Factor that effect the growth of Islamic Banking in Pakistan

Research Advisor:

Sir Salman Masood

Submitted By:

Zahid Mahmood

Roll No

MBP-9642

Session 2008-2010

Superior University Lahore

Chapter#1

Introduction

The banking system in an economy works like the blood circulation system of a body. As only an

competent blood circulation system can make sure a healthy body, similarly an efficient and

reasonable banking system can distribute economic efficiency and justice. These basic concepts

and objectives are common to any banking system whether it be Islamic or conventional

banking. . The difference lies in the methodology adopted to achieve these objectives. What are

the different factors that influence the growth of Islamic banking and how can managers deal

with these variables to increase the growth of Islamic banks for one’s own firm? Variables that

influence the growth of Islamic banking include the political support. But what kind of the

relationship is between the growth of Islamic banks (IbK) and each of the variables? The main

purpose of this study is to explore the relationship between growth of Islamic banks and these

variables. 150 questionnaires were filled to verify the spearman correlation and regression

equation. The empirical results showed that all the variables are good tools to increase the

growth of Islamic banking in Pakistan.

Purpose Statement:

Determine those factors that affect the development of Islamic banking in the country.

Research indicates these are many internal and external factors are near which growth of

Islamic banking. External factors cannot be controllable but the internal factors can be

controlled. So there are several internal factors, which affect the growth of Islamic banking in

the country. Therefore, purpose of this study will be develop a questionnaires on the variables

which were defined in the model to quantify the findings and checked the western model in the

context of developing country (Pakistan).

Objectives of the study:

To find out the different factors, how affect the growth of Islamic banking.

To know about deviation in the growth of Islamic banking.

Provide information about these factors.

Significance of the Study:

The growth of Islamic banking for the country cannot be neglected. In other way it is the main

Islamic source for the investors to make decision either to invest or deposit their money in the

Islamic way. That’s why growth of Islamic banking is so important. The Growth of Islamic

banking measures the financial position of the economy. To increase the growth of Islamic

banking of the country can be an important step is achieving the desired goals. It provides

basics for the investors and also for the shareholders to make a further stronger relation with

the customers. To check the role of those factors who affect the growth of Islamic banking.

There are several factors that affect the growth of Islamic banking like, low knowledge,

Innovation, political support. These are those factors that help to enhance the growth of Islamic

banking. Secondly, no research has been found on theses determents of growth of Islamic

banking in Pakistan. Therefore, the present study will prove to be a significant contribution in

this area.

Research Question:

Main Question

What are the main factors that impact the growth of Islamic banking?

Sub Questions

1. What is the impact of Political support on the growth of Islamic banking?

2. What is the impact of Low knowledge on the growth of Islamic banking?

3. What is the impact of Innovation on the growth of Islamic banking?

Research hypothesis:

Hypothesis 1:

H1: there is relationship between the Islamic banking and Political support.

H0: there is no relationship between the Islamic banking and Political Support.

Hypothesis 2:

H1: there is relationship between the Islamic banking and low knowledge.

H0: there is no relationship between the Islamic banking and low knowledge.

Hypothesis 3:

H1: there is relationship between the Islamic banking and innovation.

H0: there is no relationship between the Islamic banking and innovation.

Key terms

Political Support: It is the constitutional and legal responsibility of the Pakistan

government and its people to implement the interest free economy and financial system in the

country. However the government did not devise any comprehensive strategy for Islamic and

tried to enforce the Islamic order in the economic arena only (Nomani and Rahnema, 1994).

The present government’s claim that it has been promoting the interest-free banking practice

under a dual system is neither feasible nor realistic.

Low Knowledge: In Islamic banking they cannot provide the proper knowledge about the

interest free banking. Proper knowledge can increase the Islamic banking productivity in

Pakistan. The success of this kind of banking practice definitely looks for enforcing Islamic

reforms in the overall system, which is not possible. In fact the conventional banking system

have been acting very convenient source of funding for the government, but the interest free

banking order was supposed to be not.

Innovation: In business, revenue or revenues is income that a company receives from its

normal business activities, usually from the sale of goods and services to customers. In many

countries, such as the United Kingdom, revenue is referred to as turnover. Some companies

receive revenue from interest, dividends or royalties paid to them by other companies.

Revenue may refer to business income in general, or it may refer to the amount, in a monetary

unit, received during a period of time, as in "Last year, Company X had revenue of $32 million."

Chapter#2

Literature review

Gait and Worthington (2008) An empirical survey of individual consumer, business firm and

financial institution attitudes towards Islamic methods of finance. An important survey of

empirical analyses about Islamic financial products and services the comparison with the

literature on conventional financial services and products. It was found that while religious

conviction is a key factor in the use of Islamic finance consumers also identify bank reputation

service quality and pricing as being of significance. When selecting a financial institution's

products and services business firms usually employ criteria that are more conventional such

as the cost of finance in their decision making. There is also interest among financial

institutions in supply Islamic financial products and services, but this mitigations by difficulties

with firm management and a lack of familiarity with business conditions. The concept of risk

sharing with borrowers serves as a important barrier to most financial institutions engaging in

Islamic methods of finance. Need for further theoretical and empirical research on how

religious conviction affects consumers in their financial decision making. In addition most work

on Islamic finance in a single national context international comparisons are required.

Khan and Bhatti (2006) studied that why interest-free banking and finance movement failed in

Pakistan. They studied to understand the reasons why Islamic banking failed in Pakistan despite

lots of efforts being made to implement in contrast to its success in other parts of the world.

There study was based on arguable conceptual approach. They provided a longitudinal view of

the issue of replacing the interest-based financial system in Pakistan with an interest-free

system by taking the religious, socio-economic and political factors of the country. They found

that the slowly solutions to remove interest from the financial sector of Pakistan could never

succeed. They concluded that all intellectual, practical, political, constitutional and legal efforts

undertaken in Pakistan to implement an interest free system were not meant in serious and

therefore they inflicted serious damage to the basis of Islam as well as Islamic banking. Interest

is prohibited in Islam for its unfair nature. In case of Pakistan, interest institution is not only

inherent, but also strongly interlinked with other unequal tools that are prevalent in the hands

of some selected people to keep their control over political, economic and social spheres of

Pakistan. There was necessary need to eliminate interest along with its related forces from the

polity of Pakistan. The practical success of interest-free banking and finance movement in

Pakistan could not be materialized except the position and polity of Pakistan are not convinced

seriously to discover the paradigm of their personal and state institutions based on Islamic

guidance and principles.

Baba and Amin (2009) conduct a research on the offshore bankers' observation on Islamic

banking niche for Labuan: an analysis. The objective of their paper was to detail the finding of a

study to determine the viability of Islamic banking as a niche for the Labuan International

Offshore Financial Center (IOFC). Labuan was declared an IOFC by the Malaysian Government in

1990, with the goal of developing it as a financial “superstore” offering a wide range of offshore

financial products specializing in Islamic finance. They employed the mail survey method to

ensure the secrecy of the respondents and the whole population of banks is used, which enable

the researcher to ignore the problems of bias in the sampling. The Data collected from the

survey to analyzed using descriptive statistics, mean, standard deviation, and frequency counts.

The results of the survey indicated that Labuan offshore bankers did not have a clear idea of

Islamic banking principles and practices. The results also showed that most of the offshore

banks did not have officers and staff who were familiar with Islamic banking. Nevertheless,

conventional offshore banks were willing to train their officers in Islamic banking skills and

participate in future Islamic deals. The findings also indicated that Islamic banking was a viable

niche for the Labuan IOFC. However, the results also showed that Labuan does not have

competitive advantage over Bahrain and London, Presently the important Islamic finance

centers in the world.

Nathan and Ribera (2007) explore the concepts and relationships between intellectual capital

knowledge perception and corporate responsibility in the context of the corporate governance

of Islamic financial institutions. The presented an adaptation of the Nicholson and Kiel thinker

capital model of the board of directors including the role of the Shari’s Supervisory Board (SSB).

The main research question was how the SSB added value to the corporate governance model

of IFIs through their intellectual capital. Was there any value in replicating the IFIs structure in

western conventional banks and if yes how could it be done without the religious and cultural

impacts. They create that was only recently that one entered the knowledge economic time

and organizations were slowly realizing the need and the benefits not only of managing

knowledge better, but also of managing it in a wiser way. The concepts and values carried by

Islamic banking and by social responsible investments have a lot in common and they both tend

to bring wisdom to the organizations operation and goals.

Choudhury (2006) studied the Islamic macroeconomics. He designed to offer a new

perspective on the strictly microeconomic nature of all Islamic economics. He provided a

comparative study of received literature in the history of economic thought and contrasts the

ethical foundations of Islamic economics from the mainstream between microeconomic and

macroeconomic parts. They found that there was a strong microeconomic foundation of Islamic

economics for the economy wide treatment of ethical economic issues and problems including

the policy framework. His research was based on the theoretical exploration.

Anjum (2008) conduct a study on the Islamic world’s development policy responses to

the challenge of financial globalization. He analyzed the nature mechanisms conventional and

modern instruments dynamics and the future possibilities of the modern phenomenon of

financial globalization from the point of view of identifying and addressing the corresponding

real politico-economic challenges confront by the contemporary Islamic world. He focused on

the institutional responses of the contemporary Islamic world to the challenges of financial

globalization. He developed a theoretical treatise on its subject in the light of research work of

Ali Khan (2000) who points to the imperative of an Islamic institutional response to financial

globalization. by treating the institution of Islamic banking as the solid substitute of the Islamic

financial institution to highlight the actual and prospective responses of the Islamic financial

institutions to the challenges of financial globalization. He found that financial globalization was

an evolving reality. Because of its atheistic, money-oriented, undemocratic, non-universal and

interest-based world view and character, financial globalization had been posing a serious

challenge to the contemporary Islamic countries’ agenda of economically empowering and

developing themselves through the integration of their economies along the universal Islamic

lines exhibit in the form of one Islamic Omaha.

Karim and Affif (2005) conducted a study on the Islamic banking consumer behavior in

Indonesia. They used a qualitative approach to conduct that research, three market segment

was driven by different motivation was found. Due to different motivation level, the consumer

decision making process of each segment very different. In addition, based on our study, they

just looked two segmentation variable, namely value–graphic variable and economic size

variable. The combination resulted in our Kmark Segmentation Model. From this segmentation,

the consumer evaluation stage in the decision making process can be further classified. They

found that the Islamic banks development in Indonesia was phenomenal. The number of banks

increased from only five banks (three Islamic Banking Unit and two Islamic Commercial Banks )

in 2000 to 18 banks ( three Islamic Commercial Banks and 15 Islamic Banking Unit) by the end

of 2004. Therefore Assets grow by an average of 70% per year in the last five years namely from

Rp 1,790 trillion to Rp 14,035 trillion by the end of 2004. Funds collected by the Islamic banks in

Indonesia has reached Rp 10,559 trillions, while financing channeled by the Islamic banks

reached Rp 10,978 trillions, creating a finance to deposits ratio of 104,00%.Therefore Another

important development of Islamic banks in Indonesia is the number of branch and sub-

branches offices. In 2000 the number of branch offices was only 28, while in 2004 it has grown

to 148.1 this does not include the number of ATM (Automatic Teller Machines) that can be

accessed by Islamic bank customers. In 2005 it is estimated that the number of Islamic banks

will still increase significantly. Following this growth is the increase number of branch offices,

sub-branch offices, ATM, assets, and of course customers. Unfortunately, studies regarding

customer’s behavior of the Islamic banking customers in Indonesia be still rare. Questions

regarding what is the public awareness of Islamic banks, why customers choose an Islamic bank

for its financial need, why customers choose a assured bank, why customers prefer a certain

Islamic bank, and what is customers knowledge on Islamic bank products are so important but

currently not fully understood so far. That need of consumer knowledge then created the

problem of Islamic banking in Indonesia. In term of quantitative measures financial figures were

all progressing, but in term of the human nature many was yet to be understood.

Cerimagic (2010) conducted a research on the effect of Islamic law on business

practices. His research gives professionals working in Islamic countries a better understanding

of the legal system in those countries. As rule multinational companies were more equipped in

dealing with problems when govern by Western legal philosophies and jurisprudence. However

when certain issues fall on the jurisdiction of an Islamic country they had to address it by using

the Islamic laws (Shariah laws) maintained in the Quran. The data used in paper was literature

review based on texts and references sourced in the business environment. The literature used

was Islamic literature in the Bosnian and English languages. He found that the Islamic laws

oblige companies to be wary of interest, uncertainty or risk, which showed the companies that

rely on compelling interest on the consumer were prohibited in operating in Islamic states. The

law was there to protect the welfare of all the parties involved. The strict nature of these laws

often seeks to provide justice and fairness to both parties. Thus, for organizations and

international companies who intend to deal with companies based in Islamic countries and stick

to Shariah law should always be mindful of the fairness of their offers and the justice of the

outcomes of those agreements.

Burghardt and Fuß (2004) conducted a research on the Islamic banking credit products in

Germany and in the United Kingdom. They analyzed whether the predictions about a

prosperous future of an international Islamic banking market could be justified by evidence

from the German and the United Kingdom (UK) markets. They focused on Islamic Banking credit

products, since their characteristic features were heavily influenced by the criticism of interest

in Islamic law. The data was collected through the interviews with bankers to analyze the

German and the UK markets for those products from both a supply and a demand perspective.

They showed that the Islamic population in Germany mainly came from secularized Muslim

countries, where the influence of religion on commercial and banking law was low. Therefore

they did not identify any particular need for German Muslims to actively demand Islamic

banking credit products in Germany. They found that 63 percent of the Turkish population in

Germany had savings accounts in 2000, 42 percents and 25 percents had credit card and

building society savings agreements or securities accounts respectively. Of those German Turks

having bank accounts, a majority of 53 percent were customers of local savings banks, followed

by 24 percent being customers of major German banks (11 percent were clients of former

Deutsche Bank24) and the Volks and aiffeisenbanken, those 17 percent held were accounts.

Unpredictably only 14 percent of German Turks were customers of Turkish banks. These result

were in line with the overall preferences of banks by the entire German population according to

the Deutsche Bundes bank, roughly 44 percent of private individuals were clients of savings

banks, followed by 29 percent of regional banks, 20 percent of major German banks, 7 percent

of state banks and only 0.2 percent at branches of overseas banks.

Pearson (2008) conducted a study about the consciousness of Islamic finance and its recent

development in the UK. Second, to highlight the unique challenges faced by the sector,

identifying areas where good progress has been made and providing the Governments

perspective on where more barriers to development lie. Islamic finance described the part of

the financial services industry those complied with the principles of Shariah (Islamic law).

Though that had obvious appeal to some Muslims, Islamic finance was available to all

consumers and investors. The Governments policy objectives for Islamic finance be cleared.

First to establish and maintain London as Europe’s got away to international Islamic finance.

Second to ensure that nobody in the UK was without access to competitively prices financial

products on account of their confidence. The Government’s approach to achieving these

objectives was characterized by the principles of equality collaboration and commitment.

Significant progress towards meeting those objectives had been made. The UK was at that time

important centre for Islamic finance outside of the Gulf Cooperative Council and Malaysia.

London and Birmingham now host the only separate Islamic financial institutions in the EU. UK

consumers could now access a broad range of Shariah compliant retail financial products and

services, which were in time to the same standard as conventional financial products,

conferring the same degree of consumer safety. The role of the Government in achieving this

progress has been important, particularly through the removal of tax and narrow barriers. The

Treasury and the Financial Services Authority will continue to work towards creating a level tax

and regulatory playing field between conventional and Islamic finance. Furthermore the

Government would continue to keep the feasibility of issuing independent wholesale and retail

Islamic finance products under review they found that much of the future work in developing

the sector and removing barriers to growth in areas such as consistency, awareness and skills

must for industry to take forward with Government providing support and encouragement

where suitable. Particular areas where the Government has identified opportunities for further

progress included.

Through collaboration between industry and international standard setting

bodies creating a set of strong and accessible term-sheets for the main Islamic

products.

Through collaboration among industry and population groups raising awareness

and knowledge about Islamic finance at the grass roots level.

Through collaboration between industry and trade bodies high lighting the UK’s

strength as a provider of education training and skills in Islamic finance. Many

remaining barriers will be addressed as the sector grows and develops.

Shahinpoor (2009) studied, The relation between Islamic banking and micro financing,

he described the basic principles of Islamic banking and micro financing and then he showed

the relationship between the two financial practices. In general it was believed that the two

practices were not compatible since microfinance allowed interest payments on loans and

Islamic banking prohibit interest payment based on Islamic law by sharia. Both the practices

however promoted equality and fairness for all members of the society and encourage

entrepreneurship by giving collateral free loans to the poor. The two practices therefore are

ideologically linked. He found that Islamic spiritual leader’s usually dismissed micro financing

because micro financing requires high interest rates was against Islamic law. He found that it

was possible to join the two practices and to convince Islamic religious leaders that Islamic

banking could be applied to micro financing.

In (1999 conduct a study by) Naser, Jamal, Al-Khatib conducted a research on the Islamic

banking in relative to a study of customer satisfaction and preferences. The data was collected

and samples are taken from Jordan the Islamic banking system is gaining momentum. Many

international conventional banks have started to open branches which operate in accordance

with the Islamic Shariah principles in some Islamic countries. The Islamic banking system is

predictable to face strong competition not only from the Islamic banks but also from well

established conventional banks offering Islamic products and services. In this study an effort is

made to assess the degree of customer awareness and satisfaction towards an Islamic bank in

Jordan. A sample 206 respondents took part in this study. The analysis of their responses

discovered a certain degree of satisfaction of many of the Islamic banks products and facilities.

The respondents expressed their dissatisfaction with some of the Islamic banks services.

Although the respondents indicated that they are aware of a number of specific Islamic

financial products like Musharaka, Mudarabaand Murabaha, they show that they do not deal

with them.

Bhatti and Khan (2008) conducted a study on the growth of Islamic banking with prospect with

a financial risk-allocation approach they studied unequaled development in Islamic banking, its

infrastructures and supporting institutions in current years. They expressive the case for Islamic

banking in a very comprehensive and effective manner. It depict Islamic banking as a growing

regulation adding more ethical, competitive and diversified tools and systems into global

finance. It highlights the paradigm theory and practice achievements, pitfall and future

prospects of Islamic banking. They used the conceptual model and practice of Islamic banking.

They cover other related issues over the recent development of Islamic banking across the

globe. They observed that Islamic banking has made unparalleled progress over recent years.

The Middle East, South Asia and Indian Subcontinent have emerged as hub of Islamic banking.

Western conventional regulators and investors and other agents have also shown a greater

interest in and a accessible attitude towards Islamic banking. Although all the Islamic banking

has been facing some core problems and challenges that will have deeply impacts on its future

growth and there improvements.

Alhabshi, Abdullah and Mokhtar (2008) studied the Efficiency and competition of the Islamic

banking in Malaysia. The study measures the technical and cost efficiencies of these banks using

the nonparametric border method, data envelopment analysis (DEA). They results showed that

on average the efficiency of the overall Islamic banking industry has increased during the period

of study The study also discovered that although the fully fledged Islamic banking were more

efficient than the Islamic windows, they were still less efficient than the conventional banks.

Finally Islamic windows of the foreign banks were found to be more efficient than Islamic

windows of the domestic banks.

Metawa and Almossawi (1998) conducted a study on the Banking behavior of Islamic bank

customers perspective and implications. They described a study planned to investigate the

banking behavior of Islamic bank customers in the state of Bahrain. The study sample

comprised 300 customers. A comprehensive profile analysis and a series of chi square tests

were conducted to expose key characteristics and patterns the majority of Islamic bank

customers are well educated, approximately 80 percent are between 25-50 years of age more

than 50 per cent of the surveyed customers have maintained their current banking relationship

with Islamic banks for more than six years, customers understanding and usage rates are quite

high for savings accounts, current accounts, investment accounts and automated teller

machines, customers were found to be mostly satisfied with the products and services they use

most with investment accounts receiving the highest satisfaction score Islamic bank employees

received the highest satisfaction score among the elements of the service delivery system. The

two most important bank selection criteria were adherence to the Islamic principles, followed

by the rate of return.

Ismail (2010) studied Strength and improve the liquidity management in Islamic banking. They

analyzed and evaluate the current liquidity management in the Indonesian Islamic banking

industry. It also suggest an integrate and comprehensive program of liquidity risk management

which captures and assimilate the whole aspects of the issue and brings the industry into a

better way of managing liquidity risk based on sharia principles. They examine the

organizational structure of Islamic banks and Islamic windows in managing liquidity. Second it

investigates the characteristics of the depositors their investment behaviors and expectations

followed by the banks efforts and policies to manage the liquidity. Then it identifies the

potential liquidity problems and Islamic liquid instruments. Finally it proposes an integrated and

comprehensive program for managing liquidity. They were suggested that institutional

deepening restructuring the liquidity management on the liability and asset sides and

refreshing the usage of the Islamic liquid instruments in the integrated program.

Haron and Azmi (2008) conducted a research on the Determinants of Islamic and conventional

deposits in the Malaysian banking system. They investigate the impact of selected economic

variables on deposits level in the Islamic and conventional banking systems in Malaysia. Both

long and short run relationships between these variables are measured by using advanced time

series econometrics. These techniques are co integration and error correction framework which

are conducted within the vector auto failure framework. They applied recent econometric

techniques. We find determinants such as rates of profit of Islamic bank rates of interest on

deposits of conventional banking base lending rate, Kuala Lumpur composite index, consumer

price index, money supply and gross domestic product have different impact on deposits at

both Islamic and conventional banking systems. In most cases customers of conventional

system behave in conformity with the savings behavior theories. In contrast most of these

theories are not applicable to Islamic banking customers. There is a possibility that religious

belief plays an important part in the banking decisions of Muslim customers.

Sufian (2007) conducted a study the efficiency of Islamic banking industry in Malaysia Foreign

vs. domestic banks .The documents utilized the Data Envelopment Analysis (DEA) methodology

which allows for the decomposition of technical efficiency into its pure technical and scale

efficiency components. The authors additional examined whether the domestic and foreign

banks are drawn from the same population by performing a series of parametric and

nonparametric tests. Finally the authors attempt to investigate the consistency of the estimated

DEA efficiency scores by investigative its relationship with the traditional measures of banks

performance. The result obtained from the DEA suggest that Malaysian Islamic banks efficiency

declined in year 2002 to recover slightly in years 2003 and 2004. The domestic Islamic banks

was more efficient compared to the foreign Islamic banks although marginally. The source of

this incompetence of Malaysian Islamic banks in general has been scale. Suggesting that

Malaysian Islamic banks have been operating at the wrong scale of operations. The results from

the parametric and nonparametric tests further suggested that the foreign and domestic banks

are drawn from the same population. Most of the test results could not reject the null

hypothesis at the (0.05) levels of significance. The results of correlation coefficients have

further confirmed the authority of scale in determining the technical efficiency of Malaysian

Islamic banks. The results also suggest that profitability is significantly and positively correlated

to all efficiency measures.

Alexakis and Tsikouras (2009) Islamic finance regulatory framework challenges two-faced

ahead conducted a study on the regulatory framework and key regulatory institutions and

industry associations in Islamic finance today and highlight areas that merit increased

awareness. The Data is collected from a large range of bibliography was reviewed with

particular focus on the standards published by the Islamic Financial Services Board of

Accounting and Auditing Organization for Islamic Financial Institutions. Regulatory topics of

particular interest in the Islamic financial world are reviewed. An overview of the main Islamic

regulatory institutions is provided. The paper ends with a set of hypotheses requiring more

research. They found that the growth of the Islamic finance sector may be impacted by the

increased involvement in Islamic finance by Western regulators as well as credit rating agencies,

existence of sound accounting procedures, increased protection of stakeholders of Islamic

Financial Institutions.

Choudhury, Husain (2005) conducted a study on the paradigm of Islamic money and

banking. The logical perspectives in ethics, values and their functional application in the real

world are brightly covered by the theory and practice of Islamic banking in recent times. They

seeked to formalize the logical paradigm of the unity of God (Tawhid) and to make the

foundation of unity of knowledge in the context of the money of finance and real economy

linkages. The data is collected by combines’ description with argument and analysis. On the

basis of this study they structure of the balance sheet of Islamic banks with no interest rate as

an ethical condition of Islamic financing is delineated. This topic is followed by a discussion on

the experience of Islamic banks in recent times in the area of mobilizing resources and gaining

profitability popularity and permanence by the Islamic financing methods and the direct

mobilizing of financial resources into the real economy. In this technique the Islamic banks are

shown to attain the much needed complementary relations between social well being for

clients and financial efficiency for the banks.

Hasan (2008) conducted a study on the credit creation and control. In view of a rapid

development of Islamic banking in recent decades the answer to questions whether Islamic

banks can create credit like conventional banks and if yes what methods central banks could

use to control in their case of principal importance. An overview of the literature on the subject

is provided and credit creation process is explained as background material for the discussion.

They found the literature on the subject is insufficient, controversial and questionable. One

reason seems to be the difference between structural design of Islamic banks and the

objectives they are supposed to meet. It is conclude that Islamic banks can create credit in the

usual manner but central banks will have to design new tools for credit control appropriate to

Islamic banks. The findings of papers may have serious implication for the current structure of

Islamic banking and legal framework for regulating their credit creation and activities

Hassan and Aldayel (1998) studied on the stability of money demand under interest free

versus interest based banking systems. They study and examine empirically the constancy of

the demand of money under two different financial systems. One system pays interest on

money deposited at the bank and charges interest on bank loans, the other does not pay

interest on money deposited in the bank, and enter into a profit sharing contract with the bank

borrower instead of charging interest on bank loans. Therefore the first system resemble the

western financial system and the second resemble Islamic financial system. A study by Darrat

(1988) studies the behavior of demand for money in Tunisia and fulfilled that interest free

money is more stable than the interest bearing money. The behaviour of demand for money in

15 countries has been analyzed in this research in order to find out if the findings by Darrat

(1988) are applicable to other countries that practices of Islamic banking. This study finds that

the velocity of money and its variance are lower for interest free banking system than for

interest bearing banking system. This result may support the hypothesis that interest free

money is more stable than interest bearing money. The financial policy implications of interest

free banking are also analyzed.

Hassan, Christopher (2005) conducted a study on corporate governance declaration disclosure

of Malaysian banks and the role of Islam The objective of this study is to undertake a

qualitative study to examine the influence of religion specifically Islam on corporate

governance statement disclosure in the annual reports of three major Malaysian banks both

conventional and Islamic banks. It has been argued that given the characteristics and values

espouse by Islam there is an expectation that in Malaysia an Islamic organization like the Bank

Islam should make additional governance disclosures would set it apart from conventional

banks. This evidence thus far seems to suggest that the role of Islam has not been as expected.

Specifically being an Islamic organization (by virtue of label attached to and/or the nature of its

operations) and having Malays/Muslim directors leading such Islamic organization have not

resulted in better corporate governance practices and disclosure relative to other secular

banking institutions that have fewer Malay/Muslims directors. Possible implications of these

findings are proffered in the paper.

Anjum (2006) conducted the study on globalization at junction of competition,

revolution, and universally. The Islamic universal remedy, strategy and policy instrument. The

planned paper aims at contributing an objective analysis of the nature agenda and political

economic and strategic dynamics of the contemporary movement of globalization. The paper is

going to explore the important pattern of economic changes, which have culminate into global

warfare resulting from the contemporary world level experiences of globalization and the

corresponding revolutionary tendency responses encounter on the global level. In this

background the basis for adhere to the Islamic program of universalization shall be addressed

from the point of view of the sustainable development of the Islamic world. He found that

Because of either the perpetual nature (e.g. in case of Pakistan's debt crises) or habitual nature

(e.g. in case of Malaysia's slow down in 1997-98 and in 2001) of the economic crises of the

Islamic countries within the current framework of the capitalistic globalization the expected

way out for the realization of the sustainable economic and human development in the Islamic

world seem to be offered only by the Islamic program of universalization.

Boocock and Presley (1993) equity capital for Small and medium-sized enterprises in

Malaysia Venture Capital or Islamic Finance .This article seeks to explore whether there is a

role for venture capital in the funding of small and medium sized enterprises (SMEs) within a

developing country, where there has not been an established culture of equity linked funding.

In addition the links between venture capital and the concepts of Islamic banking are

examined. The Malaysian economy is taken as a case study as it allows a discussion of venture

capital issues along the potential for Islamic finance.

Choudhury (1994) conducted that study the Muslim republics of the CIS. Their Political

Economy under socialism, Capitalism and Islam discuss the present day economic

transformation sponsored by the IMF in the direction of privatization in the Common wealth of

Independent States. Chooses as a case study the Muslim CIS community as the perfect example

of the failure of the instruction of structural transformation by the socialist and capitalist

orders. Adopt a methodological and empirical approach to demonstrate the extreme

destabilization and disequilibrium which are shown to remain surrounded in these prescriptions

of change. Hence the monetary fiscal, trade and pricing policies prescribed by the IMF are

under attack as much as the old socialist prescription is shown to have been an unreal one.

Gives a brief history of the Muslim CIS community pointing to an altogether different approach

to structural change desired by these people, the world view of Islam in socioeconomic matters.

Gives details of this bring out the nature of this world view in the form of a universally

knowledge based model of structural change. Discusses the policy implications in the context of

this Islamic knowledge based world view.

Chapter III

Theoretical Foundation

Introduction

System of banking consistent with principles of Islamic law and Islamic economics, Islamic law

prohibits the collection of interest, commonly called riba, although revenue-sharing

arrangements are generally permitted. With increased trade between western nations and

Islamic nations in the Middle East, Citibank, Deutsche Bank, and other western banks have been

opening Islamic banking units since 1996. Because modern Islamic banking is relatively new,

rules for financial accounting, bank governance, and lending standards are continually evolving

as business practices become more refined. The Institute of Islamic Banking and Insurance, a

London organization, says Islamic banks are structured to retain a clearly differentiated status

between shareholders' capital and clients' deposits to ensure correct profit sharing according to

Islamic law.

Evaluation

The first modern experiment with Islamic banking was undertaken in Egypt under cover,

without projecting an Islamic image, for fear of being seen as a manifestation of Islamic

fundamental which was abhorrence to the political government. The pioneering effort, led by

Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town

of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 198l), by which time there were

nine such banks in the country. These banks, which neither charged nor paid interest, invested

mostly by engaging in trade and industry, directly or in partnership with others, and shared the

profits with their depositors (Siddiqi 1988). Thus, they functioned essentially as saving

investment institutions rather than as commercial banks. The Nasir Social Bank, established in

Egypt in 197l, was declared an interest-free commercial bank, although its charter made no

reference to Islam or Shariah (Islamic law).

The IDB was established in 1974 by the Organization of Islamic Countries (OIC), but it was

primarily an inter governmental bank aimed at providing funds for development projects in

member countries. The IDB provides fee based Faisal Islamic Bank of Egypt (1977), and the

Bahrain Islamic Bank (1979), to mention a few.

The Asia-Pacific region was not oblivious to the winds of change. The Philippine Amanah Bank

(PAB) was established in 1973 by Presidential Decree as a particular banking institution without

reference to its Islamic character in the bank's charter. The establishment of the PAB was a

response by the Philippines Government to the Muslim revolution in the south, designed to

serve the special banking needs of the Muslim community. However, the primary task of the

PAB was to assist rehabilitation and reconstruction in Mindanao, Sulu and Palawan in the south

(Mastura 1988). The PAB has eight branches located in the major cities of the southern Muslim

provinces, including one in Makati (Metro Manila), in addition to the head office located at

Zamboanga City in Mindanao. The PAB, however, is not strictly an Islamic bank, since interest

based operations continue to coexist with the Islamic modes of financing. It is indeed attractive

to observe that the PAB operates two 'windows' for deposit transactions, i.e., conventional and

Islamic. Nevertheless, efforts are underway to convert the PAB into a full fledged Islamic bank

(Mastura 1988). Islamic banking made its debut in Malaysia in 1983, but not without

antecedents. The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings

Corporation set up in 1963 to help people save for performing hajj (pilgrimage to Mecca and

Medina). In 1969, this body evolved into the Pilgrims Management and Fund Board or the

Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance

company that invests the savings of would be pilgrims in accordance with Shariah, but its role is

rather limited, as it is a non bank financial institution. The success of the Tabung Haji, however,

provided the main thrust for establishing Bank Islam Malaysia Berhad (BIMB) which represents

a full fledged Islamic commercial bank in Malaysia. The Tabung Haji also con tribute l2.5 per

cent of BIMB's initial capital of M$80 million. BIMB has a complement of fourteen branches in

several parts of the country. Plans are taking place to open six new branches a year so that by

1990 the branch network of BIMB will total thirty-three (Man 1988) References should also be

made to some Islamic financial institutions established in countries where Muslims are a

minority. There was a increase of interest-free savings and loan societies in India during the

seventies (Siddiqi 1988). The Islamic Banking System (now called Islamic Finance House),

established in Luxembourg in 1978, represents the first attempt at Islamic banking in the

Western world. There is also an Islamic Bank International of Denmark in Copenhagen and the

Islamic Investment Company has been set up in Melbourne Australia financial services and

profit sharing financial support to member countries. The IDB operations are free of interest

and are clearly based on Shariah principles.

Theoretical model:

Political Support

Low knowledge

Islamic Banking

Less innovative

Theoretical framework

Political Support: It is the constitutional and legal responsibility of the Pakistan

government and its people to implement the interest-free economy and financial system in the

country. However, the government did not devise any comprehensive strategy for Islamic and

tried to enforce the Islamic order in the economic arena only (Nomani and Rahnema, 1994).

The present government’s claim that it has been promoting the interest-free banking practice

under a dual system is neither feasible nor realistic.

Low Knowledge: In Islamic banking they cannot provide the proper knowledge about the

interest free banking. Proper knowledge can increase the Islamic banking productivity in

Pakistan. The success of this kind of banking practices definitely looks for enforcing Islamic

reforms in the overall system, which is not possible. In fact, the conventional banking system

have been acting very convenient source of funding for the government, but the interest-free

banking order was supposed to be not.

Innovation: In business, revenue or revenues is income that a company receives from its

normal business activities, usually from the sale of goods and services to customers. In many

countries, such as the United Kingdom, revenue is referred to as turnover. Some companies

receive revenue from interest, dividends or royalties paid to them by other companies.

Revenue may refer to business income in general, or it may refer to the amount, in a monetary

unit, received during a period of time, as in Last year, Company X had revenue of $32 million.

Chapter 4

Data and Methodology

Data

The objective of this study is to find out the factors that affect the growth of Islamic banking.

For the purpose of that data have been collected on four variables. In this research there are

four main variables, one is dependent and other three is independent variables. Islamic banking

is dependent variables where as Political support, Low knowledge and innovation is

independent variables. Data on the four variables have been collected through questionnaire.

The study covers the sample of 150 questionnaire people having different position in the

Islamic banks and some questionnaire are filled by the regular banks in Lahore.

Methodology:

Number of method has been used in my study to judge the relationship of independent and

dependent variable. Descriptive analysis, Scatters plot, Correlation and regression analysis.