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Islamic Banking

Historical Growth & Future Outlook

Salient Features of Islamic


Finance
Prohibition of transactions on a Riba basis.
Wealth should be directed in the Halal Channels which
will benefit all individuals.
Wealth must not be spent with a motive of exploitation or
to the detriment of society or individuals.
Funds are not to be utilized lavishly, avoiding
extravagance & thrift.

Salient Features of Islamic


Finance
Money is not be treated as a commodity in itself as a unit
of account and measure of value that can be used as a
means to fulfill the needs of society.
A fixed charge on capital is unjust. Risk and Reward go
together. No risk no return.
Wealth should be acquired through legitimate trade and
the creation of real assets.

History of Islamic Banking


In the early history of Islam, the injunction against
interest was strictly observed, but with the decadence of
moral values, financial practices based on interest (Riba)
began to permeate.
In the period of colonial domination, the interest system
became solidly entrenched in Muslim countries.
With attainment of freedom from foreign powers and the
resurgence of Islam, there is wide-spread yearning in
Muslim countries to reorder their economic life in the
light of Islam.
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History of Islamic Banking


In this context, the elimination of Riba, which is strictly
prohibited, became the biggest challenge faced by the
Muslims.

In the midst of 20th century, the Muslim experts paid a


good deal of attention in economics, banking and finance
to find ways and means eliminating Riba.

Islamic Banking system was established during


1970s.Among the first institutions was the Naseer Social
Bank which started operations in Cairo, Egypt, in 1972.
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History of Islamic Banking


In 1975 Dubai Islamic Bank was established.
During the last three decades an immense
research and efforts have been made to confine
the system for Pakistani environment.
In the present decade the Islamic banking
system has gained a good position in the world
around.
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Chronological introduction of
Islamic banking products
1970s

1980s

1990s

Retail Banking
Murabaha
Project Finance
Wadiah
Syndication
PLS Musharaka/
Equity
Mudaraba

2000s

Current

Ijarah
Sukuk
Str. Products
Wealth

Mgmt.

Islamic Banking

Increase in count in over than 75 countries


Malaysia, Bahrain, Pakistan are among big players
Total business has crossed US$1.3T.
Islamic Financial and quality control agencies emerged
Examples:
IFSB = Islamic Financial Services Board
AAOIFI = Accounting and Auditing Organization for Islamic
Financial Institutions
IIFM = International Islamic Financial Market
LMC = Liquidity Management Centre
IIRA = International Islamic Rating Agency
GCIBFI = General Council of Islamic Banks and Financial
Institutions

Islamic Banking Industry


in

PAKISTAN
An Overview

Evolution of Islamic banking


Pakistan struggled for Islamic system during 80s but the
system failed:
REASONS for FAILURE OF EARLY EFFORTS

Absence of Shariah compliance mechanism in financial institutions.


Ineffective enforcement of contracts and inefficient system for early
recovery.
Ineffective code of conduct for professionals.
Lack of continued research and development in the field of Islamic
finance and economics.
Inadequate training to the staff of SBP and banks.
Lack of public awareness about Islamic economic system.

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Evolution
of Islamic Banking
Islamic Banking in Pakistan has a short
history of 13 years when in 2001 Meezan
Bank started its operations

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Year Wise Entry of Players


2003
1. Meezan Bank
2. Bank of Khyber
3. MCB Bank
4. Bank Alfalah
2004
1. Albaraka Islamic Bank
2. Habib Bank AG Zurich
3. Standard Chartered
4. Metropolitan Bank
5. Soneri Bank
2005
1. Habib Bank
2. Bank Al Habib
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Year Wise Entry of Players


2006
1. Dubai Islamic Bank
2. Bank Islami Pakistan
3. ABN Amro N.V. (Now RBS Bank)
4. Askari Bank Ltd.
5. National Bank
6. United Bank Ltd.
2007
1. Emirates Global Islamic
2. Dawood Islamic Bank
Then many mergers took place.
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Evolution of Islamic banking

Islamic Banking industry is on fast growth;


6 full commercial Islamic banks are functional
Size of total banking industry is 13.0% (30-06-2013).
The total branch network of the Islamic banking
industry comprises of 700 branches with presence in
over 50cities.
Islamic banking gets great attention academically
Attention to Human Resource development.
Healthy competition among players
Good control
Shariah Governance
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Industry Progress

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Industry Progress

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Major Players
Full Fledged Islamic Banks
S.No. Islamic Banks

No of Branches

Meezan Bank Limited

145

Albarka Islamic Bank Limited

20

Banks Islami Pakistan Limited

85

Dubai Islamic Bank Pakistan Limited

20

Emirates Global Islamic Bank Ltd

24

Dawood Islamic Bank Limited

14

Total (A)

308

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B)

Islamic Banking Branches No. of


of Conventional Banks
Branches

National Bank of Pakistan

MCB Bank Ltd

The Bank of Khyber

17

Bank Alfalah Ltd

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Habib Metropolitan Bank Ltd

Standard Chartered Banks Ltd

Banks Al Habib Ltd

Habib Banks Ltd

Soneri Bank Ltd

10

Askari Bank Ltd

14

11

United Bank Ltd

12

Royal Bank of Scotland

Total (B)

105

Total (308 + 105)

413

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Basic Difference between Islamic and


Conventional Modes of Finance
Conventional
money
Bank
Bank

Client
Client
money + money
(interest)

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Basic Difference between Islamic


and Conventional Modes of Finance
Islamic

Bank

Goods
&
Service
s
mone
y

Client

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What Distinguishes Islamic


Banking
All transactions are asset-based
It is socially-responsible banking
Because it operates under Shariah
restrictions
Does not permit financing of prohibited
goods / Industries
It starves evil out of the society

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Basic difference between an Islamic


Bank and a Conventional Bank
Islamic Bank

Conventional Bank

1-Islamic Banking prices goods


& services

1-Conventional banking prices


money

2-The relation between Islamic


bank & Customer is one of
participation in risks and
rewards.

2-The relationship over here b/w


bank and customer is that of
debtors and creditors.

3-Profit is shared with the


depositor, higher the banks
profit, higher the depositors
income.

3-Depositors get a fixed rate


regardless of the banks
profitability, thus insulating them
from the banks true
performance.
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Basic difference between an Islamic


Bank and a Conventional Bank
Islamic Bank

Conventional Bank

4-An Islamic bank keeps capital


funds and investors funds
segregated, in order not mix up
the profit earned on its own
funds (capital & current up)
balances.

4- The conventional banks pool


together all the funds.

5-Islamic banks do not provide


finance by offering cash loans,
but through Musharaka etc.

5- The conventional banks offer


provide finance totally by
offering cash loans.

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Basic difference between an Islamic


Bank and a Conventional Bank
Islamic Bank

Conventional Bank

6-Islamic banking is primarily


equity-based.

6- The conventional system is as a


whole interest-based.

7-The Islamic system is valueoriented.

7-This system is value-neutral.

8-Actively participates in trade and 8- Does not involve itself in trade


production.
& business.

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Common Misconceptions

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Common Misconceptions
Islamic banking looks the same as conventional banking

A Halal meat and Haram meat may look exactly the same
But one is permissible while the other is not

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Common Misconceptions
A fixed rate of return is not permitted under Islamic Shariah

Fixed return does not make a transaction Halal or Haram


For example:
Profit on trading
Rent on property
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Current Trends in Islamic banking


Sukuk issuance
Housing mortgage
Shariah-compliant investment
banking activities
Murabaha domination
Mergers & Acquisitions
Project Finance
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Products & Services


Fund based - I
Corporate & SME:
Ijarah Finance (Plant, Machinery, Equipment &
Vehicles)
Musharaka Finance (Commercial)
Murabaha Finance (Local, Import, Export)
Salam Finance
Istisna Finance
Musawama
SBP Islamic Export Re-finace
Structured Finance
Sukuk
The lending rates depends on PIB, TB & KIBOR rates with
monetary policy.

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Products & Services


Fund based - II

Consumer Finance:
Diminishing Musharaka
Ijarah
Murabaha
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Product & Services


Non-fund based
Letter of Credit (Sight & Usance)
Guarantees (Bid bonds,
Performance Bonds, Advance
Payments)

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Deposit side Products & Services


Current Account (Qard)
Savings Account (Musharaka, Mudaraba)
Term Deposit Account (Musharaka, Mudaraba)
Online Banking/Phone Banking/SMS Banking
Clearing/Collection
ATM

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The HR Outlook
HR
Requireme
nt
No. of
employees
Annual
Growth
rate

2008

2009

2010

2013

9,601 13,063 16,181 20,953


36%

24%

14%

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Mountains to be crossed - I
Enhance access of financial
services to all population
segments
Enhance coverage of financial
services to all Shariah-compliant
sectors
Induce, motivate and draw nonShariah compliant sectors to
Islamic banking
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Mountains to be crossed - II
Development of standardized
products
Achieve standardization in Shariah
laws, Legal, Regulatory and
Supervisory frameworks
Comprehensive system for interbank liquidity management
Development of Islamic capital
markets
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Mountains to be crossed - III


Product Development
Short-term placement of Treasury funds
Long term tradable instruments

Risk Management tools


IT Banking solutions
Shortage of qualified,
experienced professionals
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Mountains to be crossed - IV
Strengthening of supervision
of Islamic banks:
Shariah-based mindset
critical
Transparency & Disclosure
Risk Management

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Islamic Banking is Reality


The Islamic banking system is not a
imaginary thing. There is need to
develop insight, educate and train
the bankers in the Islamic economic
and banking system.

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Islamic Banking is Reality


Without having a deep understanding
of the principles of Islamic banking, it
is difficult to offer its products and
services that confirm to the true spirit
of Islamic Shariah.

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Current banking situation


Deposit rates are not increasing
due to increase in NPLs.
Five major banks enjoying 51% of
banks deposits.
The current deposit is 27% ,
saving is 40% & fixed is 33% of
total deposit.
The average deposit rate is 8% to
9%
The spread is from 5% to 10%.

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