Term Report

Course: Analysis of Pakistani Industries

Submitted by:

Junaid ZamirSP06-BB-0010

Tariq Ali KhanSP06-BB-0022

Submitted to:Sir Afaq Ali Khan

Submission Date: 09th May, 2009

Mohammad Ali Jinnah University, Karachi22-E, Block-6, P.E.C.H.S. Karachi-75400, Pakistan

Tel: 111-87-87-87 & 431-1325-26URL: www.jinnah.edu E-mail: info@jinnah.edu

Table of Contents

ISLAMIC BANKING IN PAKISTAN 1

1. Acknowledgement ……………………………………………………………………... 3

2. What is Islamic Banking ……………………………………….…..........................

4

3. Principles ………………………………………………………………………..…………4

4. Terminologies ………………………………………………………………….……….. 5

5. Products offered by Islamic Banks ….……………………………………………….

7

6. History …………………………………………………………………………….……....9

7. How it is Different ? .

…………………………………………………………………...10

8. Industry Overview

…………………………………………………….......................11

9. Key Challenges Facing Islamic Banks ……………………………………..…….

….13

10. SWOT analysis………………………………..…………………………………….……

14

11. Problems …………………………………………………………………………………18

12. Future …………………………………………………………………….…………..….18

ISLAMIC BANKING IN PAKISTAN 2

ACKNOWLEDGEMENT

First of all we are very thankful to ALLAH-RAB-UL-IZZAT who gives us such power, knowledge and ability to accomplish our goals. With out His kind help we would be unable to do this report.

We are grateful to our teacher Mr. Afaq Ali Khan for teaching us this course of ‘Analysis of Pakistani Industries’. His versatile knowledge in this discipline and unique teaching style has developed our knowledge and cleared many ambiguities.

We are all very grateful to him for assigning this challenging presentation, which will further help us in evaluating many interrelated dimensions in establishing quality control systems in any business.

Finally, we thank all our other professors and teachers who has taught us in different fields as finance, marketing, management and other areas of specialization and made us able to think differently as an intellectual and specially to those who has directly or indirectly supported us with their assistance and guidance to compose this project report and accomplish broader vision to visualize things.

“MAY ALLAH, THE ALMIGHTY BLESS ALL THE PERSONALITIES WHO HAD DIRECTLY OR INDIRECTLY HELPED US TO ACHIEVE OUR GOALS”

What is Islamic Banking

ISLAMIC BANKING IN PAKISTAN 3

A system of financial activities consistent with Shariah, based on Islamic principles which at the core refuses collecting interest, transactions involving uncertainty and speculation.

It is based on the Islamic economic system. It is not restricted to Muslims only.

Principles

It works on Islamic set guidelines consisting of Risk Sharing, Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, Transparencies & Fair Deals.

Any predetermined payment over & above the actual amount of principal is prohibited (interest) the only loan it allows is qard-ul-hassna whereby lender does not charge any interest.

The Islamic financial system employs concept of participation , utilizing funds on a profit-and- loss-sharing basis.

Terminologies

Takaful

ISLAMIC BANKING IN PAKISTAN 4

It is a form of Islamic Insurance. Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes.

Sukuk

It is a form of Islamic Bonds the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond.

Murabaha

It is a contract for purchase and resale and allows the customer to make purchases without having to take out a loan and pay interest. Bank purchases the goods on behalf of the customer, and re-sells them to the customer on an agreed profit margin and the customer pays the sale price for the goods over installments.

Musharaka

It means partnership. It involves you placing your capital with another person and both sharing the risk and reward with profit sharing ratio, but losses must be proportionate to the amount invested.

Mudaraba

It refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise and who agrees to the division of any profits made in advance. The Bank would make Sharia’a compliant investments and share the profits with the customer, in effect charging for the time and effort. If no profit is made, the loss is borne by the customer and Islamic Bank of Britain takes no fee.

Ijarah

Ijara is a form of leasing. It involves a contract where the bank buys and then leases an item. For example auto ijarah is simply an agreement under which the vehicle shall be given to you on rent for a period, agreed at the time of the contract. Bank purchase the vehicle and it out to the consumer for a period upon completion of the ijarah

ISLAMIC BANKING IN PAKISTAN 5

period the consumer get owner ship of the vehicle through a separate sale agreement.

Products offered by Islamic Banks

Islamic current account

Islamic current account provides a very convenient and flexible option to deposit holder. It offer ease of doing unlimited transaction. This is an ideal deposit product for business and individuals who require unrestricted access to their banking account. Islamic banking holds the same properties and features like a conventional account. Islamic mahana account

All funds raised by bank are invested in businesses which are in compliance with shariah. Importantly the are invested in the manner which is pre scribed by the shariah. All profit are pooled and distributed

ISLAMIC BANKING IN PAKISTAN 6

according to the per-agreed ratio between the Islamic bank and the depositor. While the transaction are reviewed by the shariah adviser to ensure compliance with shariah.

Automobile

Auto ijarah is simply a rent agreement under which the vehicle shall be given to you on rent for a period, agreed at the time of the contract. Islamic bank purchase the vehicle and rents it out to the consumer for a minimum period of 3 years and upon completion of the ijarah period the consumer get owner ship of the vehicle through a separate sale agreement (as per the requirement of shariah ) against an agreed price.

Home finance

It is based on the concept of diminishing musharakah (shirkat- ul-malik) the bank rent its share in the property to the customer. The customer pay rent for the bank’s share and simultaneous busy share in the property from the bank the bank at the end of the tenure, the customer becomes the sole owner of the property.

ISLAMIC BANKING IN PAKISTAN 7

History

The pioneering effort, led by Ahmad Elnaggar, 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 by which time there were nine such banks in the country.

In 1973, the Islamic Development Bank was set-up.

The first Islamic bank in Malaysia was established in 1983. In 1993, commercial & merchant banks were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business.

The Islamic Summit of Lahore, Pakistan held in 1974

recommended the creation of Islamic Banks and Islamic Development Bank.

On 14 Ramadan 1420, the Shariah Bench of the Supreme Court of Pakistan gave its landmark decision banning interest in all its forms and by whatever name it may be called. The court also specified a step by step approach to rid the country of the evil of interest. (The Historic Judgment on Interest by the Supreme Court of Pakistan)

ISLAMIC BANKING IN PAKISTAN 8

After 55 years after its creation in the name of Islam, Pakistan became the first Muslim country to officially declare modern bank interest as ar-riba, declared haram by Qur'an

How it is Different ?

Islamic Orders not to use Money as a commodity.

They operate under the concept of lender-borrower relationship and the profits generated through this relationship are divided between the two parties as per agreement.

How does it works ?

The bank entirely depends upon the fixed deposits and does not borrows money from the central bank.

Bank gives loan on basis of mutual agreement.

Marjorly focuses on sales transaction.

ISLAMIC BANKING IN PAKISTAN 9

Industry Overview

Islamic Banking is growing rapidly in Pak it has been expected that by 2012 total share in Banking sector will be 12%.

Present Islamic Banking share is 5%

Growth rate is 50%

Overview Assets Rs 276 Bn (asset base of entire Banking System Rs 5,653

Bn)

Profit Rs 1.8 Bn dec-08

Deposits Rs 201.7 Bn (17.7%)

ISLAMIC BANKING IN PAKISTAN 10

Performance of various Banks

8,333UBL

630Standard Chartered

621Meezan Bank

15,459National Bank

15,375MCB

(53)Bank Islami

4,157Allied BankProfit (March 30, 2009) (Millions)Bank Name

Islamic Banks in Pakistan

• Dubai Islamic Bank Pakistan Limited

• Meezan Bank

• Dawood Islamic Bank Limited

• AlBaraka Islamic Bank

• Bank Islami

• Emirates Global Islamic Bank Limited

Branch Network

• Dubai Islamic Bank Pakistan Limited branches 25 in 10 cities

• Meezan Bank 166 branches in 40 cities

• Dawood Islamic Bank Limited 19 branches in 9 cities

ISLAMIC BANKING IN PAKISTAN 11

• BankIslam102 branches in 49 cites

• Emirates Global Islamic Bank Limited 41 branches in 24 cities

Total branch network of combine Islamic banks is 353 Branches in almost all big cities of Pakistan.

Key Challenges Facing Islamic Banks:

Shariah interpretations

It is the legal framework within which the public and private aspects of life are regulated for those living in a legal system based on fiqh for Muslims living outside the domain. Sharia deals with many aspects of day-to-day life, including politics, economics, banking and business. On the other hand, there are also those who believe that no form of banking can ever comply with the shariah. The current issue with Islamic banking is the difference of opinions given by different shariah commite which create doubt in the mind of people.

Shariah experts

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish Shariah advisory committees / consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. Shariah experts in its broader sense that gives primacy to objectives over rules and regulations shares these concerns.There views may vary creating contradictions.

ISLAMIC BANKING IN PAKISTAN 12

Product development and execution

The hasn’t been any such Islamic product developed by the Islamic banks. Till now they have modified products from conventional banking which creates doubts in the mind of a general user. Shariah compliance leads to additional time, greater product complexity, higher skills requirements, and more onerous documentation relative to conventional banking. 

Competition from conventional banking:

The above-mentioned obstacles already hamper Islamic banks’ ability to compete on an equal footing with conventional banks. Profit-loss sharing arrangements may also be viewed with caution by bank customers.

SWOT analysis

STRENGTHS WEAKNESSES

1. Advantages of religious

proposition in a country

made on name of Islam i.e.

Pakistan.

2. Competitive advantage:

Less marketing is required

than conventional banking

and better cost control as a

result.

3. Morale and commitment to

serve is higher among

1. Lack of standardization

across the Muftis /scholars of

the country and among the

scholars and bankers.

2. Disadvantage of

proposition is that there

would be a hesitant and new

thing not fully accepted /

suited to World Bank, ADB,

and other multinational donor

agencies to invest through

ISLAMIC BANKING IN PAKISTAN 13

bankers and staff due to

religious value.

4. Huge amount of savings

can be mobilized and thus

boosting the deposit base of

banks using charities and

Zakat fund schemes, etc.

5. Less use of money for

speculative purposes thus

chances of investment failure

and much volatility in

investment is reduced.

6. Innovative aspect is also

found in it, using phone

banking, e- banking, etc. a

blend of tradition and modern

life can be easily served to

customers.

7. Location wise &

geographically, it is feasible

and operational all across the

country, as Pakistan is 98%

Muslim population country

scattered in all nooks of

national territory.

8. Quality of services will not

less than conventional

banking services so a

competitor to established

banking (interest based) in

same market.

banking sector in country.

3. A lot of capital is needed

to boost it in front of

conventional banking, and

also huge reserves have to be

maintained, to meet any loss

sharing situation in Islamic

finance modes of investment.

4. Time/season factor

becomes a major problem in

case of Islamic banks, as

people would like to shift their

money from zakat deductible

accounts or they wish to pay

their zakat from “Halal” funds

during Ramadan or on Eid

festivals, etc. creating short

term liquidity problems for

the banks.

5. There are differences in

theory and practice of

Islamic banking in Pakistan to

some extent creating an

inherent weakness.

6. Management and staff

need further training to

serve Islamic financial

services and relevant

experience as well to done

their job efficiently.

ISLAMIC BANKING IN PAKISTAN 14

9. All Banks all over the world

have opened a Islamic

window offerinf wide range of

Islamic products and to deal

with Islamic operations

OPPORUNITIES THREATS

1. More opportunities now lie

in Islamic banking as it has

been accepted by BASEL, WB,

ADB, international agencies,

multinational corporations,

non Muslim governments, etc.

with creation of big sukuk and

Islamic deposit base in Gulf

and Malaysian regions.

2. Traditional interest based

banking will have to

defend through heavy

marketing and advertising in

Muslim countries which off

course reduce their

profitability.

3. Islamic banking is a

complete solution to

economic and to some extent

social needs of Muslims from

House building to education in

addition to conventional help

in commerce, business and

1. A lot of legislation is

required for Islamic banking

world wide and especially in

non-Muslim countries; even in

Pakistan some legal loopholes

are present in its proper

implementation.

2. Comprehensive Islamic

economic and banking

models have yet to develop

or they are not in their

maturity stage to provide a

blueprint of economic

development and prosperity.

3. IT developments and

Research in latest Banking

are in non-Muslim countries

where conventional interest

based banking have a very

strong position thus Islamic

banking will enjoy latest tools

of IT, but lesser than

conventional banking.

4. Environment for Islamic

ISLAMIC BANKING IN PAKISTAN 15

industry.

4. Modern Islamic banking

emerged in late 20th century

with more or less advent of

internet and information

age, thus it is naturally

blended with tools of internet,

and computer based banking,

and will witness a sharper

growth than traditional

banking growth of last 500

years.

5. New markets have been

emerged with growth of

Islamic banking as well:

Islamic mortgage, Islamic

insurance, new investment

projects etc.

6. In non-Muslim countries, like

France where Muslim are in

minority (around 10%) of

population, Islamic banking

will enjoy the benefit of niche

marketing and if properly

targeted will obtain better

results.

banking in west has been

declined after 9/11 attacks on

WTC, New York and later

Prophet Mohammad (P.B.U.H.)

protests in Muslim world,

widening the gaps between

the western investors and

Islamic banking markets.

5. Market demand is good but

very less as compared to

conventional interest based

banking through out the

world, i.e. beyond some

countries.

6. Sustainable financial

backing by large

multinational firms,

investment banks, and World

major economic powers is

lacking.

ISLAMIC BANKING IN PAKISTAN 16

Problems

The problem with these shariah boards is that they give conflicting opinions that result in confusion and doubts.

They approve 1 product and the other may reject

Jorban a Muslim scholar disapproved the penalty imposed on defaulting.

Britain had rejected Islamic mortgage as it based on interest based structure.

Malaysia has proposed to setup standards for both IB and IF. such standards would result in consensus instead of confusion or conflict.

Future

Replace conventional Banking system with Islamic banking System.

Expand their Branch Network.

2012 total share in Banking sector will be 12%.

This is evident not only from the growing number of banks established specifically for practicing shariah compliant finance, but also from the increasing number of conventional banks such as Citibank, HSBC, RBS, Standard Chartered, UBS, etc engaging in shariah compliant operations.

ISLAMIC BANKING IN PAKISTAN 17