Lecture 2 (Banking)

Slide 1

INTRODUCTION TO BANKING

BY :SYED WAQAR AHMED

OUTLINE OF LECTURE # 2Introduction to Banking: Introduction to Islamic Banking; Growth of Islamic Banking in Pakistan; Issues and Challenges; key Players and Industry Landscape.

INTRODUCTION TO BANKING: INTRODUCTION TO ISLAMIC BANKING;

Introduction to Islamic Banking The term Islamic banking refers to a banking activity or a system of banking that is in consonance with the basic principles of Islamic Shraiah(rules and values set by Islam). Islamic banking is also known as interest free banking system as the Shariah disallows the acceptance of Riba or interest rate for the accepting and lending of money. In Islamic banking system, a business that offers good interest rates or services is strictly prohibited and it is in fact considered Haraam(forbidden). Islamic banking offers the same facilities as conventional banking system except that it strictly follows the rules of Shariah or Fiqh al- Muamlat.


The Origin, History and Evolution of Islamic BankingThe origin of Islamic banking system can be traced back to the advent of Islam when the Prophet himself carried out trading operations for his wife. The Mudarbah or Islamic partnerships has been widely appreciated by the Muslim business community for centuries but the concept of Riba or interest has gained very little diligence in regular or day-to-day transactions.


The first model of Islamic banking system came into picture in 1963 in Egypt. Ahmad Al Najjar was the chief founder of this bank and the key features are profit sharing on the non interest based philosophy of the Islamic Shariah. These banks were actually more than financial institutions rather than commercial banks as they pay or charge interest on transactions. In 1974, the Organization of Islamic Countries (OIC) had established the first Islamic bank called the Islamic Development Bank or IDB. The basic business model of this bank was to provide financial assistance and support on profit sharing.


By the end of 1970, several Islamic banking systems have been established through out the Muslim world, including the first private commercial bank in Dubai(1975), the Bahrain Islamic bank(1979) and the Faisal Islamic bank of Sudan (1977).


Major Models of Islamic Banking and Finance SystemThe main and important models of Islamic banking system are as follows:MURABAHAMurabaha is the sale on the profit which is mutually agreed by both parties. Islamic banking system has adopted this term as a primary mode or technique of financing. Murabaha is actually a request which is set by the client to the Islamic bank to leverage certain services or goods for him and in return, the bank provides a definite profit to the client over the cost of the services or goods.


IJARAHIt is the contract or the legal right against a lawful or a specified return for the effort or work which is proposed to be expended and for the benefits that are proposed to be taken.MUSAWAMAHIt is the regular or general sales of goods in which the price of the goods or commodity is bargained between the buyer and the seller.

GROWTH OF ISLAMIC BANKING IN PAKISTAN

Growth of Islamic Banking in Pakistan

GROWTH OF ISLAMIC BANKING IN PAKISTANBy Guest Blogger May 17th, 2013 Category: Misc No Responses Pakistan is standing as the second largest Islamic nation in the world where Islam is the predominant religion, the population of second largest Islamic nation is over 180 million people and it is growing rapidly but on the other hand the banking sector has only been able to grab only 20 million customers. Couple of years back Pakistan had only one Islamic bank but today five Islamic banks are doing its operation in the country.

GROWTH OF ISLAMIC BANKING IN PAKISTANAccording to an analysis, there is still the capacity of 40 million more people in the market for the banking sector which they can grab. Islam is the predominant religion in Pakistan and Shariah compliant Banking as of today has a very small market share, thus reflecting a huge potential for growth in this sector. The interest-free Islamic banking has gained a tremendous growth in the country in previous years and also can further expand by making effective policies and by introducing more products.

GROWTH OF ISLAMIC BANKING IN PAKISTANAccording to the data from the State Bank of Pakistan, between 2002 and 2011, deposits grew at an average annual rate of 59.6% at Islamic banks, compared to the banking sector average of 16.1% per year in the same time period. This shows a positive growth in the deposits of Islamic banks and the interest of people towards the Islamic banks. According to the State Bank of Pakistan, in 2012, 35% growth is detected in the total deposits of Islamic banks as compared to the previous year.

GROWTH OF ISLAMIC BANKING IN PAKISTANOn the other hand, when we talk about the assets, during the past five years the assets grew by 30% of Islamic banks resulting the assets into 8.5 billion dollars. In 2012 a growth of 14% is recorded in the financing by Islamic banks in different sectors. Current holdings of Islamic banking in the country are estimated at 7.8 trillion rupees, which stands 10% of the total capital size of the banking sector.

GROWTH OF ISLAMIC BANKING IN PAKISTANMore than one thousand branches of Islamic banks shows the growth of confidence of people on the Islamic banks and thats why Islamic banking is getting fast growth in every perspective including market share, deposits and financing. People are now more concern about the Riba free financing because Riba is prohibited in Islam thats why the culture of Islamic banking is expanding and growing faster than the conventional banks because of speedy and better returns.

If new products are focused to be introduce than Islamic banking can grab 10% more share from the assets of all the banks in the current year. The Islamic banks should keep an eye on global strategies, find ways to improve rate of returns and remain Shariah compliant.

GROWTH OF ISLAMIC BANKING IN PAKISTANAccording to Irfan Siddiqui, President and CEO of Meezan, Islamic banking has a share of 8% in the banking industry thus it should grow to over 15% by 2016.The market share of Islamic banking assets grown to 8.6% by the end of December 2012 and in overall banking industry and deposits increased to 9.7% by end of December 2012 in overall industry.

GROWTH OF ISLAMIC BANKING IN PAKISTANThe assets of Islamic banking grew by 12.8% and reached to 837 billion rupees from 742 billion rupees. It was 641 billion rupees in 2011, so ultimately it is showing a huge growth in this regard. In the case of investment and financing, a growth of 17.5% is spotted in the financing and 5.5% growth is seen in the investment of Islamic banking. The deposits of Islamic banking picks a growth of 12.5% from 627 to 706 billion rupees while previously that growth rate was just 4.2% which depicts that the Islamic banking sector is growing day by day.

ISSUES AND CHALLENGESSome of the challenges that the Islamic banking industry faces today includes:Lack of awareness & skepticism at different levels including investors, bankers, regulators, researchers & customers.

Being a new industry, a major challenge in its growth is the worldwide shortage of trained Human Resource in Islamic banking & finance.

Limited number of Shariah Scholars that create over reliance and raise questions about Shariah compliance of the institutes involved.

ISSUES AND CHALLENGESFocus efforts needed for New Product Development & Research.

Solutions for Liquidity Management & creation of Islamic Inter-bank Market.

Absence of a separate Regulatory, Legal & Risk Management framework to cater the specific need of Islamic banking Institutes.

KEY PLAYERS AND INDUSTRY LANDSCAPE

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Lecture 2 (Banking)