growth of islamic banking

7/31/2019 Growth of Islamic Banking

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Research Methods Page 1

INTRODUCTION ................................................................................................. 1

History of Islamic Banking ................................................................................. 4

Purpose of Study ............................................................................................... 5

Objectives of the study ...................................................................................... 5

Hypothesis ......................................................................................................... 6

Delimitations of the study ................................................................................. 6

Review of related Literature .............................................................................. 7

Research Methodology .................................................................................... 11

Population ....................................................................................................... 11

Sample ............................................................................................................. 11

Research Instruments ..................................................................................... 12

Analysis of collected data: ............................................................................. 12

Conclusion ....................................................................................................... 15

Bibliography .................................................................................................... 17

ANNEXURES ..................................................................................................... 18


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In any economy banks play very important role. A bank is a reliable

financial institution, which has core business of mobilizing the savings of

people for investment purposes. It receives the money from one group andlends to other group of people. So bank performs the duty of financial

intermediary.

Usually there are two types of banks, conventional banks and Islamic

banks. In simple words Islamic banks operate in interest free system.

Prohibition of interest is designed in Islam in all forms and intent. This

Prohibition is strict, absolute and unambiguous.

The Holy Qur'an in verse 278 of Surah Al-Baqarah states:"O ye who believe!

Fear Allah and give up what remains of your demand for riba, if ye are indeedbelievers."

Verse 2: 279 says: "If you do it not, take notice of war from Allah and His

Messenger. But if ye turn back, ye shall have your capital sums. Deal not

unjustly and you shall not be dealt with unjustly."

Islamic banks appeared on the world scene as active players two

decades ago. But many of the principles on which Islamic banking is based

have been commonly acceptable all over the world for centuries rather than

decades, as it is evident that Islamic finance was practiced mainly in the

Muslim world throughout the middle Ages, promoting trade and business

activities. It is claimed that many concepts, techniques, and instruments of

Islamic finance were later adopted by European financiers and

businesspersons."

Although the western media frequently suggest that Islamic banking in

its present form is a recent phenomenon, in fact, the basic practices and

principles date back to the early part of the seventh century" (Islamic Finance:A Euro money Publication, 1997).

The main issue here is to know about the differences between

operations of a conventional bank and an Islamic bank by focusing on the

principles and instruments of Islamic banking.

It is difficult to say with accuracy which was the first such company or

bank that pioneered this concept of Islamic banking in practice. Some analysts

and experts in the field are of the opinion that, Islamic banking and finance,


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first emerged in 1963, when Mit Ghamr Saving Bank began an experimental

project offering interest free banking in Egypt. The project was a success and

lead to the bank opening four new branches by 1967.

Some observers are of the opinion that the concept of an "Islamic bank"was born at the Islamic Summit of Lahore, Pakistan in 1974 which

recommended the creation of an Islamic Development Bank.

Within few decades, Islamic banking and financial institutions have

been quick to establish themselves in all parts of the world in the form of

Islamic Commercial Banks, Investment and Holding Companies and

Development Banks. The over 150 such institutions that invest money

according to Islamic economic principles, are suspended to increase in

number over the next few years. Several Muslim countries like Indonesia,Iran, Malaysia, Pakistan, Sudan and Turkey, in recent years have been taking

steps to establish an Islamic banking and financial sector.

The significant decision of the Pakistani Supreme Court, in Ramadan

1420, to strike down all laws that condone interest and their orders to the

Federal government to bring all existing financial organizations in line with

Islamic principles is truly path-breaking

(www.alrajhibank.com.sa/islamicebanks.htm).

Conventional banks have begun to embrace Islamic banking on a

moderate scale. Here again the point arises, that, there is some difference

between the operations of two banking systems and also there is

something which is attracting conventional banks towards Islamic banking

system.

A significant proportion of the banking system has been Islamized in

Pakistan. Recently the State Bank of Pakistan has allowed commercial banks

to set up Islamic banking subsidiaries or provide full Islamic banking facilitiesthrough dedicated branches (Dawn economic & business review, 2003).

Meezan Bank of Pakistan had conducted a research last year on

Islamic banking. The main findings of the research were that there is a strong

need for a riba-free banking system. People perceive a number of

emotional benefits from a product that is based on the belief of Islam. The

objective is to lessen the feeling of guilt by following the canon of Islam.
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There is also a belief that Islamic banking will help fight the ills of the

economy of the country.

Many Western Ac adem ic Inst itut ion s are intr oduc ing Islamic

Economy and Banking as Subjects, like Harvard University Center for MiddleEastern Studies (CMES), Durham University, UK, Dow Jones University.etc.

These indicators reflect the rising trend of Islamic banking and finance

throughout the world. This encourages one to know in detail what Islamic

banking is all about, what are its principles and

Efforts in different countries for Islamic banking present not only an

excellent working examples for those who did not believe in the practicality

of the interest free banking but also provide a spade work over which the

infrastructure of interest free banking for a country could be built up.

Haqiqi & Pomeranz in their article Accounting Needs of Islamic

Banking gave the history of Islamic banking. They explained that, In

Muslim communities, limited banking activity, such as acceptance of deposits,

goes back to the time when the Prophet Muhammad was still alive. At that

time, people deposited money with the Prophet or with Abu Bakr Sadique,

the First Khalifa of Islam. The first modern Islamic bank, established inEgypt in 197, was called Nasser's Social Bank. Islamic accounting, an

essential tool for the success of Islamic banks, is said to have been

developed contemporaneously at the University of Cairo.

The desirability of abolishing fixed interest rates and the Islamization of

financial systems were discussed at the first meeting of the Islamic

Organization Conference (IOC) in Jeddah in 1973. Subsequently, many Islamic

banks were founded under the profit-and- loss sharing system (PLS), which will

be discussed below.

Islamic banking operations are not limited to Arab soil, or Islamic

countries, but are spreading throughout the world. One reason is the

"growing trend toward transcending national boundaries, and joining

Muslims into a political and economic entity that could have a significant

impact on the pattern of world trade. Since Muslims are inclined to follow

Islamic traditions, there is a tendency to establish an Islamic economic

system in every Islamic nation, And to restore Shariah Law as the basic source

for legislation" (Abdel-Magid).


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Further expansion is planned for example; DMI has announced a

five-year program to create a network of branches and subsidiaries in more

than twenty countries (The Economist, 1982).

An American businessman of Iraqi origin plans to establish a U.S. basedfinancial institution to be administered in accordance with Islamic banking

practice. When approved by U. S. authorities, the institution will serve

several million American Muslims (Barron's 1985).

External financing is important almost for every kind of business in an

economy and banking industry is the main facilitator in this regard. Islamic

banking system plays its role in the banking industry as its minor part. Even

though its a minor part it cant be left behind because banks are the bases of

the economic growth. So, studying Islamic banking system in detail will not

only benefit the researcher but also will be a source of effective information

for many classes of bank customers. It will help better understanding Islamic

banking system and its salient features.

My main purpose of the study of this topic to focus on the growth of

Islamic Banking sector in Pakistan, I will highlight the growth in all aspects,

growth in Market Share, Investment, Branch network, Depositors and manymore factors .

Research is a way to help students enhance their knowledge by

learning from the practical environment and also to apply the learned

theoretical concepts in the practical field. the main objective & purpose of

this study is to review the various aspects of Islamic Banking and to identifythe factor of growth of Islamic banking in Pakistan and also assess their

viability and applicability with respect to individual and corporate

consumers. More specifically the objectives will be:

To review the History and Development of Islamic Baking in the

Pakistan.

To focus on the growth of Islamic banking system in Pakistan


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To gauge the differences between interest based banking and Islamic

banking.

To understand the role of government of Pakistan in the

implementation of the proposed system.

To study consumer attitude towards Islamic Banking in order toevaluate its success in Pakistan.

Is Islamic banking becoming popular in Pakistan?

Is Islamic banking really a need of the people?

How it is different from conventional banking system?

Is the religious teachings main reason for growth of Islamic Banking?

The research is conducted within the following limitations:

1) To keep the study manageable, my research is conducted on limited

grounds.

2) The study is conducted on small level and only the important aspects

are considered.

3)

There was a shortage of time thats why limited data is collected.

4) Limited period of time and small sample size in survey

questionnaire.

5) Some respondents, who have limited knowledge of Islamic banking or

no knowledge about the financial modes of conventional and Islamic

banking, also answered the questions hence the replies of some

questions may be based on their own imagination or thoughts

6) Although majority of respondents of Islamic banking questionnaire were

account holders of Meezan Islamic Bank, however some of respondents

had accounts in other Islamic banks too or accounts in Islamicbranches of conventional banks, so the results of this study are not

fully applicable to Meezan Islamic Bank of Pakistan.

7) Therefore, in this study the results about Islamic banking should be

taken only as indicative and perceptive rather than conclusive.


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Islamic bankers do not expect to advance money and receive a

predetermined sum on a fixed date in the future. Under the Shariah, the base

of the Islamic faith, they are instead responsible for ensuring that money is

invested in viable projects, with reliable borrowers. If the project succeeds the

banker shares in the profit. If it fails he suffers the losses.

Islamic financial techniques have been employed successfully in a

growing number of major projects in the West. Al Rajhi Bank has

completed deals for the financing of ships and aircraft (using the Ijara -

lease financing technique), and many industrial projects including the

building of power stations, a refinery and schools, and the expansion of an

aluminium smelter in Bahrain (using the Istisna - deferred financing

technique).

Given the huge potential for development in the Islamic world and the

increasing amount of funds being invested according to the Shariah, it seems

perfectly reasonable to suppose that the recent growth in Islamic banking

will continue at an accelerated pace (Colin Willis).

The sources of knowledge are mainly newspapers and magazines,

television and radio, and family members. Many of the Muslim respondents

visit the banks branch and seek information about the bank services and

operations on their own initiative. For non-Muslims, about 75% of therespondents know of the existence of the Islamic bank from information

derived mainly from newspapers and magazines.

For millions of Muslims, banks are institutions to be avoided. Islam is a

religion which keeps Believers from the teller's window. Their Islamic beliefs

prevent them from dealings that involve usury or interest (Riba) Yet Muslims


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need banking services as much as anyone and for many purposes: to finance

new business ventures, to buy a house, to buy a car, to facilitate capital

investment, to undertake trading activities, and to offer a safe place for

savings. For Muslims are not averse to legitimate profit as Islam

encourages people to use money in Islamic ways, not just to keep their fundsidle (Nida'ul Islam, 1995).

Islamic banking is based on the Quran that teaches prohibition of

charging interest. Islamic banking is widely regarded as the fastest growing

sector in the Middle Eastern financial services market. The best known

feature of Islamic banking is the prohibition on interest. The Quran forbids

the charging of Riba on money lent.

The rules regarding Islamic finance are quite simple and can be summed up

as follows:a) Any predetermined payment over and above the actual amount of

principal is prohibited.

b) The lender must share in the profits or losses arising out of the enterprisefor which the money was lent.

c) Making money from money is not acceptable by Islam.d) Uncertainty, Risk or Speculation is also prohibited.

e) Investments should only support practices or products that are not

forbidden in Islam.

Islam was the basis of creation of an independent state within the

undivided Indo-Pak Sub- Continent. All Constitutions of Pakistan have

incorporated, within the principles of policy, the elimination of Riba as an

important objective of the State policy. Quaid-e-Azam in his speech at the

occasion of the inauguration of State Bank of Pakistan, had expressed the

desire for evolving an Islamic system of banking. In Pakistan Islamic banking

emerged as a response to both religious and economic needs.

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

most of the significant and practical steps were taken in early 1980s. It was

a very bold and comprehensive exercise. Pakistan was among the three

countries in the world that had been trying to implement interest free

banking at national level.

Numerous measures were taken to introduce interest free banking

in Pakistan. Banking and other relevant laws viz. SBP Act, Companies
http://www.islam.org.au/http://www.islam.org.au/http://www.islam.org.au/http://www.islam.org.au/


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Ordinance, recovery laws, negotiable instruments act, etc. were amended to

facilitate interest free banking systemand the industry was given a specific

timeline to convert to the Islamic banking system.

State Bank Pakistan also gave the industry the products which it was

allowed to use without any change or exception. New regu lat ions

were prepared prescribing the modes of financing, profit distribution

mechanism for deposits, financing facilities by SBP, etc. which constituted

ground work for Islamization of financial system.

The efforts and practical steps undertaken in the 1980s to Islamize the

economy at national level are considered as pioneering work in the Muslim

world as this became important reference material for other countries

which undertook the path towards introduction and establishment of anIslamic banking system.

In early 90s the whole exercise was challenged in the Federal Shariah

Court and the procedure adopted by banks in Pakistan since July 1, 1985 was

declared un-Islamic by the Federal Shariah Court (FSC) in November 1991. The

system was based largely on mark-up technique with or without buy-back

arrangement. The FSC declared that various provisions of the laws held

repugnant to the injunctions of Islam in its Judgment dated November 14,

1991 wouldcease to have effect as from July 1, 1992.

In a meeting held on September 4, 2001 under the Chairmanship of

the President of Pakistan, attended by officials of the Ministries of Finance

and Law, Governor State Bankof Pakistan, Chairman and some members of

the Council of Islamic Ideology and the Chairmen, and the two Task Forces it

was decided that the shift to interest free economy would be made in a

gradual and phased manner and without causing any disruptions. It was also

agreed that State Bank of Pakistan would offer three institutional options:

1) Setting up subsidiaries by the commercial banks for the purpose of

conducting Shariah compliant transactions;

2) Specifying branches by the commercial banks exclusively dealing in Islamic

products with all safeguards to ensure integrity and purity of Islamic banking

operations,


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The growing depositors confidence is well reflected, which shows an

increase of 15.5 percent in the deposits. The deposit base of Islamic banks

stood at Rs 238 billion. Total liabilities of Islamic banks have increased by

13.3 percent to Rs 274 billion from Rs 242 billion. While the net assets and

equity increased by around 7 percent each. There is an increase of 6 percentin the reserves to one billion rupees and then appropriated profits increased

by 79 percent to Rs 900 million in last quarter.

Islamic Finance has made commendable progress in the last few years.

The growth rate remained consistently higher than the conventional

finance industry, culminating in continuously rising share of Islamic finance in

the local and global financial markets. The SBP is leading the way in Pakistan

and has envisioned to achieve a share of 12 percent by 2012 in its Islamic

banking strategy plan.

This study is basically descriptive in nature, and this would explore &

review the research done on Islamic banking by different researchers and

scholars.

This research work is from the data collected directly from the

financial Statements of the banks, both Islamic and conventional and also

from the reports of State Bank of Pakistan, another source is direct from thecustomer of the banks.

The primary data collection applied obtaining the information from

peoples through filling of questionnaires, observation, and interview methods

in Lahore. My university friends have also helped me for this work. 30 persons

at Meezan Islamic bank and 30 at conventional banks in Lahore were asked to

express their views during this study.

Population for this research is customers at Meezan Islamic bank and other

conventional bank (NIB Bank).

As I have limited time that is why to make the research size manageable in

time I have selected a sample of 30 people from each type of bank (Meezan

bank & NIB).


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I used Questionnaires & direct interviews to get the replies of Customers at

bank and also few personnel of banks.

The data collected is summarized according to the numerical order of the

questionnaire and analyzed according to the importance and need of the

study. Some of the questions are analyzed in details and some of are not due

to the requirement of the study.

18-30

31-40

41-50

51-60

Above 60

Answers showed that Islamic Baking is more popular in young and middle age

peoples of the society, while the conventional banks are popular in old orsenior citizens of the country

Male

Female

Respondents in both kind of banks were Male. During our whole stay, at

different place of the projected sites, we could not meet any female

respondent or account holder at Islamic Bank.

While there were some female coming in conventional Banks. This analysis

shows that Islamic banks have to make the females as their target customer,

so that the Islamic banking services can disburse in a balanced way.

Matric

Intermediate


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Graduate

Masters

Above masters

Islamic banking is more popular in highly educated class of the society ascompared to conventional banks. University graduates respondents of

Islamic banks represent 64.3 percent as compare to the 34 percent of

conventional banks respondents. While, high school graduate respondents at

conventional banks are 38.67% as compare to 5.33% in Islamic Banks.

Private employees and businessmen are more in numbers in Islamic banks as

compare to conventional banks. While t h e n u m b e r s o f s t u d e n t s

a n d government employees are more in the conventional banks.

Rs. 7000-10,000

Rs. 10,001- 20,000

Rs. 20,001- 25,000

Above Rs. 25,000

The result of this question shows that Islamic banks are more popular in high-level income groups of the society, whileconventional banks are more popular

in low-level income groups.

Investment/ Savings

Borrowings

Other

The distribution of account holders in both types of banks is symmetric.Although the purposes distribution is not very clear, yet conventional

bank have more numbers of respondents at their services section.

Yes

No

There was unexpectedly high percentage of the conventional bank account

holders or visitors who were well aware of the Islamic banking concepts. On


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the other hand, as oppose to our expectations 11 of the Islamic bank

respondents were not aware of the concepts of the Islamic banking. This

result shows that Islamic banks did not explained well the concepts of

Islamic banking to their customers. And this result was of opposite to

expectations, that Islamic banks enhance the awareness and education both

in economic as well as religious matters and support the religious resurgence

for the community

Yes

No

No reply

I got very supportive response for transfer of their financial activities from

conventional bank Islamic bank.

RIBA

Higher profit Other

Peoples want to transfer their bank dealings from conventional banks to

Islamic banks because of religious background as well as higher profits as

shown by the annual financial reports of both kinds of banks.

Yes No

No reply

This question also shows an affectionate attachment of the people for Islamic

baking. Even in the case of higher bank charges peoples are willing to

continue their dealings with Islamic bank.


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Agree

Disagree

Dont know

The replies of above question show that peoples in Pakistan expect that

Islamic banks are more helpful for economic development, societal balanceand human prosperity. It is also verdict from the injunction of Shariah rules

that Islamic financial institutions are obliged to participate in the equal

distribution of wealth, human prosperity and equal economic development

This research study is result of a pioneer fieldwork conducted so far on

Islamic Banking in Pakistan. Therefore, the results should be taken only as

indicative and perceptive rather than conclusive. It is hoped that further

empirical or theoretical studies will be done to draw more definitive realities.

In a system based on profit and loss sharing, it is to the advantage of

banks and financial institutions to invest in those projects where higher

rates of profits are anticipated. The Islamic banking system, therefore,

induces savings and capital formation and lead to optimum allocation of

resources.

Islamic banking is a part of over-all value system of Islam. It is,

therefore, imperative that simultaneously genuine efforts are made to ensurethat the people are imbued with honesty of purpose and their actions

conform to Islamic values. The basic values that Islam seeks to establish

are: (a) Freedom (b) Brotherhood (c) Equality (d) Justice (e) Trust i.e.

treating the God given capabilities and resources as trust. (f) Honest

Consciousness i.e. sense of responsibility and care for ones obligations.

It emerges from all this that Islamic banking has following

distinguishing features: (a) Islamic banks deal with money and do not deal in

money, (b) it is interest- free, (c) Lending and investing are treated

differently; loans are interest-free but carry a service charge, while investing

is on a profit-and-loss-sharing (mudaraba) basis, (d) it is multi-purpose and

not purely commercial, (e) it is strongly equity-oriented, and (f) Value erosion

of capital due to inflation is compensated.

Islamic have to develop the new modes of finance. That included a lot

of work to formulate new contractual arrangements on both their asset

and liability sides. They can participate and make use of such new and

innovative techniques that would help them better serve their customers.


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Islamic banks like all other modern conventional banks under interest-

based system have to remain competitive and tailor their services and

products according to the needs and requirements of their clients, ensuring

that the products designed by them remain within the framework of

Shariah.


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17 | P a g e

Author. (November-December ,1995). Principle of Islamic Banking.

Nida'ul Islam Magazine, 10th

issue.

Mishkin, S. Fredevic (1995). The Economic of Money, Banking and

Financial Markets.

Khan, Abdul Wadood. (1999). Interest Free Banking:Lahore.

Khawaja, Abdul Haleem . (1994). Economic Theory Lahore: Naveed

Publications.

Siddiqi, Najatullah, M. (1983). Banking without Interest. Leiscester: the

Islamic founded on, UK.

Khan, Ikram, M. (1992). Islamic Banking in Pakistan: Lahore

Taqi Usmani, M .(1998).An Introduction to Islamic Finance. IdaratulMa'arif: Karachi, Pakistan

Uzair, M. (2001). Interest Free Banking : Royal Book Company Karachi.

State Bank of Pakistan (2009) Quarterly Report on Islamic Banking

Dawn economic & business review, 2003.

http://www.islamic-banking.com/ibanking/whatib.php

www.alrajhibank.com.sa/islamicebanks.html

http://www.islamicconferences.com http://www.islamicbanking-finance.com

http://www.islamic-finance.net

http://www.albaraka.com/islamicinfo/islamicbooks/instruments/table.ht

http://www.worldbank.org/fandd/english/0697/articles/0140697.htm

http://www.islamic-economics.com

http://www. riba-free-economy.com

http://www.interest-free commercial banking.com

http://www.gdrc.org/icm/islamic-banking.html
http://www.islam.org.au/http://www.islamic-banking.com/ibanking/whatib.phphttp://www.islamic-banking.com/ibanking/whatib.phphttp://www.alrajhibank.com.sa/islamicebanks.htmlhttp://www.alrajhibank.com.sa/islamicebanks.htmlhttp://www.islamicconferences.com/http://www.islamicconferences.com/http://www.islamicbanking-finance.com/http://www.islamic-finance.net/http://www.islamic-finance.net/http://www.albaraka.com/islamicinfo/islamicbooks/instruments/table.hthttp://www.albaraka.com/islamicinfo/islamicbooks/instruments/table.hthttp://www.worldbank.org/fandd/english/0697/articles/0140697.htmhttp://www.worldbank.org/fandd/english/0697/articles/0140697.htmhttp://www.islamic-economics.com/http://www.islamic-economics.com/http://www.islamic-economics.com/http://www.riba-free-economy.com/http://www.gdrc.org/icm/islamic-banking.htmlhttp://www.gdrc.org/icm/islamic-banking.htmlhttp://www.gdrc.org/icm/islamic-banking.htmlhttp://www.riba-free-economy.com/http://www.islamic-economics.com/http://www.worldbank.org/fandd/english/0697/articles/0140697.htmhttp://www.albaraka.com/islamicinfo/islamicbooks/instruments/table.hthttp://www.islamic-finance.net/http://www.islamicbanking-finance.com/http://www.islamicconferences.com/http://www.alrajhibank.com.sa/islamicebanks.htmlhttp://www.islamic-banking.com/ibanking/whatib.phphttp://www.islamic-banking.com/ibanking/whatib.phphttp://www.islam.org.au/


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18 | P a g e

2003

1. Meezan Bank

2. Bank of Khyber

3. MCB Bank

4. Bank Al-Falah

2004

1. Albaraka Islamic Bank

2. Habib Bank AG Zurich

3. Standard Chartered

4. Metropolitan Bank

5. Soneri Bank

2005

1. Habib Bank

2. Bank Al Habib

2006

1. Dubai Islamic Bank

2. Bank Islami Pakistan

3. ABN Amro N.V. (Now RBS Bank)

4. Askari Bank Ltd.5. National Bank

6. United Bank Ltd.

2007

1. Emirates Global Islamic


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19 | P a g e

2. Dawood Islamic Bank

18-30

31-40

41-50

51-60

Above 60

Male

Female

Matric

Intermediate

Graduate

Masters

Above masters

Rs. 7000-10,000

Rs. 10,001- 20,000

Rs. 20,001- 25,000

Above Rs. 25,000

Investment/ Savings

Borrowings

Other Yes

No

Yes


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20 | P a g e

No

No reply

RIBA

Higher profit

Other

Yes

No

No reply

Agree

Disagree

Dont know

Name:____________________________

Cell #:_____________________________Occupation:______________________Comments:__________________________________________________________

growth of islamic banking

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