islamic finacial movement in pakistan

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ISLAMIC FINANCIAL MOVEMENT IN PAKISTAN

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lThis presentation includes the historical background of steps taken to implement Islamic Financial system in Pakistan. it also highlights the current challenges, probems and solutions

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Page 1: Islamic finacial movement in Pakistan

ISLAMIC FINANCIAL

MOVEMENT IN

PAKISTAN

Page 2: Islamic finacial movement in Pakistan

INTRODUCTION

• Islam was the basis of creation of Pakistan therefore the

inception of Pakistan should have been marked by the laws

and legislation to put Islam to practice.

• However, this was not the case. there was a stark difference

between 'words' and 'actions'.

• Just after an year, the SBP came into being and

unfortunately our central bank stared working on the un-

islamic principle of Riba.

Page 3: Islamic finacial movement in Pakistan

INTRODUCTION

• To make the situation worse, Pakistan started taking loans from IMF and WB.

• The vicious circle of the interest based loans made the situation worse.

• The promised war of Allah and His Messenger was eminent in the past and is eminent today

Page 4: Islamic finacial movement in Pakistan

TOPICS TO BE DISCUSSED…

1. Steps towards the Islamic Financial Movement

2. Problems faced by Islamic Financial Sector

3. Challenges for the Islamic Financial Sector

4. Solutions and Guidelines

Page 5: Islamic finacial movement in Pakistan

HISTORY OF ISLAMIC MOVEMENT

• Efforts for economy wide elimination of Riba started during 1970s

• Most of the significant and practical steps were taken in early 1980s.

• Pakistan was among the three countries in the world that had been trying to implement interest free banking at national level.

Page 6: Islamic finacial movement in Pakistan

HISTORY OF ISLAMIC MOVEMENT

• 1979: Elimination of interest from the operations of

specialized financial institutions

• 1981-1985: Elimination of interest from the

operations of specialized financial institutions

Page 7: Islamic finacial movement in Pakistan

HISTORY OF ISLAMIC MOVEMENT

• 1980: The legal framework of Pakistan's financial and corporate system was amended on June 26,1980 to permit issuance of a new interest free instrument of corporate financing named Participation Term Certificate (PTC).

• An Ordinance was promulgated to allow the establishment of Modaraba companies and floatation of Mudaraba certificates for raising risk capital.

Page 8: Islamic finacial movement in Pakistan

HISTORY OF ISLAMIC MOVEMENT

• 1981: Separate Interest-free counters started operating in all the nationalized commercial banks to mobilize deposits on profit and loss sharing basis.

• 1985: No bank in Pakistan was allowed to accept any interest-bearing deposits and all existing deposits in a bank were treated to be on the basis of profit and loss sharing.

Page 9: Islamic finacial movement in Pakistan

HISTORY OF ISLAMIC MOVEMENT

• The efforts and practical steps undertaken in the 1980’s to Islamize the economy at national level are considered significant in the Muslim world.

• 1991: The procedure adopted by the banks in Pakistan was, declared un-islamic by the federal shariat court in November 1991 since it was largely based on Markup techniques.

Page 10: Islamic finacial movement in Pakistan

HISTORY OF ISLAMIC MOVEMENT

• After 2000, the SBP formulated the Commission for Transformation of Financial System (CTFS) and Task Force was set up in the Ministry of Finance to suggest the ways to eliminate interest from government financial transactions

• After 2000 many conventional banks have established separate branches for Islamic financing. Moreover, some Islamic Banks have also come into existance

Page 11: Islamic finacial movement in Pakistan

CURRENT SITUATION

• The industry has shown tremendous growth rate of 55% since inception.

• The ever increasing share of Islamic Banking ‐in the local Banking system stands at 5.9%.

Page 12: Islamic finacial movement in Pakistan

PROBLEMS

&

CHALLANGES

Page 13: Islamic finacial movement in Pakistan

Short Term Liquidity Management

•Islamic Financial Institutions (IFIs) in Pakistan cannot invest

in conventional interest based instruments.‐

•Sukuk which was introduced in 2008 to provide liquidity. But

due to limited supply and high demand, these Sukuk are

rarely traded in the secondary market.

•Absence of secondary market is both a problem and a

challange

Page 14: Islamic finacial movement in Pakistan

Lack Of Tax Incentives

In Pakistan, the investors do not get tax

concessions for investing in Shariah compliant

investments. Absence of tax incentive is a

hurdle in growth.

Page 15: Islamic finacial movement in Pakistan

Human Capital

• There has always been a dearth of qualified bankers who are well versed in Islamic laws as well as contemporary economics and finance.

• Majority of the human resource force working in Islamic finance industry comes from the conventional side. They do not have adequate understanding of Islamic finance which affects their ability in dealing and convincing their clients.

Page 16: Islamic finacial movement in Pakistan

Investment Avenues

• SBP figures indicate that Murabaha, Ijarah and Diminishing Musharakah, which are all essentially asset based, fixed ‐return products, constitute more than 80% of the financing portfolio of Islamic banks in Pakistan.

• Now It is a challenge for Islamic institutions to enter into other modes of Islamic finacing as well

Page 17: Islamic finacial movement in Pakistan

Standardization Of Contracts

• All Islamic financial institutions offer the same basic products but the problem is that each institution has its own group of Islamic scholars on the Shariah board to approve the product.

• The very same product has different features. This prevents standardization.

• Lack of standard financial contracts and products becomes a source of trouble and dispute.

Page 18: Islamic finacial movement in Pakistan

Perception Of Users

• Many people in the Muslim and non-Muslim world do not

understand what Islamic banking actually is.

• Due to unsatisfactory experiences in the name of Islamic

Banking in the past, some Pakistani customers are now

skeptical about the authenticity of Islamic banking

practices.

Page 19: Islamic finacial movement in Pakistan

Legal Support

• Appropriate laws for implementation of Islamic financial

contracts do not exist.

• Issues of Islamic banks and conventional banks are dealt

in the same court and by the same judge. But, we know that

issues of both banks are different in nature.

Page 20: Islamic finacial movement in Pakistan

SOLUTIONS

Page 21: Islamic finacial movement in Pakistan

Human Resource Development

Both business schools and religious schools should offers specialist courses to prepare the next generation of Shariah scholars and Islamic‐financial managers.

Page 22: Islamic finacial movement in Pakistan

Tax Reforms

Tax laws are not very much supportive about Shariah compliant investments.

The Government needs to revamp the existing structure of taxes and duties to make them conducive to Islamic finance.

In this regard, stamp duties should be reduced and tax incentives should be provided.

Page 23: Islamic finacial movement in Pakistan

Using Media to Create Awareness

Creating awareness among the masses has been one of the greatest challenges for Islamic banks.

Media can play a participative role in removing the misconceptions people have regarding Islam.

Page 24: Islamic finacial movement in Pakistan

Investment In Sectors Ignored By Conventional Banks

Avenues missed out by conventional financial institutions are a great opportunity for Islamic Banks.

In Pakistan, agriculture and SME sectors are of paramount importance but these remain largely ignored. Islamic banks can excel by investing in these sectors.

Page 25: Islamic finacial movement in Pakistan

PRE-REQUISITES

• The taxation system and the legal system should support the Islamic Investments.

• Efforts are needed at changing the general perception. Through a comprehensive campaign, people must be made to understand that Islamic banking does not mean free loaning to the business and industry and that the savers can justifiably take return on the basis of results of the business activity undertaken with help of their funds

• Commitment and determination that are pre-condition should be visible to the general public.

Page 26: Islamic finacial movement in Pakistan

OPERATIONAL GUIDELINES

& PROPOSALS

Page 27: Islamic finacial movement in Pakistan

Guidelines & Proposals

1. Good governance in terms of enforcement of law and control over the corporate and private sectors need to be ensured.

2. Curbing informal (black) economy and documentation of economy by banning all bearer instruments like prize bonds and rupee traveler cheques that have become major vehicle of black economy.

3. A shariah board needs to be set-up to establish countrywide uniform shariah interpretation of financial transactions and to review and supervise the activities of banks including documents and transactions to ensure that they are in compliance with its rulings.

Page 28: Islamic finacial movement in Pakistan

Guidelines & Proposals

4. The disputed cases of the Islamic banks cannot be handled by the conventional banks. To ensure a proper, speedy and supporting Islamic legal system, separate Islamic banking courts should be established.

5. Providing an effective penal code for willful defaulters, dishonest clients and corrupt bank officials

6. Separate prudential regulations should be established for Islamic Banks.

Page 29: Islamic finacial movement in Pakistan

Guidelines & Proposals

7. The edifice of financial system needs to be restructured. The structure should be based on profit/risk sharing i.e as a whole the system must be equity based and not credit based.

8. Unit trusts, investment funds, mutual funds, etc should be establsihed to replace the interest based fund mobilization schemes.

Page 30: Islamic finacial movement in Pakistan

Guidelines & Proposals

9. Treatment of Deposits:

– Deposits of the risk-averse clients should be accepted either in current accounts that will be guaranteed with no share in return from financing operations of the banks or by establishing Murabhaha funds wherein they will be treated as Rabbulmal and get the quasi fixed return out of profits or rentals earned by the respective funds.

– Risk-prone deposits will become part of bank’s equity involving a weight age system (longer the maturity, higher the weight) on daily product basis (DPB).

Page 31: Islamic finacial movement in Pakistan

Guidelines & Proposals

10. Transactions relating to imports, exports and working capital requiraders/business community can be financed through Musharakah or Mudarabah modes. Similarly, working capital and project financing can be offered through participatory modes.

Page 32: Islamic finacial movement in Pakistan

Guidelines & Proposals

11. Provisioning for bad debts should be replaced by sharing in possible losses.

12. Credit system needs to be reformed to drastically so that the credit creation capacity of the banks is largely reduced.

13. To develop the Islamic financial system in its purest form and to bring about a structural change, the government should make the use of participatory modes compulsory for specified types of transactions