PAKISTAN ISLAMIC BANKS JOIN

HANDS
Pakistan’s six Islamic banks are going to set up an Islamic inter-bank price
market in order to stop relying on interest-based conventional banks in meeting
their short-term funds requirements. "Things are almost finalized and an official
announcement in this regard will soon be made," Ahmed Ali Siddiqui, head of
Product Development Shari`ah Compliance at Meezan Islamic Bank, Pakistan's
first full-fledged Islamic bank.

Pakistan has six Islamic banks, Meezan Bank, Bank-al-Islami, Global Islamic
Bank, Al-Barka Bank, Dawood Islamic Bank and Global Emirates Islamic Bank.
They have around 500,000 customers in consumer financing and deposits
sectors and hold 5 percent share in the overall banking sector in the country.
Meezan is the first full-fledged Islamic bank in Pakistan and was issued license
by the State Bank of Pakistan in 1997.

There is already a conventional inter-bank price market for interest-based

conventional banks in the South Asian Muslim country. "Though, the exiting inter-
bank price market is not completely haram, our customers and religious scholars
feel awkward about that because of the involvement of interest-based banking
sector," Siddiqui said.

"Therefore, the Shari`ah advisory boards of the six Islamic banks sat together a
few months back and decided to set up their own interest-free price market," he
added. "The major thrust of the proposed market is that the Islamic banks should
not depend on the conventional banking sector in order to meet short-term funds
requirement, which is unavoidable in this field," Siddiqui explained.

"Therefore, we have decided to meet our respective funds requirements through

each other. We believe that the Islamic banks have sufficient funds to meet each
others’ funds requirements." Dr Shahid Hasan Siddiqui, a Karachi-based veteran
economist, welcomed the Islamic inter-bank price market plan. "This is a very
timely decision because the Islamic banks have been depending on interest-
based banks to meet their short-term funds requirement, which confuses their
customers," he told IOL. "There is no doubt about its viability. It will work
Inshaullah."

Expanding

The banks decision is the latest sign of the boom in Islamic finance in Pakistan.
"This is a major step which we are going to take vis-à-vis expansion of Islamic
banking in Pakistan," said Siddiqui. He asserted that Islamic banking has gained
a boom during the last few years, especially after the simmering global financial
crunch.
"We have witnessed a growth rate (in Islamic Banking) in three figures during the
last year. And we are targeting 12 percent share in the overall banking sector by
2012." Siddiqui says the current global financial crisis has diverted more and
more Pakistanis towards Islamic banks.

"We have not received any direct impact of the global financial crisis because our
investments are assets-based rather than speculations." Islamic finance is
already one of the fastest growing sectors in the global financial industry. The
Islamic banking industry, which began almost three decades ago, has made
substantial growth and attracted the attention of investors and bankers across
the world.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide
whose assets are predicted to grow to $1 trillion by 2013.

A CONSUMER PERSPECTIVE

The Idea of Islamic Banking is still hot these days in Pakistan. Either completely
new Islamic institute are being emerged or recent traditional banks are opening
additional branches focusing in Shariah-based Financing products/services. But
still consumers doubt that how much are they Islamic? Three years back, Fazal
Ahmed, chief financial officer of the Islamic Investment Bank quoted that
“Pakistan followed Malaysia and Bahrain considered the role models of Islamic
banking while it formulated its regulations, now Pakistan has the best possible
framework for Islamic banking that it can”. But, at the end of the day, government
institutions and authorities cannot judge whether they have proved themselves or
not while consumers do.

Now, according to the average consumer of the Islamic banks in Pakistan they
still have doubt in their mind from the scratch to the main services provided by
Islamic Banks.

Consumers would be open to the thought of acquire Islamic banking products

and services given that the organization that is offering the service is renowned,
and better customer service features such as ATM access, phone banking and
so on, are offered. This provides a great prospect for Islamic financial
organizations in a market that already have many other competitive existing
commercial banks. If Islamic financial organizations can make on their
understanding and status in the monetary world, and can offer Islamic banking
products/services in non Islamic markets such as Singapore, United Kingdom,
Australia, they can plan to increase an emergent consumer base of the local
residents in Pakistan, some of who may have beforehand excused themselves
from dealing with the usual financial organizations because of the use of interest.
The consumers still also believe on the fact the lack of consciousness about
some basic concepts and philosophy of Islamic banking. In Pakistan, a number
of consumers would not adopt halal banking products because they feel insecure
that what will happen if credit facilities were taken away. In the Islamic monetary
structure money is not lent out, as an alternative it is an asset-backed scheme
where monetary organizations invest in projects. Consequently, financial
organizations deal in equity, not debt. To counter this inadequacy, some banks
have started issuing ‘debit’ cards. These cards are alike to the credit cards
excluding the actuality that they use the consumers own funds as an alternative
of trust on any credit. Another concern is that of sharing profits and not losses. A
lot of consumers who have been using the Islamic banking services were not
educated about the loss sharing concept earlier. This would designate that some
economic organizations have been assuring profits. In fact, it breaches the
fundamental law of Islamic financing structure that is, relating compensations to
risk. Any kind of money earned on investment without risk is simply interest more
willingly than profit.

So, it reveals the fact that, in order to recognize how the Islamic structure makes
a distinction between profit and interest, they have to look at the dissimilarities in
financial beliefs. Because past experiances have already shown that the
rationale of ‘monetary and financial standing’ is very important for a consumer to
select a particular bank. In capitalist theory, capital and entrepreneurs are taken
care of as two separate identities of production where the first identity acquires
interest and the second identity is permitted to get the profit. It is implicit that
interest is a fixed return to offer capital, and profit can simply be produced after
allocating the fixed return to land, labor and capital.

On the contrary, the Islamic monetary system does not regard as capital and
entrepreneurs as separate identities of production. It accepts as true that each
individual who puts in capital in the figure of money to a business enterprise
assumes the risk of loss and as a result is permitted to a proportional share in the
actual profit. The system is caring of the entrepreneur, who in a capitalist
economy would have to make fixed interest repayments even when the venture
is making a loss. Capital has a fundamental aspect of entrepreneurship, until now
as the risk of the industry is apprehensive and for that reason, rather than a fixed
return as interest, it develops profit. So, as much profit one earn of the business,
the more return on capital.

The profit would be privileged if there are no fixed interest repayments. In this
fashion the profits produced by the money-making activities in the public are
uniformly dispersed among those who have given capital to the organization. In
this way, an integration of social responsibility and extra Islamic values in
rewarding consumers’ needs to be worthy of ultimate consideration as it signifies
an excellent and basic discrimination between Islamic and conventional banking
systems, and potentially competent to push Islamic banking to better pinnacle in
securing consumers’ gratefulness and response.
Top researchers in the area of Islamic Finance have affirmed that assurance
made by organizations that consumers will take delivery of a set rate of return
without having to acquire losses are prohibited and immoral. Thus far, not only
are financial organizations enduring the practice but government societies in
Muslim nations are also contributing venture openings with certain income.
Taking into consideration, that the Muslim administration is accountable for
overseeing the structure in order to battle the prohibited practices of monetary
institutes, by giving definite returns; the governments are seen to be overlooking
the performance of the monetary organizations. Even though these proceedings
may assist Islamic Banks develop in the short run, but in the long run overall cost
will prevail over the profit in shape of damage to the repute and legitimacy. Such
progress also offer ammunition to the detractors of the system who are
previously questioning whether the structure is nothing more than an interest
based system operating under the guise of profit.

The most essential information discovered by the past behaviors is that

consumer satisfaction over and over again is directly related to the quality of
services that Islamic banks offer. The excellence of services comprises of factors
like taking care of consumers with politeness and admiration; workforce
capability to put across faith and self-assurance; effectiveness and efficacy in
managing any operation; and well-informed and attentiveness in offering
clarifications and answers relating to the products and services of an Islamic
bank.

As a result, Islamic bankers can no more rely only at marketing strategy of pulling
religious and holy consumers towards them who might only worry about
Islamicity of banking services. Some significant insights acknowledged on the
bases of different thoughts of consumer baking selection criterion entails the
requirement for Islamic banks to improve its quality of services which is at the
present measured as an important success factor that have an effect on an
institute’s competitiveness. With respect to the standing of a variety of bank
selection criterion, some of these would undoubtedly revolutionize accordingly of
people having turn out to be extra conscious of the culture of Islamic banking.
For instance, media advertising would be probable to have an extreme good
impact on Muslims. The aspiration by Muslims to be compensated a high rate of
interest have to decrease. In case of non- Muslims, media advertising may turn
out to be well rated accordingly of being uncovered to revealing bank promotion.
Besides this, an additional considerable subject, which needs awareness, is the
need to strengthen community learning and understanding towards the
distinguishing features of Islamic banks and how it may beneficially go with the
concern of consumers in their economic transactions. Islamic banks have latent
of being advertised to different sectors of consumers who are worried with the
legality of the ability from Islamic viewpoint and those who try to find for service
value, handiness and well-organized business. Customer learning programs are
for that reason vital if they are to amplify the level of customer consciousness
about the distinctive features of Islamic banking and the range of services and
products offered by it.

On the whole, after consumers have been uncovered to the ethnicity of Islamic
banking, it would be anticipated that consumer’s knowledge of what Islamic
banking engages would enhance and their thoughts towards this type of banking
should vary. The change would be estimated to be much bigger in local
consumers. Similarly with the standing of the different banking selection criterion.
Shifts would be likely, extra predominant with banking customers throughout the
country.

Islamic banking has proved vital potential as a competitive and better substitute
against conventional banking system in many countries of the world. Currently,
two different approaches are experienced towards the development of Islamic
banking. First way experienced by Pakistan, Iran and Sudan is to implement
Islamic banking on a country wide and on a comprehensive basis. Second, way
is to setup individual Islamic banks in parallel to the conventional interest based
banks. Pakistan and Malaysia can be assumed as the two leaders of Islamic
Finance. Both countries selected different tracks to achieve the same goals of
developing full fledge Islamic banking but gained different results.

The Governments of Pakistan has tried to employ Islamic banking system at

once at national level. The overnight exercise of islamization didn’t produce the
required results due to lack of required support and continue efforts to eliminate
the interest (Riba) from the economy. Most of the Islamization efforts either had
been reversed or at least, further progress was stopped. Since 2001, the Central
Bank of Pakistan has started adopting the gradual policies of implementing
Islamic banking which Malaysia has adopted twenty years back. Al-Meezan Bank
in Pakistan (fully Islamic and independent commercial bank) and full fledge
separate Islamic banking branches from few commercial banks are healthy
indicators for positive expectations.

Malaysia employed the gradual approach of implementing Islamic banking.

Although, the country is facing problems in segregating Islamic and conventional
banking fixed assets and overheads expenses but, no doubt, it has successfully
developed viable Islamic financial system. After developing Islamic banking
infrastructure and Islamic instruments for financial investments and liquidity
management, the country is actively progressing towards the development of
Islamic capital market. Malaysia is now also inviting the international players to
experience its new dual banking system.