used for providing funds of any kind. Therefore, 'Musharakha' can play a vital role in an economy based on Islamic principles.”

Conditions of Musharakah

Since Musharakah is, in essence, a contract, all conditions and rules of a contract must be met. Apart from those, there are some basic rules that apply specifically to Musharakah.

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The proportion of profit to be distributed among the partners must be determined and agreed upon at the time of the contract. Otherwise the contract is not valid under Shari’ah.

The ditribution of profit can be under any of the following type:

o Each partner’s share in the profit may be exactly equal to the proportion of initial investment into the partnership.

o The ratio of profit distribution may vary, without restriction, from the ratio of investment.

o The ratio of profit distribution may vary, however, for sleeping partners (non-active partners, who only contribute capital), it cannot be any higher than the ratio of investment.

All the Muslim jurists are unanimous that each partner’s share in loss must be exactly equal to the ratio of initial investment. Anything to the contrary will render the contract invalid.

The norm is for each partner to take part in the management of the partnership, with each partner acting as an agent of the partnership and any work done by one partner deemed to be authorized by all partners. However, if the partners wish they can contract under alternate arrangements for the management of the partnership.

It is agreed upon by the jurists that a partnership is terminated if:o One of the partners terminates the partnership; o One of the partners dies (where the heirs get the choice to continue the

partnership or liquidate it to draw their share from the partnership); o One of the partners becomes insane.

If the remaining partners want to continue the business under any of the above scenarios, it is achievable with mutual agreement. The remaining partners would have to purchase the share of the out-going partner.

Another question raised is whether the partners can agree, at the time of contracting, that the partnership will not be terminated unless all partners agree to the termination. Though the earlier fiqh books are silent on the issue, there is nothing in the Shari’ah that would prohibit such an arrangement

Usage of Mudarabah/ Musharakah:

These modes can be used in the following areas:

Assets Side Financing:

Short/Medium/Long Term finacing Project Financing Import Financing Import Bills Drawn under Import LC Inland bills dran under import LC


Bridghe financing Export Financing Working capital Financing Running accounts financing / Short term advances

Liability Side Financing:

For current/ Saving/ Mahana amdani/Investment accounts

(deposit giving Profit based on Mushrakah/ Mudarabah)

Inter-Bank lending / borrowing. Term Finance Certificate & Certificate of Investment. T bills and Federal Investment Bonds / Debenture. Securitization for large projects (based on Musharakah) Certificate of Investment based on Murabaha Islamic Musharakah bonds(based on projects requiring large amounts-profit based

on the return form the project)

3. Murabaha(cost-plus):It refers to the sale of goods at a price which includes a profit margin in addition to the cost. Such a contract is valid on condition that the price, other costs and the profit margin of the seller are stated at the time of the agreement on the sale.

Explanation of Definition

a) Murabaha is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit or mark-up thereon.

b) The profit in Murabaha can be determined by mutual consent, either in lump sum or through an agreed ratio of profit to be charged over the cost.

c) All the expenses incurred by the seller in acquiring the commodity like freight, custom duty etc. shall be included in the cost price and the mark-up can be applied on the aggregate cost. However, recurring expenses of the business like salaries of the staff, the rent of the premises etc. cannot be included in the cost of an individual transaction. In fact, the profit claimed over the cost takes care of these expenses.

d) Murabaha is valid only where the exact cost of a commodity can be ascertained. If the exact cost cannot be ascertained, the commodity cannot be sold on murabaha basis. In this case the commodity must be sold on musawamah (bargaining) basis i.e. without any reference to the cost or to the ratio of profit / mark-up. The price of the commodity in such cases shall be determined in lump sum by mutual consent.

Two points to remember before dealing in murabaha:


It should never be overlooked that, originally, murabaha is not a mode of financing. It is only a device to escape from "interest" and not an ideal instrument for carrying out the real economic objectives of Islam. Therefore, this instrument should be used as a transitory step taken in the process of the Islamization of the economy, and its use should be restricted only to those cases where mudarabah or Musharaka are not practicable.

The second important point is that the murabaha transaction does not come into existence by merely replacing the word of "interest" by the words of "profit" or "mark-up". Actually, murabaha as a mode of finance has been allowed by the Shariah scholars with some conditions. Unless these conditions are fully observed, murabaha is not permissible. In fact, it is the observance of these conditions which can draw a clear line of distinction between an interest-bearing loan and a transaction of murabaha. If these conditions are neglected, the transaction becomes invalid according to Shariah.

Conditions of Murabaha:

1. Murabahah is not a loan given on interest. It is the sale of a commodity for a deferred price which includes an agreed profit added to the cost.

2. Being a sale, and not a loan, the murabaha should fulfill all the conditions necessary for a valid sale.

3. Murabahah cannot be used as a mode of financing except where the client needs funds to actually purchase some commodities. For example, if he wants funds to purchase cotton as a raw material for his ginning factory, the Bank can sell him the cotton on the basis of murabaha. But where the funds are required for some other purposes, like paying the price of commodities already purchased by him, or the bills of electricity or other utilities or for paying the salaries of his staff, murabaha cannot be affected, because murabaha requires a real sale of some commodities, and not merely advancing a loan.

4. The financier must have owned the commodity before he sells it to his client.

5. The commodity must come into the possession of the financier, whether physical or constructive, in the sense that the commodity must be in his risk, though for a short period.

6. As mentioned earlier, the sale cannot take place unless the commodity comes into the possession of the seller, but the seller can promise to sell even when the commodity is not in his possession. The same rule is applicable to Murabaha.

7. In the light of the aforementioned principles, a financial institution can use the Murabahah as a mode of finance by adopting the following procedure:

Firstly: The client and the institution sign an over-all agreement whereby the institution


promises to sell and the client promises to buy the commodities from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up to which the facility may be availed.

Secondly: When a specific commodity is required by the customer, the institution appoints the client as his agent for purchasing the commodity on its behalf, and an agreement of agency is signed by both the parties.

Thirdly: The client purchases the commodity on behalf of the institution and takes its possession as an agent of the institution.

Fourthly: The client informs the institution that he has purchased the commodity on his behalf, and at the same time, makes an offer to purchase it from the institution.

Fifthly: The institution accepts the offer and the sale is concluded whereby the ownership as well as the risk of the commodity is transferred to the client.

(All these five stages are necessary to affect a valid murabaha. If the institution purchases the commodity directly from the supplier (which is preferable) it does not need any agency agreement. In this case, the second phase will be dropped and at the third stage the institution itself will purchase the commodity from the supplier, and the fourth phase will be restricted to making an offer by the client. This is the only feature of murabaha which can distinguish it from an interest-based transaction. Therefore, it must be observed with due diligence at all costs, otherwise the murabaha transaction becomes invalid according to Shariah.)

8. It is also a necessary condition for the validity of murabaha that the commodity is purchased from a third party. The purchase of the commodity from the client himself on 'buy back' agreement is not allowed in Shariah. Thus murabaha based on 'buy back' agreement is nothing more than an interest based transaction.

9. The above mentioned procedure of the murabaha financing is a complex transaction where the parties involved have different capacities at different stages.

(a) At the first stage, the institution and the client promise to sell and purchase a commodity in future. This is not an actual sale. It is just a promise to affect a sale in future on murabaha basis. Thus at this stage the relation between the institution and the client is that of a promisor and a promise.

(b) At the second stage, the relation between the parties is that of a principal and an agent.

(c) At the third stage, the relation between the institution and the supplier is that of a buyer and seller.


(d) At the fourth and fifth stage, the relation of buyer and seller comes into operation between the institution and the client, and since the sale is affected on deferred payment basis, the relation of a debtor and creditor also emerges between them simultaneously. All these capacities must be kept in mind and must come into operation with all their consequential effects, each at its relevant stage, and these different capacities should never be mixed up or confused with each other.

10. The institution may ask the client to furnish a security to its satisfaction for the prompt payment of the deferred price. He may also ask him to sign a promissory note or a bill of exchange, but it must be after the actual sale takes place, i.e. at the fifth stage mentioned above. The reason is that the promissory note is signed by a debtor in favor of his creditor, but the relation of debtor and creditor between the institution and the client begins only at the fifth stage, whereupon the actual sale takes place between them.

11. In the case of default by the buyer in the payment of price at the due date, the price cannot be increased. However, if he has undertaken, in the agreement to pay an amount for a charitable purpose, he shall be liable to pay the amount undertaken by him. But the amount so recovered from the buyer shall not form part of the income of the seller / the financier. He is bound to spend it for a charitable purpose on behalf of the buyer.

Usage of Murabaha:

Home Financing, Term Financing (Completed properties, New Financing / Refinancing), Vehicle Financing.

4. Musawamah (Simple Sale)An Islamic finance term that describes a sale in which the seller is not obligated to disclose the price paid to create or obtain the good or service. This defers from murabaha, where a buyer knows the cost of the underlying asset. Musawamah usually occurs when it is difficult to determine what the cost of a particular good or service was, or when the good is comprised of a pool of products. In order to comply with Shari'ah, there are many restrictions to a musawamah, including:

Conditions of Musawamah:

The underlying asset must be in existence and in the sellers’ possession at the time of the sale.

The sale must occur instantaneously, future sale dates are void. The asset must be of value and usable. All other conditions relevant to Murabaha are valid for Musawamah as well. The seller in Musawamah is not obliged to reveal his cost.


Usage of Musawamah:

Personal Financing

5. Bai-Muajjal (Credit Sale)Bai-Muajjal is a contract between the bank and the client (Seller and Buyer) under which the Bank (Seller) sells to the client (Buyer) certain specified goods (permissible under Shariah and Law of the country), purchased as per order and specification of the client at an agreed price, payable within a fixed future date in lump-sum or by fixed installments.

Bank categorizes Bai-Muajjal as following:

Bai-Muajjal Commercial: Investment for purchase and sale of goods to individual or Firm or Company for Trading purpose shall be termed as Bai-Muajjal Commercial.

Bai-Muajjal Industrial: Investment to Industrial undertaking in the form of supply of Machineries, Equipments, Raw Materials etc, will be termed as Bai-Muajjal Industrial.

Bai-Muajjal Agricultural: Investment to agriculture sector for supply of seeds, fertilizer etc, shall be termed as Bai-Muajjal Agriculture.

Bai-Muajjal Import: Investment for Import of goods from abroad shall be termed as Bai-Muajjal Import.

Bai-Muajjal Scheme: Investment under any specific Scheme shall be termed as Bai-Muajjal Scheme.

Conditions of Bai-Muajjal:

1. Bank is not bound to declare cost of goods and profit mark-up separately to the client. 2. Spot delivery of the item and payment is deferred. 3. Ownership and possession of the goods is transferred by the Bank to the client before receipt of sale price. 4. Client may offer an order to purchase by the Bank any specified goods and committing himself to buy the same from the Bank on Bai-Muajjal mode. 5. It is permissible to make the promise binding upon the client to purchase from the Bank, that is, he is to either satisfy the promise or to indemnify the damages caused by breaking the promise.


6. Cash/Collateral Security should be obtained to guarantee the implementation of the promise or to indemnify the damages. 7. Mortgage/Guarantee/Cash Security may be obtained before/at the time of signing the agreement. 8. Stock and availability of goods is a pre-condition for Bai-Muajjal agreement. The responsibility of the bank is to purchase the desired goods at the disposal of the client to acquire ownership of the same before signing the Bai-Muajjal Agreement with the client. 9. The Bank after purchase of goods must bear the risk of goods until those are actually delivered to the client. 10. The Bank must deliver the specified goods to the client on specified date and at specified place of delivery as per contract.

11. The Bank may sell the goods at one agreed price which will include both the cost price and the profit. 12. The price once fixed as per agreement and deferred can not be further increased.

Usage of Bai-Muajjal:

Home Financing, Term Financing (Completed properties, New Financing / Refinancing)

6. Bai-Bithamin Ajil (Deferred Payment)

A deferred payment sale where the payment is made in a single installment is called Bai' Bithaman Ajil. The deferred payment sale contract would include all the terms and conditions present in Bai' al-Mu'ajjal.

Note:-The only difference between Bai-Bithamin Ajil and Bai Muajjal is that in bai-bithamin Ajil the payment is made in one lone installment, whereas in bai muajjal paymnet may be made in one lone installment or in multiple installments.

Thus, Bai Muajjal can be Bai-Bithamin Ajil but Bai Bithamin Ajil cannot be Bai Muajjal.

(The conditions and usage of Bai Bithamin Ajil are same as Bai-Muajjal.)


7. Bai Salam (Future Delivery)

Introduction to Salam

It is one of the basic conditions for the validity of a sale in Shariah that the commodity (intended to be sold) must be in the physical or constructive possession of the seller. This condition has three ingredients:

Firstly, the commodity must be existing; therefore, a commodity which does not exist at the time of sale cannot be sold.

Secondly, the seller should have acquired the ownership of that commodity. Therefore, if the commodity is existing, but the seller does not own it, he cannot sell it to anybody.

Thirdly, mere ownership is not enough. It should have come in to the possession of the seller, either physically or constructively. If the seller owns a commodity, but he has not taken its delivery himself or through an agent, he cannot sell it.

Definition:

Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Risks associated with Salam:

Credit risk due to seller default is one of the risks associated with Salam. The price of the object of Salam will be higher at the time of delivery. This may

lead some dishonest people to sell the goods at other places and thus dishonoring the Salam contract.

Goods bought under Salam contract cannot be sold by the bank before actual delivery of the product. Hence banks will not be able to get its invested money back, with profit, before he actually possesses the good with him.

Conditions of Salam:

1. First of all, it is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of affecting the sale. It is necessary because in the absence of full


payment by the buyer, it will be tantamount to sale of a debt against a debt, which is

expressly prohibited by the Holy Prophet

2. Salam can be affected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of Salam.

3. Salam cannot be affected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.

4. It is necessary that the quality of the commodity (intended to be purchased through Salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.

5. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.

6. The exact date and place of delivery must be specified in the contract.

7. Salam cannot be affected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari‘ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed. All the Muslim jurists are unanimous on the principle that salam will not be valid unless all these conditions are

fully observed, because they are based on the express Hadith of the Holy Prophet

The most famous Hadith in this context is the one in which the Holy Prophet has said:


"Whoever wishes to enter into a contract of Salam, he must affect the Salam according to the specified measure and the specified weight and the specified date of

delivery".

Usage of Bai Salam:

Home Financing, Term Financing (Property under construction)

8. Bai' al-Inah (Sale and Buy Back Agreement)

The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency.

Note:- This type of contract is same as doing interest base transaction, this kind of transaction is prohibited by most of the scholars.

Conditions of Bai-al Inah:

Involves 2 parties : bank – customer. The customer approach bank for financing and bank sells the bank’s asset to the customer at a determined sales price (cost plus profit). Customer agrees to pay back in instalments, taking ownership of the bank asset. The customer re-sell the asset to the bank at a determined price (cost price / discounted price) and the bank pays (releases) the amount immediately for the customer to use. The asset ownership is returned to the bank.

Not widely accepted by the Middle East as it considered the transaction only happens on paper with no actual assets being transferred. Considered as a form of debt creation without an underlying asset, thus similar to conventional lending.

Usage of Bai-al Inah:

Islamic Credit Cards, Personal Financing

9. Sukuk (Islamic Bonds)

Sukuk in general may be understood as a shariah compliant ‘Bond’. In its simplest form sukuk represents ownership of an asset or its usufruct. The claim embodied in sukuk is not simply a claim to cash flow but an ownership claim. This also differentiates sukuk from conventional bonds as the latter proceed over interest bearing securities, whereas sukuk are basically investment certificates consisting of ownership claims in a pool of assets.

Sukuk (plural of word sak) were extensively used by Muslims in the middle ages as papers representing financial obligations originating from trade and other commercial activities. However, the present structure of sukuk are different from the sukuk originally


used and are akin to the conventional concept of securitization, a process in which ownership of the underlying assets is transferred to a large number of investors through certificates representing proportionate value of the relevant assets.

Sukuk and Bond

A bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal, whereas, the sukuk holders claims an undivided beneficial ownership in the underlying assets. Consequently, sukuk holders are entitled to share in the revenues generated by the sukuk assets as well as being entitled to share in the proceeds of the realization of the sukuk assets.

A distinguishing feature of a sukuk is that in instances where the certificate represents a debt to the holder, the certificate will not be tradable on the secondary market and instead is held until maturity or sold at par.

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines sukuk as being:

“Certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity”.

Conditions of Sukuk:

Trust certificates evidencing the investor’s claim to underlying assets. These underlying assets are the payment streams from Shariah compliant structures (such as Musharaka, Ijara or Mudaraba).

Issued with fixed rate, floating rate or other structured payment flows. Possible issuance in convertible form. All international rating agencies rate Sukuks using their rating criteria conformed

specifically for Sukuks Sukuks can be issued in listed and unlisted form. London, Luxembourg and

Bahrain Stock Exchanges and the DIFX, amongst others, will list Sukuk issues. Sukuk issuance programmes (the Shariah compliant equivalent to MTN-

Programmes) are suitable for regular capital markets issuers.

Tradable shariah-compliant capital market product providing medium to long-term fixed or variable rates of return. Assessed and rated by international rating agencies, which investors use as a guideline to assess risk/return parameters of a sukuk issue.

Regular periodic income streams during the investment period with easy and efficient settlement and a possibility of capital appreciation of the sukuk.


Liquid instruments, tradable in secondary market.

10. Takaful (Islamic Insurance):

Takaful (Arabic ‘mutual provision of guarantees, Islamic insurance) is a System based on the principles of solidarity and mutual assistance, under which the parties to the contract support each other when any of them suffers a loss (which means primarily a monetary compensation). According to Muslim scholars, the Islamic insurance (takaful) contract, as opposed to the conventional insurance contract, does not contain the elements of gharar and riba.

Takaful is one of the fastest growing segments of Islamic financial system in Pakistan. One of the reasons is that till recently Islamic Banks were forced to accept insurance cover issued by the conventional insurance companies due to absence of Takaful operators. This handsome growth is mainly due to two facts:

Growth of Islamic Banking Low insurance penetration in the country

Parties in contract:A takaful contract is made between two parties but Takaful scheme normally involves:

a) The takaful operator; providing the service to the communityb) The participant wishing to cover against risk of suffering a financial loss resulting

from fire, accident, burglary, death; etc.

Difference between Takaful and Conventional Insurance:

The distinction between the conventional insurance and Takaful business is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreement. Likewise they share in any surplus or loss from the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.

Examples of Takaful Insurance Products

Investment

Retirement, Education Plan, Marriage Plan, Term with Return of Capital,Waqf Plan , Ladies Flexible Plan, Executive Plan and Capital Plan.

Risk Only


Level Term, Keyman, Reducing Term and Increasing Term.

Group

Group Credit, Group Retirement and Group Term.

Riders

Total Permanent Disability, Partial Permanent Disability, Premium Waiver on Disability or Death, Accidental Death, Critical Illness, Family Income Benefit, Term Rider and Top-Up Rider.

Major Difference between Islamic Banking and Conventional Banking:

There are two major differences between Islamic Banking and Conventional Banking:

1. Conventional banking practices are concerned with "elimination of risk" where as Islamic banks "bear the risk" when involve in any transaction.

2. When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest; whereas Islamic banks bear all the liability when involve in transaction with consumer. Getting out any benefit without bearing its liability is declared Haram in Islam.

Islamic Banking Vs Conventional Banking

Characteristics Islamic Banking System Conventional Banking System

Business Framework

Based on Shari’ah laws - Shari’ah scholars ensure adherence to Islamic laws and provide guidance.

Not based on religious laws or guidelines - only secular banking laws.

Balance between

moral and material

requirement

The requirement to finance physical assets which banks usually take ownership of before resale reduces over extension of credit.

Excessive use of credit and debt financing can lead to financial problems

Available. Enables several parties, including the Islamic

Not generally available through commercial banks, but through


Equity financing

with risk to capital

Bank to provide equity capital to a project or venture. Losses are shared on the basis of equity participation while profits are shared on a pre-agreed ratio. Management of the enterprise can be in one of several forms depending on whether the financing is through Mudarabah, Musharaka, etc.

venture capital companies and investment banks which typically take equity stakes and management control of an enterprise for providing start-up finance.

Prohibition of Gharar

Transactions deemed Gharar are prohibited. Gharar denotes varying degrees of deception pertaining to the price and quality of goods received by a party at the expense of the other. Derivatives trading e.g. options are considered as having elements of Gharar.

Trading and dealing in derivatives of various forms is allowed.

Profit and Loss Sharing

All transactions are based on this principle.

Returns are variable, dependent on bank performance and not guaranteed. But the risks are

managed to ensure better returns than deposit accounts.

Consumers can participate in the profit upside i.e. in a more

equitable way than receiving a predetermined return.

This principle is not applied. Returns to depositors are irrespective of bank performance and profitability.

The customer as depositor is like a lender and does not share in the success of the enterprise beyond receiving a fixed rate of predetermined interest.

Unlike the Islamic system the depositor cannot theoretically gain subject to improved bank performance.


Industry Progress and Market Share

The history of Islamic banking from its recorded inception is less than 40 years old. From a humble beginning in a small village in Egypt in the late 60’s, it has spread to the four corners of the world. By normal standards in a time span that is less than half a century it could have hardly been expected to establish foothold in Muslim world, let alone make its presence felt in Muslim-minority countries. Yet such has been its phenomenal rate of growth that not only is it taking firm roots in its homestead, but is also attracting genuine interest among the standard bearers of conventional banking and in swathes of land where Muslims are a small minority only.

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 (IBs) and twelve conventional banks with Stand Alone Islamic Banking Branches (SAIBBs). Some of the current facts and figures about the industry progress and market share are given below:-

The market share of Islamic banking assets in the overall banking system rose to 4.3% as of December 31, 2007 compared with 3.0% in preceding year.

Islamic banking deposits, financing and investment stood at 4.1%, 4.3% and 2.6% respectively as compared to 2.79%, 2.88% & 0.94% a year earlier.

YoY (Year over Year) growth for total assets, deposits and financing & investment was 75%, 78%, 91% respectively.

Branch network during the same period reached 289 from 150 branches, showing 93% increase in year 2007.

It is hoped that by the end of this financial year theshare of assets of Islamic Banking to overallindustry will cross 5.0%.


Criticism on Islamic Banking:

Islamic banking has the same purpose and product offering as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions)

In general, Islam prohibits paying and receiving interest (riba). Simply puts it, you can’t make fast money from money. On the other hand, the role of money (capital) is recognized and therefore when the money (capital) is used in economic activity, sharing of the profit/loss is permitted. Charging a higher price for deferred payments in trade is also allows. All money must be invested in industries Muslims consider ethical.

Some scholars and people think that there is no difference between Islamic and Conventional banking. They have been criticized as under:

1. In conventional banking the name given to ‘rate of return’ is interest; whereas in Islamic Banking it is called Wadiah or Indicative Profit Rate.

2. Wadiah = saving account with ‘token/appreciation’Refers to deposits, which have been deposited with another person, who is not the owner, for safekeeping. As Wadiah is a trust, the depository becomes the guarantor and, therefore guarantees repayment of the whole amount of the deposits, or any part thereof, outstanding in the account of depositors, when demanded. The depositors are not entitled to any share of the profits but the depository may provide returns to the depositors as a token of appreciation.

3. Mudarabah = saving account or Fixed deposit account with ‘profit sharing’

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Refers to an agreement made between a capital provider (depositor) and another party (Bank/ entrepreneur), to enable the bank/entrepreneur to carry out business projects, based on a profit sharing basis, of a pre-agreed ratio. In the case of losses, the losses are borne by the provider of the funds.

4. Bai-Bithamin Ajil = Mortgage loan in arranged as ‘deferred payment’Refers to the sale of goods (house) on a deferred payment basis (installment) at a price, which includes a profit margin agreed to by both parties. As the final price is fixed, additional monthly payment toward the loan will not resulted in total loan, unlike conventional loan.

5. Bai-al-Inah = Personal loan where the bank sell the loan & buy back immediately with a discountThe financier sells an asset to the customer on a deferred payment and then the financier immediately repurchases the asset for cash at a discount.

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Information and Performance Regarding A Few Islamic Banks

Albaraka Islamic Bank:-Company InformationAlbaraka Islamic Bank Pakistan (AIB) has been operating in the country through branches of Albaraka Islamic Bank, Bahrain since 1991. Albaraka Islamic Bank operates under the auspices of the Bahrain-based Albaraka Banking Group (ABG), which is a leading contributor of Islamic banking, investment and treasury services. The bank is second oldest Islamic bank in Pakistan; it has 18 branches as of December 31, 2007 with deposit base of around Rs. 17 billion. Along-with total assets of Rs. 22 billion, out of which financing represent almost 55% (Rs.13 million). Albaraka Bank enjoys almost 12% share of Islamic Banking market in terms of deposit, financing and total assets in Pakistan.Performance During 2007The total asset base of the bank grew by almost 17% during 2007 to stand at Rs. 22 billion as at 31-Dec-07. The profitability of the Bank also experienced substantial improvement and registered a growth of 90% during the year. The aggregate financing portfolio of the Bank has also grown by a healthy 30%, on account of increased financing activities especially in the consumer sector. In line with this, the deposit base also went up to Rs. 16.97 billion to support the increased business activities, posting a growth of around 23%.

Meezan Bank Limited:-

Meezan Bank is a publicly listed company, first incorporated on January 27, 1997. It started operations as an Islamic investment bank in August of the same year. In January, 2002, in an historic initiative, Meezan Bank was granted the Nations first full-fledged commercial banking license dedicated to Islamic Banking, by the State Bank of Pakistan.

Meezan Bank, stands today at a noteworthy point along the evolution of Islamic Banking in Pakistan. The banking sector is showing a significant paradigm shift away from traditional means of business, and is catering to an increasingly astute and demanding financial consumer who is also becoming keenly aware of Islamic Banking. Meezan Bank bears the critical responsibility of leading the way forward in establishing a stable and dynamic Islamic Banking system replete with dynamic and cutting-edge products and services.

Bank Alfalah:-

Bank Alfalah’s Islamic Banking Division (BAL-IBD) started operations in 2003 and at its yearend reflected a modest capital base of Rs 100 million and deposits totaling Rs 113.7m. By following yearend, BAL-IBD’s equity had risen more than 4 times to Rs 569m and the balance sheet footing had swelled to Rs 7,799 million. Deposit size had grown from less than Rs 114m to over Rs 7,229 million.


The pace of frenetic, triple digit growth was continued over the next twelve months as equity more than doubled to Rs 1,278 million from Rs 569m. Assets also recorded a more than 100% growth, climbing to Rs 15,634 million from Rs 7,799 million. Deposits alone failed to double – rising to Rs 12,476m from Rs 6,548 million – yet managing a healthy 90% increase.

Financial results as of June 30, reflect growth but at more modest pace. Total balance sheet size fell shy of Rs 18 billion.

Contemporary Local & International News:-

News in Focus:

Karachi; February 21, 2008: Governor State Bank of Pakistan Dr. Shamshad Akhtar has said that Islamic Banks must now focus on increasing their branches in rural areas of Pakistan. She expressed these views while briefing the media at a ceremony celebrating Meezan Bank’s milestone of establishing 100 branches across Pakistan on Thursday.

She said that the central bank has promoted a very liberal licensing policy under which each bank is required to open 20 per cent of their branches in rural area to enhance the outreach of Islamic Banking.

Meezan considers new products

Meezan Bank Ltd would introduce Meezan Islamic Card and Islamic Micro Financing in the country. The new products were reviewed in 12th Shariah Supervisory Board meeting of Meezan Bank Ltd held at Jamia Dar-ul-Uloom Karachi. The meeting was chaired by Mufti Taqi Usmani and attended by Irfan Siddiqui, Meezan Bank’s President and CEO with the senior management and other prominent International Shariah scholars including Sheikh Essam Ishaq from Bahrain, Sheikh Abdul Sattar Abu Guddah (Saudi Arabia) and Dr Imran Ashraf Usmani. The board after reviewing the concept of proposed Islamic Micro financing banking approved the idea of introducing the Islamic Micro Financing developed by Meezan Bank’s Product Development team and opined that through Islamic Micro finance banking the true benefits of Islamic banking can reach to the grass root level and it would help alleviating poverty and bring economic prosperity in thesociety. Shariah board also discussed various features of proposed Meezan Islamic Card and recommended various tools to further improve the idea so that Islamic Shariah is truly followed in Islamic card as well. The bank has a variety of Shariah-compliantproducts and services under one roof.


Dubai Islamic Bank Pakistan’s assets reach Rs 21bn

Dubai Islamic Bank Pakistan (DIBP) recorded an incremental growth of 152 percent in its total asset base, which stood at Rs 21 billion by the end of December2007. Elaborating the bank’s achievements at a press conference, M A Mannan, CEO Dubai Islamic Bank, Pakistan said that in a short span of two years since the bank commenced operations in Pakistan, its customer base has grown by 228 percent to about 21,000 customers in 2007. Its deposit base has grown by 273 percent to Rs 16.1 billion in 2007. The share capital of Dubai Islamic Bank stands at Rs 5 billion. Mannan said, “Of the products introduced last year, DIB Auto Finance registered a volume of Rs 2.9 billion within 9 months of its launch. In a market where cutthroat competition persists, this reflects a great success for the bank.” During the year 2006–07, Dubai Islamic Bank arranged Sukuk bonds worth Rs.24 billion, which is 41 percent of the total domestic Sukuk issuances.

Japan banks focusing on Islamic funds

Japan’s Energy and Natural Resources Finance Department Director General, Tadashi Maeda said that Japan can play the role of a gateway internationally in a regional market from Asia which would help strengthen inter-regional linkages between Asia and the Gulf. In this regard Japanese banks have been focusing on the importance of Islamic funds because “we recognize the importance of Islamic finance with total assets reaching some one trillion dollars,” he said. Therefore, Japan along with Muslim countries in Asia, in particular Malaysia, has signed a memorandum of understanding (MoU) with the Central Bank of Malaysia to create an integrated Islamic Financial Market in Asia. The Financial Market would attract more investments from the Gulf including the sovereign wealth funds in the region and strengthen ties between the Gulf and Asia which is very important in terms of the energy security, Maeda, who is also Japan Bank for International Cooperation Director General, said.

Kenya gets First Islamic Bank

Two branches of the first fully Shariah compliant bank in Kenya, The Gulf African Bank (GAB) have opened in Nairobi. The GAB will initially operate a branch in city centre and another at the city suburb dominated by Refugees from Somalia, an area that does booming business dealings with imports from Dubai and Far East. The bank according to its managers will open another branch in Mombassa a town with huge Muslim population before moving to other places in the coast and northeastern province where Muslim population is big. With an estimated population of nearly 5 million Muslims in KenyaGAB hopes to do booming business in the country.


Commercial Bank of Kuwait to go Islamic

The Commercial Bank of Kuwait was awaiting approval from the central bank to transform into an Islamic lender, the bank's chief executive said. 'There is at least 25 percent of the market who prefer to deal with Islamic banks,' Jamal al-Mutawa toldReuters. 'Why would we lose this sector?' Existing banking laws allow commercial banks to establish a unit to operate according to Islamic law with a capital of 15 million dinars ($55.11 million), Mutawa said. CBK, which at first had only submitted a request to set up an Islamic unit, decided later to transform entirely to tap demand for Islamic banking products in the Gulf Arab state.


Branch network during the period reached 289 from 150 branches, showing 93% increase in year 2007, however in recent survey of May 7, 2008; the total number of branches have increased to 312; which is quite an embracing figure in such a short period.



The abbreviation used for the banks are:-

No. Abbr. Bank

1 ABN ABN Amro Bank N.V.2 AIB Albaraka Islamic Bank B.S.C. (E.C.)3 ASK Askari Commercial Bank Limited4 BAF Bank Alfalah Limited5 BAH Bank AL Habib Limited6 BIP Bank Islami Pakistan Limited7 BOK The Bank of Khyber8 DIB Dubai Islamic Bank Pakistan Ltd9 DWD Dawood Islamic Bank Limited10 EGI Emirates Global Islamic Bank Ltd11 HBL Habib Bank Limited12 HMB Habib Metropolitan Bank Limited13 MBL Meezan Bank Limited14 MCB MCB Bank Limited15 NBP National Bank of Pakistan16 SCB Standard Chartered Bank (Pakistan)17 SNR Soneri Bank Limited18 UBL United Bank Limited- Ameen

Documents

Islamic Banking in Contemporary World & Islamization of Banks in Pakistan