Presentation Topic

Islamization of Banking System in Pakistan

Group 3
Presenting by: Presenting to :
Roll NO:BECF15M054 Mam Shumaila
Roll NO:BECF15M016
Roll NO:BECF15M031 Subject:
Roll NO:BECF15M035 Islamic Economics
Roll NO:BECF15M019
Roll NO:BECF15M011
Roll NO:BECF15M007
Topic Covered:
• Introduction of Islamization System.
• When Islamization system implemented in Pakistan.
• List of Islamic banks in Pakistan.
• State Bank policy about Islamization financing.
• Reports of Implementation issues Islamization system in Pakistan.
• The Role of Private sector implementation of Zakat and Usher.
• A brief survey of reforms in Islamization financing in Pakistan.
 Introduction Of Islamization Financing:
 What is Islamic financing?
• The process of bringing someone or something under the influence of
Islam or under Islamic rule.

• Islamic banking has been defined as banking in consonance with the ethos
and value system of Islam and governed by the principles and rules laid
down by Islamic Shariah.

• Interest free banking is a narrow concept denoting a number of banking

instruments or operations, which avoid interest.
• Islamic banking, the more general term is expected not only to avoid interest-
based transactions, prohibited in the Islamic Shariah, but also to participate
actively in achieving the goals and objectives of an Islamic economy.
• In Islamic financing system use the moodes of financing like,
• Mudarbah,
• Musharkah,
• Bai -Muajjal ,
• Bai- Salam etc.

• Today, Islamic financial institutions, in one form or the other, are working in
about 75 countries of the world
Islamization of banking system in Pakistan
“Islamic banking has been defined as a banking system which is compatible
with the culture and value system of Islam, followed by the principles laid
down by Islamic shariah.”
History of Islamic banking
• Steps for Islamization of banking system of Pakistan were started in 1977-
78. Pakistan was among the 3 countries in the world that had been trying to
implement interest free banking at national level.
• Separate interest free counters started operating in all the nationalized
commercial banks and one foreign bank (bank of Oman) on January 1, 1981
to mobilized deposits on profit and loss sharing basis.
• In March 1981, financing of import and inland bills and that of then rice
export corporation of Pakistan, cotton export corporation and the trading
corporation of Pakistan were shifted to markup-basis.
Cont…..
• The first Interim Report of the CTFS submitted in October 2000, identified
number of prior actions which were needed to be taken to prepare the
ground for transformation of the financial system.
• The state bank issued detailed criteria in the December 2001, for
establishment of full fledged Islamic commercial banks in private sector.
• Al-Mezan Investment Bank received the first Islamic commercial banking
license from State bank of Pakistan in January 2002 and the Mezan bank
limited commenced full fledged commercial banking operation from March
20, 2002.
• The banking system in Pakistan is familiar at least to some extent with the
concepts of Islamic banking in Pakistan. The experience of an investment
bank shows that they had been earning profit in export financing on the
basis of Musharaka and Mudaraba.
Cont….
• From July 1, 1982 banks were allowed to provide finance for meeting the
working capital needs of trade and industry on a selective basis under the
technique of Musharaka.
• From April 1, 1985 all finances to all entities including individuals began to
be made in one of the specified interest free modes.
• From July 1985, all commercial banking in Pak rupees was made interest
free. From the date 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.
• The procedure adopted by banks in Pakistan 6th July, 1985 was however
declared un-islamic by the Federal Shariat Court(FSC) in November 1991.
• The Commission for Transformation of Financial System(CTFS) was
constituted in January 2000 by the State bank of Pakistan.
LIST OF ISLAMIC BANKS IN PAKISTAN AND
THEIR TERMS AND CONDITIONS
• Slamic banks
• Meezan bank limited.
• Dubai islamic bank.
• Al baraka bank.
• Bank alfalah islamic.
• Bankislami pakistan limited.
• Askari bank ltd.
• Mcb islamic banking.
• Ubl islamic banking.
 (1): Terms and conditions for meezan bank internet banking
facility/services pakistan

• 1: definitions 1.1 "terms and conditions/ agreement" means these terms and conditions
and as amended/ modified by meezan bank from time to time which will be posted on
this website .
• 2. Customers acceptance
• 3. Customers responsibilities for security
• 4. Accesses and use of meezan bank internet banking facilities/services
• 5. Customers instructions for services
• 6. Execution of instructions/transactions
• 7. Charges
• 8. Liability for loss or damage
 (2): AGREEMENT BETWEEN USER AND Dubai Islamic
Bank
• 1: MODIFICATION OF THESE TERMS OF USE
• 2: LINKS TO THIRD PARTY SITES
• 3: NO UNLAWFUL OR PROHIBITED USE
• 4: USE OF COMMUNICATION SERVICES
• 5: LIABILITY DISCLAIMER
• (3): TERMS & CONDITIONS of Al Baraka bank:
• 1. Investors contribute their surplus money.
• 2. A pro-rata profit
• 3. Loss suffered by the AMI joint/specific pool account.
• 4. Return proportionate to each investor participation.
• 5. AMI joint/specific pool account fund will be managed by ABIB
 (4): Terms And Conditions of Bank Alfalah Islamic:
• 1: Scope
• 2: Security of Passwords
• 3: Contents & Services
• 4:Shared Facilities
• 5: System Integrity
• (5): TERMS & CONDITIONS of bankislam Pakistan limited:
• 1: Customer’s Acceptance
• 2. Customers Responsibilities for Security
• 3. Accesses and Use of “BankIslami Pakistan Limited” Internet Banking and Mobile App
Facilities/Services
• 4: Customers Instructions for Services
• 5: Execution of Instructions/Transactions
 State bank policy about islamization financing
• "The SBP is itself committed to promoting Islamic banking in Pakistan on
a parallel basis. The SBP strategy provides for three institutional options:
an independent and dedicated Islamic bank;
• an Islamic banking subsidiary of a conventional bank; or a dedicated
Islamic banking branch of a conventional bank with all safeguards to
ensure integrity and purity of Islamic banking operations.
• In this respect, SBP has taken a number of initiatives since the judgment
• A detailed set of criteria for establishment of Islamic commercial
banks in the private sector was issued in December 2001.
• A new fully dedicated Islamic bank, Meezan Bank Limited, has
been issued a license and the bank has started its business.
• In order to allow existing banks to set up subsidiaries for Islamic
banking, draft amendments in Section 23 of Banking Companies
Ordinance, 1962 have been submitted to Government for
approval.
• A new Islamic Banking Division has been established in the
Banking Policy Department for regulation and promotion of
Islamic banking.
• Existing Prudential Regulations have been reviewed by SBP for
their application on Islamic banks, and revised regulations are
being prepared.
• Export Finance Scheme of SBP is being revised to conform to Musharaka
basis.
• Courses on Islamic economics, banking and finance have been included in
the curricula of the Institute of Bankers in Pakistan.
• International Islamic University, Islamabad, has conducted a training course
for trainers on Islamic Financial System in April 2002. SBP staff along with
staff of other banks attended the course.
• SBP has reviewed its Forms of Financial Statements for banks in the light of
newly developed accounting standards.”
Issues of Islamilization of Banking system in Pakistan

• Vocabulary of Islamic Banking

There is no universally followed terminology of Islamic financing. Most of
the Islamic Banks use the nomenclature Murabahah that stands for financing
via sale on deferred payment. Some uses ‘’Istisna’’ financing signifies
payment by an Islamic bank to thee manufacturer of a thing. These terms
create hurdle in communication process and this way they effects the growth
of the Islamic system.
• Migration from Riba-Based to Riba-free Banking
Some Muslim countries have adopted a dual banking system in the hope of
gradually shifting to riba-free banking. Both system creates mismanagement
and mixing interest based operations of the banks.
• Financial Products yielding Stable Income Flows
These are needed for pensioners, widows, orphans, and similar
other vulnerable groups in the society that rely on fixed income
schemes. This is the challenge that Islamic banking has to answer.
• Divisible and tradeable Financial Instrument for Govt and
Industry Needs
In Muslim countries there is precarious situation where the tax
revenues are consistently outstripped by govt expenses for
miscellaneous purposes.This situation underline the need for
Shari’ah complaint divisible and tradeable financial instruments
for meeting govt needs and the same use for large scale
investment in the private sector.
 • Use of Media
The Islamic Banks have not ever used an effective media to publicise
their activities. Even the Muslims are not very much aware of the fact
that the Islamic banking is being practised in the world.
• Extra management burden of the Islamic Banks
Unless such fool –proof devices are developed that do not entail this
extra costs. In developing countries business enterprises generally do
not maintain proper accounts due to these malpractices the cost of
Islamic banking increases
The role of financial institutions in private sector
• Private sector is strongly associated with economic growth.
• The private sector is the source of our 90% of jobs in developing
countries .
• public sectors are often overburdened and struggling to meet debt
and deficit targets.
• even for the provision of public good and key infrastructure
,government face significant fiscal constraints.
• As a result , the private sector is playing a growing role In
provision of key services and construction of infrastructure , via
instruments such as concessions
 IFI Trends going forward
• Growing private sector focus of IFIS
• More partnerships (e.g with government ,other IFIS ,investors ,private
sector,NGOS)
• Greater focus on development impact and results
• Innovations ,especially for instruments such as ppps/blended finance,
local currency financing ,diversified risk products
• Seeking new ways to increase resource mobilization
• Growing attention to public sector and private
sector(corporate)governance issues
 Implementation of zakat and ushr
zakat:-
One of the five pillars of islam. only imposed on muslims ,it is generally
described as a 2.5% tax on savings to be donated to the muslim poor and
needy.
Ushr:-
A 5% tex on the harvests of irrigated land and 10% tax on harvest from rain-
watered land .the term has also been use for a 10% tex on merchandise
imported from states that taxed the muslims on their products. Caliph umer
ibn al-khattab was the first muslim ruler to levy ushr.
According to some jurists ,ushr is not obligatory on those vegetables and
fruits which are not stored ,but if the grower sells them in the market ,he will
have to pay zakat as on other trade goods .
 Changings and Reforms in finance in
Pakistan
• There has been large-scale growth in Islamic finance and banking in
Muslim countries and around the world during the last twenty years.
• Islamic finance is now reaching new levels of sophistication. Many
problems and challenges relating to Islamic instruments, financial markets,
and regulations must be addressed and resolved.
• Islamic finance was practiced predominantly in the Muslim world
throughout the middle ages. European financiers and businessmen later
adopted manyconcepts, techniques, and instruments of Islamic finance.
 Changes in finance in Islam
• The banks have no intention of changing the sharia-compliant nature of their products. The
Islamic system of finance envisages a significantly different basis of contractual arrangements
compare to those entailed by the interest based system. In order to accommodate the new
system a number of changes in the existing legal framework were required.
• Through the insertion of new section 26A, the banking companies were enabled to raise
deposits on the basis of profit and loss.
• The PLS depositors were insulated from the application of the act which envisaged unlimited
liability of the partners in the partnership.
• A change was also effected in the negotiable instruments Act 1881 whereby promissory note
issued on the basis of adjustable profits were made possible.
• Amendments were also incorporated in the state bank of Pakistan Act 1956 to enable it to deal
with new instruments of financing while undertaking its supervisory and central banking
operations.
• Evidently, a significant amount of legal engineering was undertaken to provide protection to
the new system.
 Reforms in finance in Islam
• The regulatory reforms implementing by Malaysian government since 2010 have been
enhancing the performance of Islamic banks. ... The findings indicate that
financial liberalization and openness, assets, profitability, return on assets and inflation
have statistically positive impacts on Islamic banks performances.
• Firstly, Islamic banking is popular amongst modern and moderate Muslims. Mostly,
conservative Muslims away from Islamic banking because they are not sufficiently
convinced of the shari’a authenticity of Islamic banking.
• Secondly, Islamic banking provides one of the very few credible examples of an
application of Islamic principles to the modern phenomenon of business activity.
• Thirdly, Islamic banking and finance is serving as a catalyst for rapid developments in
Islamic juristic thinking.
• Islamic banking can certainly play an important role in bringing up socio-economic
justice to the country. While other parties have by and large failed to capture the
opportunity of using Islamic banking as a tool for socio-economic reforms, it is high
time for PTI to embrace Islamic banking as part of its election manifesto, and appeal
even more to the younger generation in the country.
THANKS..!