Table of Contents

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. Problems..14 11. Future18

ISLAMIC BANKING IN PAKISTAN

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

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.

ISLAMIC BANKING IN PAKISTAN

Principles
It works on Islamic set guidelines consisting of Risk Sharing, Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, and Transparencies & Fair Deals. Any predetermined payment over & above the actual amount of principal is prohibited (interest) the only loan it allows is qard-ulhassna 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
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.

ISLAMIC BANKING IN PAKISTAN

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 Shariaa 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 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 they are invested in the manner which is pre scribed by the shariah. All profit are pooled and distributed 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

ISLAMIC BANKING IN PAKISTAN

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- ulmalik) the bank rent its share in the property to the customer. The customer pay rent for the banks 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.

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

ISLAMIC BANKING IN PAKISTAN

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) 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 work? The bank entirely depends upon the fixed deposits and does not borrow money from the central bank. Bank gives loan on basis of mutual agreement. Majorly focuses on sales transaction.

ISLAMIC BANKING IN PAKISTAN

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%)

Performance of va
Bank Name

Profi

Allied Bank
Islamic Banks in Pakistan

Dubai Islamic Bank Pakistan Limited Meezan Bank

Bank Islami MCB

Dawood Islamic Bank Limited

ISLAMIC BANKING IN PAKISTAN

National Bank

AlBaraka Islamic Bank Bank Islami Emirates Global Islamic Bank Limited

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.

Product development and execution The hasnt 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.

ISLAMIC BANKING IN PAKISTAN