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Islamic BankingHistorical Growth & Future Outlook

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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.

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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.

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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

1970’s 1980’s 1990’s 2000’s Current

Retail Banking

Murabaha Project Finance

Wadiah Syndication

PLS Musharaka/ Equity

Mudaraba Ijarah

Sukuk

Str. Products

Wealth Mgmt.

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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

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Islamic Banking Industryin

PAKISTAN

An Overview

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Evolution of Islamic bankingEvolution of Islamic banking

Pakistan struggled for Islamic system during 80s but the system failed:

REASONS for FAILURE OF EARLY EFFORTS• Absence of Shari’ah 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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Evolutionof 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 PlayersYear Wise Entry of Players

20031. Meezan Bank2. Bank of Khyber3. MCB Bank4. Bank Alfalah20041. Albaraka Islamic Bank2. Habib Bank AG Zurich3. Standard Chartered4. Metropolitan Bank5. Soneri Bank20051. Habib Bank2. Bank Al Habib

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Year Wise Entry of PlayersYear Wise Entry of Players

20061. Dubai Islamic Bank2. Bank Islami Pakistan3. ABN Amro N.V. (Now RBS Bank)4. Askari Bank Ltd.5. National Bank6. United Bank Ltd.20071. Emirates Global Islamic2. Dawood Islamic Bank

Then many mergers took place.

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Evolution of Islamic bankingEvolution 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• Shari’ah Governance

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Industry Progress

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Industry Progress

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Major PlayersFull Fledged Islamic Banks

S.No. Islamic Banks No of Branches1 Meezan Bank Limited 145

2 Albarka Islamic Bank Limited 20

3 Banks Islami Pakistan Limited 85

4 Dubai Islamic Bank Pakistan Limited 20

5 Emirates Global Islamic Bank Ltd 24

6 Dawood Islamic Bank Limited 14

Total (A) 308

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B) Islamic Banking Branches of Conventional Banks

No. of Branches

1 National Bank of Pakistan 5

2 MCB Bank Ltd 8

3 The Bank of Khyber 17

4 Bank Alfalah Ltd 32

5 Habib Metropolitan Bank Ltd 4

6 Standard Chartered Banks Ltd 8

7 Banks Al Habib Ltd 4

8 Habib Banks Ltd 1

9 Soneri Bank Ltd 4

10 Askari Bank Ltd 14

11 United Bank Ltd 5

12 Royal Bank of Scotland 3

Total (B) 105

Total (308 + 105) 413

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Basic Difference between Islamic and Conventional Modes of Finance

Conventional

Client

money + money (interest)

Bank

money

ClientBank

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Basic Difference between Islamic and Conventional Modes of Finance

Islamic

ClientBank Goods &

Services

money

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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 Bank1-Islamic Banking prices goods & services

2-The relation between Islamic bank & Customer is one of participation in risks and rewards.

3-Profit is shared with the depositor, higher the bank’s profit, higher the depositors income.

1-Conventional banking prices money

2-The relationship over here b/w bank and customer is that of debtors and creditors.

3-Depositors get a fixed rate regardless of the bank’s profitability, thus insulating them from the bank’s 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.

5-Islamic banks do not provide finance by offering cash loans, but through Musharaka etc.

4- The conventional banks pool together all the funds.

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 Bank6-Islamic banking is primarily equity-based.

7-The Islamic system is value-oriented.

8-Actively participates in trade and production.

6- The conventional system is as a whole interest-based.

7-This system is value-neutral.

8- Does not involve itself in trade & business.

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Common Misconceptions

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“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

Common Misconceptions

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“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

Common Misconceptions

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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 & ServicesFund 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 SukukThe lending rates depends on PIB, TB & KIBOR rates

with monetary policy.

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Products & ServicesFund based - II

Consumer Finance:

Diminishing Musharaka

Ijarah

Murabaha

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Product & ServicesNon-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 Requirement

2008 2009 2010 2013

No. of employees

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

AnnualGrowth rate

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 non-Shariah 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 inter-bank 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.

Current banking situationDeposit 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%. 40