Prospects of Islamic Banking in Pakistan

Author; Professor Dr. Habiburrahman

Institution; Sarhad University of Science and IT

Chinar Road, University Town,

Peshawar, Pakistan.

Email awan.habib@gmail.com

About the author

Professor Dr. Habiburrahman holds his doctorate degree in Economics from the

University of Punjab, Lahore, Pakistan. He retired from a local bank as Vice President

after serving for nearly thirty four years operating almost all the commercial banking

desks. During the long span of his service he has been contributing substantially towards

the amelioration of the masses by composing and releasing valuable articles on rural

uplift in local news papers. He also authored a book on “ISLAMIC FINANCIAL

INSTRUMENTS” suggesting therein alternative to interest based lending .He is

chairman of SARDAR KHAN WELFARE TRUST a charity organization caring for

betterment of downtrodden layers of the society.

He is, now, Associate Professor and Head of Business Administration Department at

Sarhad University of Science and Information Technology, Peshawar, Pakistan as

Associate Professor.

Abstract

The advent of the 21st century brought in its wake science revolution which prompted the

emergence of new technology. Though after the end of 2nd

world war survival of

Japanese economy gave tremendous boost to industrial products, auto and electronic out

put yet the technological advancement affected the centuries old economic supremacy of

American and European States. During the period some of the nations prospered while

other still continue striving hard for their existence. Globally the world is divided into

two different categories i.e. the poor and the rich. The poor nations have been falling prey

in the hands of advanced countries because of resource insufficiency and resorting to

cross the borders borrowing on the bases of interest. The poor countries mostly comprise

on Asian and African states densely populated with resource constraints. Dearth of

capital has, of late, been compelling these nations on state borrowing internationally.

Besides cross the border transaction, borrowing with in country has also been pressing

hard the poor economies. Due to heavy debt servicing major portion of their budgets is

eaten up by loan repayment.

Both intensive and extensive efforts have been made to press hard upon the need of a

change in the present economic scenario which revolves around the element of “Interest”.

Theorist and Jurists have made all out efforts to severely criticize the present economic

system which takes its roots from interest based lending techniques. However, a few

could evolve and present a model which may work with least involvement of the element

of interest.

Interest based borrowing a malignancy in disguise, has mostly worsened the economic

conditions of the borrowers because of its ever increasing repaying burden.

Islamic economic system employing the Islamic Financial Instruments ensures both the

entrepreneur and financier a fair share in the operational results of a given business or

industry over a period of time. we shall make an effort to discuss the significance of the

financial instruments in the growth of Pakistan economy vis-à-vis implications with

regard to the global market mechanism and operation.

Problem Statement:

There is a cut throat competition from the conventional Banking Sector

We shall discuss the obstacles hampering the growth prospects by analyzing the existing

Islamic Banking business in Pakistan, public response to a change, discuss in detail the

existing growth process and measures for future success.

Research Methodology:

In order to intensively study the operational mechanism of the Model Islamic Bank in

Pakistan and find out the public opinion relating to operation of Islamic banking a

detailed study will be made through Collection of information on the accepted practice in

each Islamic bank through

1) Questionnaire to be completed with the help of customers of the selected conventional

banks as well as of Islamic Banks operating in Pakistan

2) Analysis of Financial Statements and Annual Reports of selected Islamic banks

carrying on their business in Pakistan.

The information so collected will be analyzed to find out the real issues existing in the

system implementation and suggest measures for improvement.

Prospects of Islamic Banking in Pakistan

Before highlighting the pace of growth of Islamic Banking in Pakistan I deem it

necessary to apprise audience of this seminar of the evolution of banking in the sub-

continent of Indo-Pakistan. Let me first talk about banking in INDIA.

BANKING IN INDIA

In India banking is as old as 5th century A.D. However, the system was not properly

organized and the money transactions took place from individual to individual. The

money lender, in the local language "MULTANI" and "SHROFFS", later developed

business on a very large scale and also acted as agent to the government, in12th century,

for collecting revenue and money changing .Muhammad Tughluq played a pioneering

role in establishing the first “ROYAL MINT” in INDIA which was office of issue of

token currency in India. .These Mints later on took the form of Royal Treasuries which

functioned as central bank and also performing as drawing and disbursing office of the

government. With the advent of 17th century, the socio-political scenario of India

underwent a radical change. The British East India Company engaged "Alexander & Co"

and "Ferguson & Co" instead of availing the services of Local Bankers and Treasuries.

The organized banking in India commenced with the authorization of Bank of Bengal in

1809 and establishment of Bank of Bombay in 1840. In order to promote public

confidence, the limited liabilities banks were started in the year 1860. The promulgation

of Imperial Bank of India Act - 1920 resulted in the merger of Peoples Bank of India Ltd,

Central Bank of India and Bank of Baroda Limited which then took the new form of

Imperial Bank of India in 1921.

On the recommendations of "Royal Commission on India's Currencies & Finance",

Reserve Bank of India was established in the year 1935 as Central Bank of the country.

By the end of 1946 there were 93 scheduled Banks with 3106 branches operating in sub-

continent of India.

BANKING IN PAKISTAN

The area comprising Pakistan had 487 branches of different banks at the time of

independence. All the banks except Australasia Bank limited (A Muslim Bank which was

established in 1942) had their head offices located in area now under the rule of India.

All the Indian Banks, immediately after independence, closed their offices in Pakistan.

Another Muslim Bank namely Habib Bank Limited continued its operation in Pakistan.

The shifting of Hindus from this part of the subcontinent badly effected the banking

business because the major share of deposits were held by banks then fallen in the

territories of India and only 6% of the advances disbursed in the territories fallen in

Pakistan. This fact is further elucidated with the help of Table-.1.

TABLE-.1: POSITION OF SCHEDULED BANKS IN EARLY 50's

Bank Name Deposits Loans

Australasia Bank 3.9 1.3

Habib Bank 122.4 23.7

Total: 126.3 25.0

All Scheduled Banks 1,040.0 440.0

Percent share of Muslim Banks 12 6

With such a meager portion of business the Pakistani Banks could not help the economy

to move forward. The situation was again alarming when the total number of bank's

branches declined to 199 in the year 1950. However, the challenge was boldly accepted

by our people with all expertise.

State Bank of Pakistan was inaugurated as Central Bank of the country by Mr.

Muhammad Ali Jinnah on 1st July, 1948. The State Bank first took upon itself to fill in

the vacuum created by the departure of Indian Bankers. It provided all help and

encouragement to Habib Bank for expanding its branch network. The establishment of

National Bank of Pakistan in 1949 further facilitated banking activities in the country.

The enforcement of Banking Companies (Control) Act - 1949 paved the way for sound

credit disbursement and secured deposit mobilization. By the end of financial year 1964-

65, there were 36 scheduled banks operating in Pakistan with credit disbursement of Rs.

575.87 crores. The debacle of East Pakistan gave a severe setback to our economy which

directly affected banking operation. The nationalization of Banks Ordinance 1974, no

doubt reduced the number of scheduled Pakistani Banks from 13 to 5 by merging small

banks into following leading companies:

1. National Bank of Pakistan.

2. Habib Bank Limited.

3. United Bank Limited.

4. Muslim Commercial Bank.

5. Allied Bank of Pakistan Limited.

In 1989, First Women's Bank was also established which eventually became a scheduled

bank.

On end June, 1995 scheduled banks branch network including Foreign Banks was 8400

with a total deposit of Rs. 670.774 Billion and credit amounting to Rs. 413.811 Billion.6

However, the bank business grew at faster speed and the deposits of banks operating in Pakistan rose to Rs.1162.2 Billion by the end

of year 1999. Table .2 and 3 evidences the growth.

TABLE.2: POSITION OF SCHEDULED BANKS

(Rupees in Millions)

S.

No

Description END JUNE, 1995 END JUNE, 1996

Domestic

Banks Foreign

Banks Total

Domestic

Banks Foreign

Banks Total

1. Bank Deposits 543410

(81.01)

127364

(18.99)

670774

(100.00)

646282

(7993)

162322

(2007)

808604

(100.0)

a. Demand Deposits 281188

(90.17)

30643

(9.83)

311831

(100.00)

319237

(8940)

37860

(1060)

357097

(100.0)

b. Time Deposits 262222

(73.05)

96721

(26.95)

358943

(100.00)

327045

(7243)

124462

(2757)

451507

(100.0)

2. Bank Advances 352973

(85.30)

60838

(14.70)

413811

(100.00)

396442

(8351)

78289

(16.49)

474731

(100.0)

3. Bills Purchased &

Discounted

48807

(81.82)

10842

(18.18)

59649

(100.00)

51690

(82.69)

10821

(17.31)

62511

(100.0)

4. Investments 198976

(80.97)

46770

(19.03)

245746

(100.00)

223139

(79.63)

57078

(20.37)

280217

(100.0)

a. Govt: Securities 167931

(78.44)

46150

(21.56)

214081

(100.00)

185061

(76.71)

56189

(23.29)

241250

(100.0)

b. Other Securities 31045 620 31665 38078 889 38967

5. Total Assets/ Liabilities 1309783 337833 1647616 1498829 411562 1910391

6. Bank Branches (Nos) 8326 74 8400 8523 83 8606

Notes: i. Figures in parentheses show percentage share in total. ii. Totals may not tally due

to separate rounding off.

Table .3

S.No Description END JUNE, 1998 END JUNE, 1999

Domestic

Banks

Foreign

Banks Total

Domestic

Banks

Foreign

Banks Total

1. Bank Deposits 839.9 231.8 1071.7 959,3 202.9 1162.2

a. Demand Deposits 374.7 61.8 436.5 436.5 56.1 492.6

b. Time Deposits 465.2 170.0 635.2 522.9 146.8 669.7

2. Bank Advances 530.2 113.9 644.1 610.3 115.6 725.9

3. Bills Purchased &

Discounted

50.3 12.8 63.1 53.6 10.1 63.7

4. Investments 326.1 75.9 402.0 341.0 49.9 390.9

a. Govt: Securities 286.5 74.7 361.2 274.2 47.6 321.8

b. Other Securities 39.6 1.3 40.9 66.8 2.3 69.1

5. Total Assets/ Liabilities 1294.3 293.2 1587.6 1456.8 277.5 1734.3

6. Bank Branches (Nos) 8049 81 8130 7973 85 8058

Although our commercial banks had equally been charged with the responsibility of

undertaking mandatory development financing in the field of Agriculture and Industries,

yet The following development finance institutions had also been established to

accelerate the pace of economic development.

TABLE: 4 Institution-wise credit disbursements

S.

No

Name of Institute Date of

Establishment

Paid up

Capital

Total credit Disbursement

as on June 1995.

1 Pakistan Industrial Credit &

Investment Corporation. 1957 150 (M) 697 (M)

2 Investment Corporation of

Pakistan Feb, 1966

100 (M)

(subscribed)

3378 (M)

(30-6-93)

3 National Investment Trust Nov, 1962 1.200 (M)

4 National Development

Finance Corporation Jan, 1973 200 (M) 2434 (M)

5 Bankers Equity Oct, 1979 One Billion 1024 (M)

6 Small Business Finance

Corporation 1972 70 (M) 3720 (M)

7 House Building Finance

Corporation 1952 125 (M) 972 (M)

8 Agriculture Development

Bank of Pakistan Sept, 1957

360 (M)

(Subscribed)

8337 (M)

9 Industrial Development Aug, 1961 500 (M) 529 (M)

Bank of Pakistan.

The Banks and Financial Institutions functioning in the world are generally transacting

the business of advancing money on the basis of "Interest". The developing countries

mostly locating in Africa and South East Asia, therefore, have to accept the terms

dictated by the lending agencies.

Due to heavy debt servicing major portion of their budgets is eaten up by loan repayment.

Let us first discuss the nature of interest /RIBA so that implementation of

Islamic Banking can be argued more effectively.

PROHIBITION OF RIBA (INTEREST):

The origin of Riba (interest) can be traced back even before the year 1700 B.C., when

interest-based lending and borrowing was carried out by individual money-lenders. Later

on, organized lending institutions were developed by Greeks. However, Aristotle’s

dictum, that the charging of interest was immoral and unnatural, was adhered to

fanatically which gave severe setback to the then system of lending. Nevertheless, the

increased volume of business gave impetus to the receding activities of lending in the

wake of industrial revolution. Consequently, in response to the ever increasing effective

demand, both for money and credit, the financial entrepreneurs developed lending

organizations with vast network even on multinational level. However, Islam had, long

ago, rejected all means of exploitation including the receiving of "Riba" in its different

forms.

Not-withstanding the developed lending system on most modern lines, the Muslims all

over the world continued condemning the system for reasons that the interest is

prohibited in Islam and has been differentiated from profit which is the result of trade in

commodities.

In true Islamic perspective, Riba is an increase over the principal lent in coin or

commodity and has been forbidden by Allah.

"Oh ye who believe devour not usury doubling and quadrupling (the sum lent)

observe your duty to Allah that ye may be successful"

(Sura-III verse-130)6

In sura Albaqra verse 275, Allah informs that:

"Those who swallow usury can not rise up save as he arise whom the devil hath

prostrated by (his) touch - that is because they say: Trade is just like usury; where

as Allah permitted trading and forbidden usury. He unto whom an admonition from

his lord commeth and he refrained (in obedience thereto) he shall keep (the profit

for) that which is past and his affair is (henceforth) with Allah. As for him who

returned (to usury) - such are rightful owners of fire. They will abide therein." 7

In verse 278-279, Allah sounds ultimatum to those Muslims who do not abide by the

injunction and still continue eating "USURY":

"Oh ye believe observe your duty to Allah and give up what remaineth (due to you)

from Usury, if ye are (in truth) believers: if you do not then be warned of war

(against you) from Allah and his messages." 8

In surah Al-Nisa verse 159-160, Allah describes the end of those who used to take usury

(interest) in the following manner:

"Due to the tyranny of those who entered the Jewish religion we have banned them

to good things that had been lawful to them: and due to their dissuasion from the

religion of Allah and taking Usury which is banned to them and by reason of eating

the money of people through illicitness we have prepared for the renegade atheist

among them painful suffering."9

From all the above verses it transpired that interest, by whatever name it is called or by

whichever means it is dealt in, is forbidden for those who believe in Allah. From the

Quranic point of view every interest based transaction is forbidden. Quranic injunctions

are definite and cannot be subjected to compromise. Quranic revelation has since

completed and Islamic Sharia is universal with its basic characteristic of finality and

conclusiveness.

Legitimate trade is allowed which may or may not result in profit. We do not find an

individual verse on profit. There is no explicit version which can enunciate the concept of

profit. Yet profit is allowed because it accrues out of a business activity rather than

lending.

In the Islamic jurisprudence also the term profit is not discussed isolately because of the

fact that whatever business is undertaken it carries equal risk of loss. Very established

business with good speculative tendency may go into bankruptcy tomorrow. This

contingent risk of loss coupled with escalating rate of gain differentiates trade transaction

from lending and borrowing business.

From verses 275 of Sura Al-Baqra, it reveals that trade has been allowed by Almighty

Allah. The term 'trade' distinctively implies sale/purchase of goods and services which

event may or may not result in gain to the trader. This very characteristic of the

operational result of a business venture has permitted trade.

From the inherent characteristics of interest and profit it is deduced that:

Interest is a payment at a predetermined rate for the use of money over a specific period

of time.

Interest is, therefore, a reward paid to the owner of capital on account of parting with

liquidity. This reward quantum of which is settled down prior to the use of capital and

again money holder must defer his satisfaction of wants to a future date, is called

"Interest". These two major characteristics of interest differentiate it from profit which is

paid for risk taking. In other words, profit is the payment for risk taking whereas interest

is a reward for parting with assets. Table-3.1 shows the comparison between interest and

profit.

Every Muslim has the right to choose and select the business or profession. He is free to

undertake any productive venture for maximizing utility. But his this act of choosing

must be within norms of Islamic Sharia. It, in no way, violates the boundaries, the

limitations put by Almighty Allah which aim at the amelioration of masses. The activity

must, therefore, find validity in terms of Quranic injunctions represented in model life of

the Holy Prophet Muhammad (Peace Be upon Him). Any activity forbidden by Islam is

prohibited for all time and must, therefore, be abstained from.

Islam eliminates all kinds of exploitation. Stronger is not allowed to squeeze the weaker

or rich to exploit the poor. Riba in any form is, therefore, strictly prohibited in Islam.

Anas Ibn Malik informs that Prophet (Peace Be Upon Him) said, "when one of you

grants a loan and the borrower offers a dish, he should not accept it and if the borrower

offers a ride on an animal, he should not ride until the two of them have been previously

accustomed to exchanging such favour."

Table-5

INTEREST PROFIT

The amount of interest to be paid is certain. The quantum of profit is uncertain and probable.

Interest is paid by those who have faced

deficiency of funds. Profit is earned by those who are efficient with skills and

expertise.

The volume of interest grows with the span

of time period The sum of profit depends upon the judicious use of

resources within a given market situation.

Interest is received on lending of assets and

increases with the length of time span. Profit is earned on the sale of goods/ services and is not

affected by time period.

Interest accrues out of lending and borrowing

of assets. Profit is the result of sale/purchase transaction.

In another hadith, quoted by Hazrat Jabir in Tirmizi, Muhammad (PBUH) cursed not

only the receiver of Riba but also those who recorded and witnessed the transaction of

Riba. The prophet (PBUH) said:

"They are all alike (in guilt)."

A tradition by Abu Hurairah quoted in the collections of Masnad Ahmad reported that the

Holy Prophet (PBUH) said:

"On the Night of Ascension I came upon people whose stomachs were like houses

with snakes visible from the outside. I asked Gabriel, "who they were?". He replied

that they were people who had received Riba".

The ordinances and hadiths explicitly expounds the severity of the sin of receiving Riba,

warns the believers of dire doom and, therefore, enjoins upon the Muslims to refrain from

transaction involving "Riba". The believers are instructed to avoid Riba, may be

conspicuous or in disguise. The philosophy behind the principle is to prevent exploitation

of the poorer and needy persons and also discourage concentration of wealth in the hands

of a few capitalists.

The prohibition of Riba has always prevented Muslims from undertaking the activities

which in any manner carry the element of INTEREST. Banking sector therefore received

urgent attention for revamping. Accordingly Council of ISLAMIC IDEOLOGY was

charged with the responsibility of preparing report on the elimination of RIBA from

banking/financial transaction .A brief history of ISLAMIC BANKING is hereunder.

1980

Council of Islamic Ideology presents report on Elimination of INTEREST.

1981

Commercial banks transformed their interest based deposits accounts into profit and loss

sharing accounts

1985

All commercial banks were prohibited to extend loans on the basis of interest Rather

various non-interest modes were advised for implementation.

Procedure adopted by banksin1985 was declared un-Islamic by the Federal Shariat Court.

1999

The Shariat Appellate Bench of the SUPREME COURT of Pakistan rejected the appeals

and directed all laws on interest banking to cease.

2001

State Bank of Pakistan set criteria for establishing Islamic Banks and Stand-Alone

Islamic banking branches by existing commercial banks to conduct Islamic Banking in

the country.

2002

The first Islamic Banking license was issued to MEEZAN Bank.

2006

BANK ISLAMI PAKISTAN and DUBAI ISLAMIC BANK commenced operation.

Thus the banking in Pakistan has passed through three different phases.

1. Conventional Banking during the period from July, 1947 to June, 1981.

2. Introduction of Non Interest Modes of financing from July 1981 to June, 1985 which

continued operating till 1995

3 . The establishment of first independent Islamic Bank namely MEEZAN BANK

limited in the year 2002

Let us have glimpses of the Islamic Banking while using the following instruments

during the period. We shall therefore have glimpses of the banking in all the above three

periods while briefly elaborating the various instruments used in the conduct of business.

INVESTMENT TYPE MODES OF FINANCING

From January, 1980 to December, 1984 was a transitional period which aimed at

allowing the economy to adapt to the changed circumstances. The investment of funds,

therefore, remained confined mostly to Musharika and Rent-sharing during the period up

to December, 1984.

Lending on the basis of interest was no more allowed and from 1st April, 1985 banks

could extend finance facilities to the customers through one of the following modes

approved by council of Islamic ideology and circulated by State Bank of Pakistan.1 (THE

CENTRAL BANK OF THE COUNTRY) 2

Again in June, 1984 State Bank of Pakistan issued instruction to all the banks operating

in Pakistan not to extend any Credit facilities (Save Foreign Credit Line) on the basis of

interest. The Banks were further instructed to accommodate the customers by extending

finance only under the following modes: 3

- Modaraba.

- Musharika.

- Equity participation.

- Rent sharing.

MODARABA:

Modaraba was the first Islamic Financial Instrument officially employed in Pakistan after

the promulgation of modaraba ordinance - 1980. It was, in fact, initial step towards

Islamisation of the economy which was taken by the Government of Pakistan for the

elimination of "Riba" and establishment of an "Interest-free" system of economics.

Under the Modaraba companies ordinance 1980 any company registered under the

companies Act, 1913 (replaced by companies’ ordinance 1984) or a statutory body

registered with "Registrar of Modaraba” can float a MODARABA.

OPERATION:

Since the inception of the scheme of modaraba some 53 companies have been

registered/enlisted at Karachi Stock Exchange Market with a total paid up capital of Rs.

8396.000 (Millions)4

The availability of so huge amount of funds was, in fact, the outcome of formation of the

modaraba companies which could attract public subscription. To supplement their capital

base the companies were also allowed to float certificates of investment.

During the period from 1980 to 1992 the business of the modaraba companies showed a

very encouraging upward trend. The investing class preferred putting money in the equity

of these companies because of being a substitute investment channel free of "Riba".

There had, therefore, been a very good turn over in the stock of most of the modaraba

companies. The market value of 10 Rupees share certificate of Grindlay’s Modaraba rose

to Rs. 48 during the years, 1992-93. However unfortunately the political unrest in the

country from 1995 onward sent a severe setback to the market value of stock of

modaraba which event retarded the further expansion of modaraba funds. Consequently

the very brisk business had to face a critical situation. As a matter of corollary out of 53

listed companies only 27 companies have been able to declare dividend on the equity of

certificate holders for the year, 1996. This phenomena reveals a downward business trend

which eventually deteriorated the market value of Modaraba share certificates.

Consequently the market price of shares of 50 modaraba companies is now quoted below

par value.5

TABLE-6 FINANCIAL INSTITUTION-WISE BREAK UP OF TOTAL

LOAN/FINANCES DISBURSEMENT (*)

(RS. IN MILLION)

Funding Institutions Year

1993-94

Year

1994-95

Year

1995-96

Average of

Previous 3

years

Percentage of

total bank

finances

-Total Loans/Finances by a. All Banks 314114 412378 495410 407301 b. Development

Finance Institutions 19102 20773 16680 18552 4.55%

c. Investment Banks 21094 63204 24204 26192 8.89% - Total Financing by

a. Modaraba 2081 4935 4265 3760 0.92% b. Leasing Companies 5324 14145 10998 10156 2.49%

MUSHARIKA:

The concept of Musharika has commonly been employed for the organization and

conduct of business and small scale industry. Small traders have been forming

partnerships for sharing profits of the ventures. In many cases handicraftsmen also

contracted to provide capital both in the form of cash and appliances. This cooperation

has always been beneficial in promoting the mutual interest and giving impetus to the

economic growth of the nation as a whole. However, the capital so accumulated could not

suffice the ever increasing fund requirements of expanding business and industry. To

cope with the shortfall the business-men and industrialists have to seek help from money

lenders and other fund suppliers on the basis of "interest".

With an aim at eliminating "Riba" from the economy (initially from Banking) State Bank

of Pakistan, on the recommendation of council of Islamic Ideology, issued instruction to

commercial banks for allowing finance facility through the instrument of "Musharika" in

1982.

It was again an effort to institutionalize the use of the instrument so that huge industries

and other ventures facing difficulty for want of working capital could be supported by

providing funds on the basis of profit and loss sharing

EQUITY PARTICIPATION:

PARTICIPATION TERM CERTIFICATES (PTC):

Under the investment type modes of financing banks were also allowed to contribute

their funds for investment in the corporate sector by purchasing ordinary redeemable

shares of the public limited companies.

Under the scheme of "Equity Participation" banks had option to become equity holder of

any corporate unit and share the earning of the unit by way of dividend. Banks by holding

the shares were equally liable for contributing proportional loss if sustained by that

particular unit during a given accounting period. Banks like other share holders would

have been at liberty to dispose of the share certificates and appropriate the gain if

accrued. Earning on bank's investment, indeed, depended on the profit and loss position

of the company whose shares were purchased by the bank. Again gain on turnover of

shares co-related with the return on equity because companies with poor performance

could not declare better dividend which event directly affected the market-ability of the

stock of the company held by the bank. Financial market has always been very sensitive

to political unrest and natural calamities. Still the investment under the mode of equity

participation continues by the nationalized commercial banks in Pakistan though with

highly escalating quantum. Reasons of fluctuations being instability of the share market

and also comparatively higher markup rate in the finance market which attracted

maximum of the funds available for investment.

Out of the 724 organizations listed with stock exchange Karachi only 281 companies

could declare dividend as on 31-12-1994 whereas during the preceding year i.e.; Dec;

1993. 297 companies out 653 had declared dividend.7 On the other hand, ever rising

mark-up/profit rate in the market induced the banks to divert investment funds to short

term financing instead of tying up funds in the form of equity holding. The investment

portfolio of banks, therefore, largely reflects guild-edge securities and treasury bills.The

following table testifies the fact:

TABLE-7: INVESTMENT IN SHARES AND OTHER NON-INTEREST

INSTRUMENT:

S.No Description June

1985

June

1990

June

1993

June

1994

June

1995

i Shares 1409 1800 4144 5152 7357

ii. NIT Units 463 1992 1770 2881 5879

iii Participation term

Certificates

1238 17230 15602 16821 15438

iv Modaraba Certificate - 10 8 24 109

v Mutual Funds 61 48 19 83 135

vi Others 425 382 1949 259 3070

31.988 Billion

TABLE-8: INVESTMENT IN TREASURY BILLS AND GOVT SECURITIES.

S.

No

Description June

1985

June

1990

June

1993

June

1994

June

1995

i Treasury Bills 7080 27223 42905 87993 92992

ii. Federal Govt.

Securities

16215 23083 112805 112663 116814

iii Provincial Govt: 2505 3981 3679 3234 3070

212.876 Billion

The above information reveals that investment in all portfolios has been on a rise so

much so that quantum of funds employed in share purchase rose by four times and in the

NIT units not less than three times in the year 1995 over the amount invested in 1990.

The guild edge securities and treasury bill equally attracted funds for investment inspite

of the fact that the rate of return on Govt. bond was not so better rewarding. Again the

investment in participation term certificates has been much escalating and at occasion fell

by nearly 2000 million.8 9

RENT SHARING:

Rent Sharing is an investment type mode of financing which was introduced to meet the

long term investment needs of the customers. Initially the instrument was allowed to be

employed for the financing of construction as well as outright purchase of residential

houses/flats. the premises without liquidating the liability. The repayment starts only

when the client secures the capacity to pay and that too, in accordance with an expected

rate of earning. Although the condition of 50% weightage to banks investment is arbitrary

and does not receive approval from jurists point of view, yet the sharing of capital as well

as accrued benefits leaves little to be objected to.

The scheme was adopted by House Building Finance Corporation in its totality. Banks in

Pakistan were also advised by State Bank to extend finance facility for the

construction/purchase of residential houses/flats only under the rent-sharing mode.

Document devised for the security of bank finance envisaged a partnership between

customer and banker which phenomena does not allow the customer to avail his/her

position as owner-in-possession. The default rate has therefore, been very negligible. The

success of the scheme, however, depended upon the availability of funds specified for

this purpose.

The scheme of housing finance on rent sharing basis, however, inspite of its utility and

public acceptability has been discontinued since the year, 1984 by banks. Instead,

housing finance is allowed on the basis of pre-determined rate of markup, for simple

reasons that the share of bank in rental value can not match with the rate of earning on

banks finances allowed under trade related modes could be usefully employed, yet due to

lack of state support i.e. enforcement by law, this very important non-interest mode has

been abandoned.

TRADE RELATED MODES OF FINANCING

FINANCING ON THE BASIS OF DEVELOPMENT CHARGE:

This was an other device to be used as financial instrument to accommodate the

customers who are in need of funds for carrying out development of the fixed assets.

Originally this mode was introduced as a part of non-interest banking system aiming at

providing fund facilities on the basis of sharing incremented change accrued to a fixed

asset as a result of finance extended by the bank. However, the device was not employed

by the banks thought the mode of "Development Charge" like rent sharing gives a just

share to each of the partners. This specific instrument can be used for the development of

barren agricultural land, renovation and modification of various mechanical appliances

and addition to commercial and residential buildings of financing. Thus, although with

minor modification the instrument of rent sharing.

FINANCING OF CUSTOMER UNDER BUY - BACK AGREEMENT:

For the financing of customers to meet their trade needs the banks are permitted to

accommodate them by purchasing the property/assets previously used to be offered as

security. Under the conventional banking system, bank simply makes advances to the

customers against the various types of properties assets accepted by way of mortgage

securing thereby the amount of loan. The revised system of banking does not allow

lending on the basis of interest. Banks, however, outright purchase the assets or property

at a price agreed between the bank and the customer.

The price so determined, in fact, is the amount of finance a bank agrees to allow to the

customer. This is the purchase price from banks points of view while it is a sale price of

the customer. In the agreement, banker allows the customer to purchase the property back

from the bank but at a price which in addition to the sale price includes profit of the bank

also. In other words the bank sells the assets/property at a price higher than the purchase

price and thus earns profit on account of sale/purchase transaction of the asset or

property. It is, in fact, a conditional sale for a specified period on expiry of which the sale

becomes absolute in favour of bank. The transaction, therefore, has two edge advantages

as it is a sale/purchase transaction and does not involve the process of lending and

borrowing.

It avoids prolong litigation resulting in wastage of time and money required for realising

the security. Under this mode bank does not claim money. Rather bank claims the

property purchased under the agreement as owner. Since the actual value of the property

is always much higher than the sale price, customer therefore, redeem the property as

early as possible in order to escape the effect of the agreement expiry of which causes

loss of right of foreclosure otherwise available to the customer.

FINANCE UNDER HIRE/PURCHASE AGREEMENT:

This mode had been employed even earlier than the introduction of NIB system. The

bank used to lend money for the purchase of machinery and vehicles. The assets so

acquired are used to be registered in the name of bank. The customer is mere hirer. The

customer, therefore, pays rent for the use of the asset periodically. The customer

simultaneously pays off monthly installment of the cost of machinery/vehicle financed by

the bank. On full payment of the cost, the machinery or vehicle is absolutely transferred

in the name of customer. Good maintenance and judicial use pays the clients in the form

of better valuable assets. This mode had also been utilized for financing of machinery

requirements of the industrial sector of the economy. Mostly the mode was being used for

financing of transport and communication sector wherein the disbursement has been on

steady increase. The State Bank of Pakistan's report on Money and Banking for the year

1993-1994 reveals that as on December, 1993 a sum of Rs. 17877 (Million) disbursed

and outstanding which increased to Rs. 2327.00 (Million) in 1994 and then rose to Rs.

3359 (Million) in the year, 1995.3

Under the trade related modes of financing the instrument of hire - purchase attained

great importance because of procedural convenience and easy marketability of the

security. With no gestation period and immediate accrual of income to the hirer the

repayment of finance amount has been a least concern for the customer. We, contrarily,

experienced the mode differently. The normal financing under this mode from 1982 to

1990 did not create any recovery problem. Huge limits availed by the clients were

continuously renewed because of timely adjustment.

PURCHASE OF TRADE BILLS:

With the abolition of interest the trade bills are purchased by financing bank at a price

lower than the face value. The purchase price payable by the bank is called "marked

down price" and the difference between the face value and marked down price is called

"mark down" which is the profit earned by bank on the purchase of a particular trade bill.

Since the switching over to revised system of banking the entire portfolio of "Bill

purchased/discounted" is managed on the basis of "mark down".

TABLE-9

Bill Purchased and Discounted by Scheduled Banks.

S.

No.

Economic Group Year

1985

Year

1989

Year

1992

Year

1995

i. Government 45 64 59 219

ii Public Sector Enterprises. 484 2085 2940 2.715

iii Private Sector Enterprises 6907 1580 31187 41.127

iv Trust Fund and non Profit

Organization

06 0 11 13

v others 218 701 1221 1.850

45.924 (B)

The mode of "purchasing of trade bills" no doubt, enjoys public acceptability, but it still

carries the defect of "Interest in disguise". The "mark down" as is practiced in banks is

nothing but simple interest charged on the amount of finance allowed against a particular

trade bill which goes on accumulating with the increase in number of days like that of

interest recovered either monthly or quarterly rest.

LEASING:

This is an other financial instrument originally introduced in banks under NIB mode of

financing but later on adopted as an independent method of acquiring assets on rent and

also renting out assets for a specified period of time. In banks the instrument is being

used for acquiring premises for conducting business and residential purposes. The

instrument is also being used for acquiring vehicles and machineries. The rent is

determined between the owners and the bank which is paid in advance. The bank uses the

asset so long as it pays rent.

However, with the introduction of the instrument in open market many agencies have

since started leasing business in respect of automobiles, electronics and other machinery.

Some of the banks like Allied Bank entered into the contract of leasing with the

firms/companies providing transport service like "Natover".

The No. of leasing companies and their business has been on increase. The existing

leasing companies have also been expanding their capital base. Table-9.2 denotes fresh

issues of the leasing business which has been providing good cushion to the financial

market have added to the capital base:5

The volume of business depends upon the funds deployed by the companies. A perusal of

annual report of State Bank of Pakistan gives the following financing picture of leasing

companies: 6

TABLE: 10 Year-wise amount of subscription to leasing companies.

YEAR NO OF ISSUE AMOUNT OFFERED AMOUNT

SUBSCRIBED

1992-93 4 120 (M) 149 (M)

1993-94 4 157 (M) 3592 (M)

1994-95 6 410 (M) 1244 (M)

TABLE11: Category-wise amount sanctioned and disbursed by leasing companies.

S. No Type of

Assistance

Year 1993-94 Year 1994-95

Amount

Sanctioned

Amount

Disbursed

Amount

Sanctioned

Amount

Disbursed

1 Fixed Industrial

Financing

7204 6100 10225 8046

2 Working Capital

Financing

1037 1007 1430 1430

The above information reveals that the leasing business is constantly growing amid the

politico-economic disturbances in the country. Need was, therefore, felt to regulate the

formation and conduct of leasing companies so that the right of the contracting parties

could be safeguarded. The corporate law authority in terms of SRO, 345-CD/96

accordingly promulgated the leasing companies (establishment and regulation) rules

1996.

But the leasing companies by themselves could not achieve the goal for which they were

primarily formed i.e. earning of profit in accordance with the principles of Islamic Sharia.

The stock market of leasing companies in the early years showed very encouraging rising

trend which subsequently went on declining. As a result of this phenomena out of 32

leasing companies registered at Karachi Stock Exchange 22 were quoted below par and

again 14 companies could not declare dividend for the year, 1996.7

While making a study of the selected companies it was observed that most of the

companies undertook installment loans and real estate related business which was neither

allowed by Islamic Shariah nor by " Leasing Companies Rules 1996". Business of the

leasing companies mostly consisted on credit sale at "Marked up Price "instead of leasing

on rental value basis. The "ORIX" leasing company although is the leading leasing

company of Pakistan which gave 45% dividend for the year, 1996 was found indulged in

the business of futures and options besides dealing in real estate and lending of funds

under "Installment Loan Scheme".8

This reveals that the leasing companies instead of concentrating on their basic goals and

activities diversified their management portfolio in violation of policy objectives.

Even leasing company rules 1996, carries the defect of amalgamating the business of

leasing with loans taking and loan advancing on the basis of markup. Rule No. 7 itself

allows the leasing company to invest at least seventy percent of its funds in leasing

business which means the left over amount can be deployed elsewhere.

The leasing companies are required to invest at least 15% of the resources raised through

investment certificate in national saving schemes. The National Saving Schemes

themselves carry fixed rate of return which tantamount to interest. The National Saving

Schemes means predetermined rate of interest to the leasing company which certainly

does not seek approval under the law of Sharia. (Rule-11).

Similarly Rule No. 11 has permitted the leasing company to charge markup on its loans.

This phenomena also depicts dubious character of the leasing company as to whether a

leasing company will conduct, lending business too ? The leasing company's rules

therefore, seems to have been framed merely to regulate the existing business of

whatsoever nature it may be.

It is, therefore, suggested that a specific law be passed and enacted, describing the

investment venues in accordance with Islamic Sharia and any violation thereof be treated

an act of crime causing disqualification of the proprietors and preventing him/them from

continuing the business of leasing.

FINANCING UNDER SALE/PURCHASE TRANSACTION (FINANCING ON

THE BASIS OF MARK-UP)

The scheme of purchase of goods from customer and simultaneous resale thereof to the

customer on the basis of mark-up on deferred payment basis was introduced from 1st of

January, 1985 when all financing operations were confined to be allowed only under one

of the twelve modes of financing mentioned earlier.

However, this mode attained much acceptability because it largely resembled with

Sanctioned Over Draft (SOD) facility. Therefore, most of the finance transactions in

banking are being routed through this mode. The method is generally known as "Mark up

Financing", a misconception of the instrument which arose due to its commonly practiced

mechanism

Under this mode bank, at the request of the customer, approves a certain limit of finance

against the permissible stock of trade goods. The customer draws upon the account within

that specified limit. The use of facility is allowed on the basis of sale/purchase agreement

more commonly known as IB-6 and IB-7.

Under this agreement, the financing bank purchases the stock, in trade of the customer, at

a price equivalent to the amount of limit approved.

The limit value is however, determined on the basis of actual value of stock less marginal

amount required as per selective credit control policy of the State Bank of Pakistan.

Nevertheless, the drawing powers of the customer will remain confined to the limit

already approved by the bank. The customer's drawing will represent the cost of goods

sold to the bank and all repayments made by the customer will reduce the balance of sale

price of stock purchased by him on credit. More simply the bank purchases stock from

the customer in cash which amount is withdrawn by the customer. However, the same

stock is repurchased by the customer on deferred payment basis on the basis of mark up.

The customer pays the price back to bank at a future date. But the bank's sale price is

higher than its purchase price by the amount of mark up. The quantum of markup

depends upon the agreed rate and also period of finance or for that matter the period

which lapsed between the date of purchase by customer and then repayment of sale price

by the customer. The document i.e. sale/ purchase agreement IB-6 prescribed for the

transaction (besides others) contains an agreement of purchase of goods from customer

and simultaneous resale thereof to the customer on deferred payment basis on the basis of

mark up.

At present major portion of banks finances are being utilized for meeting short term

working capital requirements of trade and industry. In order to cope with the emergent

need of the market and also mitigate the strain on liquidity position of the financing

agencies I suggest that the bank may adopt "Traders Credit Cheque" system instead of

directly allowing financing on the basis of "Mark-up".

Out of the scheduled bank's total advances of Rs. 418.292 billion more than Rs. 370.212

billions had been disbursed and outstanding under this mode of financing as on 31-12-

1994.9 As such major portion of bank's advances are being made under this particular

mode of financing.

.Unfortunately with the change of Govt; in 1995 the system lost its due attention and the

banking sector once again reverted to the old conventional system but this time under the

garb of MARK- UP instead of INTEREST.

In order to find out the views of the scholars and also people involved in financial matters

on the legitimacy and acceptability or otherwise of the existing system and seek

suggestions for alternative instruments, (if the present state of affairs is found non-

commensurating with the tenets of Islam), a sampling based research has been carried

out. During the exercise, individual opinions were sought on the basis of a questionnaire.

Among the respondents included 10 economists, 10 scholars on Islamic jurisprudence, 60

traders, 15 bankers and 1 bureaucrat. Expressing their contention, majority of them

severely criticized the existing "Mark-up based financing". They held that the change

merely replaces compound interest based lending with simple interest which, too,

increases with every increase in time span. The informative questions were answered as

shown in Table-11.1

TABLE-12

S.No. ANSWER/

RESPONSE

No. OF

RESPONDENTS

1. Do you think that interest charged by

banks is legitimate, if not then why?

NO

YES

81

10

2. Do you think that existing NIB (Non-

Interest Based) banking modes used by

banks in Pakistan are free of interest? If

not then what do you suggest as an

alternate?

NO

YES

85

6

3. Are you willing to place all your surplus

funds in current accounts?

NO

YES

13

78

4. Are you willing to undertake risk of

business partnership in a bank? If yes,

then which type of business will you

prefer?

(a) Musharika

(b) Modaraba

(c) Leasing

NO

YES

All the three are

good.

12

79

8

49

23

11

5. Do you think that the existing Modaraba

or leasing companies are operating in

accordance with Islamic Sharia?

NO

YES

32

59

6.

Do you think credit plus sale (Mark-up

financing) transactions conducted by

banks are legitimate under the law of

Sharia?

NO

YES

73

8

It is really interesting that while responding to the questions, neither reasonable

arguments were given in support of the answer nor any of the respondents suggested

practicable mechanism. However most of them cursed the element of INTEREST

because of its prohibition in the HOLY QURAAN.

In order to get rid of the “interest” we may recognize the flaws and grey areas in the

system based purely on Stratagem, assumptions and pretexts. Islam being the religion of

natural justice exhorts the lesson of cardinal virtues. Instead of putting the society into a

quagmire of suspense, let us be honest and deny the false incandescence of nay “interest”

in disguise .Why not resort to actual Islamic Modes of financing which caries the

authenticity of Islamic Shariah beyond any suspicion?.

The advent of the 21st century brought in its wake the science revolution which prompted

the emergence of new technology. Though after the end of 2nd

world war survival of

Japanese economy gave tremendous boost to industrial products, auto and electronic

output yet the technological advancement affected the centuries old economic supremacy

of American and European States. During the period some of the nations prospered while

other still continue striving hard for their existence. Globally the world is divided into

two different categories i.e. the poor and the rich. The poor nations have been falling prey

in the hands of advanced countries because of resource insufficiency and resorting to

cross the borders borrowing on the bases of interest. The poor countries mostly comprise

on Asian and African states densely populated with resource constraints. Dearth of

capital has, of late, been compelling these nations on state borrowing internationally.

Besides cross the border transaction, borrowing with in country has also been pressing

hard the poor economies. Due to heavy debt servicing major portion of their budgets is

eaten up by loan repayment

However the start of current decade again surged with an urge of eliminating RIBA and

the banking industry in Pakistan took a momentum in establishing independent Islamic

Bank Branches through out the country.

We now have more than forty banks operating in Pakistan of which six have been

licensed to independently operate under Islamic modes of financing

The growth of Islamic banking business has been showing very encouraging trend.

Presently Islamic banking has been holding more than 3.8% share in overall banking

business. Six independent Islamic banks are operating with 186 branches and assets of

more than Rs; 178 Billions up to September, 2007. At present a total of 289 branches are

transacting Islamic Banking of which 103 branches of commercial banks are also

operating under Sharia based modes of financing .The growth in business of Islamic

banking during the last half a decade promises very fast approach towards the

achievement of goal of Islamization of banking sector .The following statistical

inferences drawn from the operation of Islamic banks in Pakistan advocates the success

of the efforts in days to come.

Table 13: Islamic Banking Branch Network

S. No Name Of Bank Branches

Full Fledge Islamic Banks

1 Meezan Bank Ltd 100

2 Al Barka Islamic Bank Bsc(EC) 18

3 Dubai Islamic Bank Pakistan Limited 17

4 Bank Islamic Pakistan Limited 36

5 Emirates Global Islamic Bank Limited 10

6 Dawood Islamic Bank Limited 5

Sub Total 186

Standalone Islamic Banking Branches

7 Bank Alfalah Ltd 32

8 MCB Bank Ltd 8

9 Bank Of Khyber 17

10 Habib Metropolitan Bank 4

11 Habib Bank Ltd 1

12 Standard Chartered Bank 8

13 Bank Al Habib 4

14 Soneri Bank Ltd 4

15 Askari Bank Ltd 14

16 National Bank of Pakistan 3

17 United Bank Ltd 5

18 ABN Amro Bank N.V. 3

Sub Total 103

Grand Total 289

Islamic Banking Sector: Comparative Consolidated Balance Sheets of Islamic

Banking Institutions.

Table 14

Description Dec-06 Jun-07 Sep-07 %Change

ASSETS 21,7777 16,530 -25%

Cash and balances with treasury banks 15,266 18,464 22,125 20%

Balances With other banks 16,383 12,942 7,807 -40%

Due From Financial institutions 5,602 11,519 25,482 121%

Investments 7,053 78,834 88,330 12%

Financing 65,137 5,067 5,873 16%

Operating Fixed Assets 2,518 440 531 21%

Deferred tax assets 192 9,948 11,198 13%

Other assets 6,031 158,990 177,696 12%

Total Assets 118,183

LIABILITIES

Bills payable 1,260 1,723 2,192 27%

Due to financial institutions 6,547 8,164 5,153 -37%

Borrowing from Head office 4,194 6,166 9,517 54%

Deposits and other accounts 83,742 108,293 124,437 15%

Sub-ordinate Loans - - -

Liabilities against assets subject to finance lease 43 50 16%

Deferred tax liabilities 491 932 990 6%

Other liabilities 6,102 8,431 9,272 10%

Total Liabilities 102,336 133,753 151,610 13%

NET ASSETS 15,847 25,238 26,086 3%

REPRESENTED BY

Paid up capital /Head office capital account 14,465 22,209 23,445 6%

Reserves 529 1,374 665 -52%

Un-appropriated/Un-remitted profit 756 1,106, 1,449 31%

Sub Total 15,750 24,689 25,559 4%

Surplus/(Deficit)on revaluation of assets 97 549 527 -4%

Equity 15,847 25,238 26,086 3%

Analysis of the Consolidated Balance Sheet of Islamic Banking Institution

Table 15

Earning and Profitability Section Jun-07 Sep-07

Mark-up income to Total Assets 6.8% 6.6%

Mark-up Expense to Total Assets 3.7% 3.5%

Net Mark-Up income to Total Assets 3.1% 3.0%

Non-Mark-Up income to Total Assets 1.2% 1.1%

Non-Mark-Up expense to Total Assets 3.1% 3.0%

Net Mark-Up income to Gross Income 73.1% 73.5%

Non-Mark-Up to Gross Income 26.9% 26.5%

Operating expense to Gross Income 72.2% 73.3%

ROE (Average Equity) 2.8% 4.0%

ROA (Average Assets) 0.4% 0.6%

Assets Quality Ratios

NPFs to Financing 1.0% 0.9%

Net NPFs to Net Financing 0.0% -0.8%

Net NPFs to total Assets 0.0% -0.04%

Provisions to NPFs 102.1% 108.4%

Net NPFs to total Capital -0.07% -0.27%

The Balance Sheet footing of the Islamic Banking industry increased during the

past quarter by 12%.The total assets portfolio in the Islamic Banking Sector

expanded to Rs.177.7 billion in September 2007 from Rs.158.9 billion in june

2007.

Financing constituted 49.7% of the total assets and stood at Rs 88.3 billion in

September 2007 as compared to Rs 78.8 billion at the end of June 2007, showing

an increase of 12%.

There was a increase in “Balance with other banks” Balances held by Islamic

Banking Institutions at the other Banks increased by 20% of Rs .22.1 billion

from Rs 18.5 billion.

Deposits increased by 15% to Rs 124.4 billion as at the end of September 2007

from Rs 108.3 billion at the end June 2007

Islamic Banking Sector’s equity increased by 3% to Rs 26.1 billion as of

September 2007 from Rs 25.2 billion at the end of June 2007.

Un-appropriate /unremitted profit as at the end of quarter September 2007,

increased by 31% to stand at Rs.1.5 billion in comparison to the previous

quarters figures of Rs 1.1 billion.

The asset quality ratios reflect that the quality of finances of the Islamic Banking

Institutions is very strong. NPF to financing are just 0.9% which depicts that a

minimal part of financing is being classified due to delay or not repayment

which too, are adequately covered by proper provisioning.

Deposits Structure

Table 16

Description Jun-07 Sep-07 %Change

Deposits and Other Accounts 108,293 124,437 15%

A) Customers

Fixed deposits 39,652 47,423 20%

Savings deposits 31,640 38,582 22%

Curent accounts -Non Remunerative 23792 24,467 3%

Others 998 1,115 12%

Total of A 96,082 111,587 16%

B) Financial Institutions

FI Remunerative deposits 12,151 12,819 5%

FI Non Remunerative deposits 59 31 -48%

Total of B 12,211 12,850 5%

Particulars of deposits

In Local currency 101,693 117,518 16%

In Foreign currency 6,599 6,919 5%

Total 108,293 124,437 15%

Total Deposits have increased by 15% from 108,293 million to 124,437 million

Rupees.

Deposits by customers have increased by 16 %.

Deposits by financial institutions have increased by 5%.

Fixed Deposits by customer’s constitute 38 % of the total deposits depicting

customer’s preference towards long term fixed deposits.

Modes of Financing

Table 17 (Rs. In million)

Modes of Financing Jun-07 Sep-07 Inc./Dec.

Murabana 35,767 36,469 2%

Ijarah 24,038 25,738 7%

Musharaka 582 1,394 139%

Mudaraba - 84 -

Dimin.Muharaka 15,877 23,314 47%

Salam 952 1,276 34%

Istisna 757 39 -95%

Qarz/Qarz-e-Hasna 6 8 28%

Others 1,663 927 -44%

Gross Financing 79,641 89,247 12%

Amount of NPF 790 846 7%

Provisions 807 917 14%

Net NPF (17) (71) 321%

Gross Financing 79,641 89,247 12%

Total No of

Finanacees’accounts

29,204 34,362 18%

Share of Murabaha Financing has decreased from 44.91% in previous quarter to

40.9% in total financing by the IBI’s during the quarter ending September 2007.

Second most widely used mode of Finance is Ijarah Financing accounting for

about 28.8 % of the total financing.

Diminishing Musharakah has increase by 47% and jumped to 26.1% from 19.9%

of total financing in June 2007.

The total number of Financees’ accounts increased by 18% from 29,204 to 34,

362 in current quarter.

Industry Progress and Market Share (Rs in billions)

Table 18

Description Sep-07 Mar-07 Dec-06 Dec-06 Dec-04 Dec-03

Total Assets 178 136 118 72 44 13

% age of Banking Industry 3.8 3.2% 2.9% 2.1% 1.4% 0.5%

Deposits 124 93 83 50 30 8

% age of Banking Industry 3.6% 3.0% 2.8%72 1.9% 1.2% 0.4%

Financing &Investment 114 78 72 48 30 10

% age of Banking Industry 3.2% 2.5% 2.4% 1.8% 1.3% 0.5%

Full Fledged Islamic Bank 6 5 4 2 2 1

Conventional Bank with Islamic Banking

Branches 13 12 9 7 3

With this pace of rapid growth, in relation to centuries’ old conventional banking

system, we are confident that the Islamic banking will very soon be leading

monetary and financial system and a major source of business and industry world

over.

BIBLIOGRAPHY

1. Akhter,A.R.-“The Law and Practice of Interest-free Banking’,1998,Mansoor

Book House, Lahore

2. Allied Bank –“Elimination of Riba”,Non Interest Banking

Circulars/Periodicals/Quarterly Journals issued during the year,1980-95

3. Inayat, Nadeem-“Operation of Islamic Banks in Areas of Investment and Trade”,

1996, Institute of Policy Studies, Islamabad.

4. Kenedy,Charles-“Islamisation of Law and Economy, Case studies on Pakistan”

1996,The Islamic Foundation ,United Kingdom\

5. Rehman-Dr.Tanzilur: The Judgement that could not be delivered”, Royal Book

CO., 1994.

6. Tannon, M.L.-“Banking Law and Practice in Pakistan and India”, 1977 Union

Book Stall, Karachi.

7. Annual Report, 1985-1999-State Bank Of Pakistan.

8. “Interest Free Banking”,1982 Institute of Bankers in Pakistan ,Karachi.

9. Quarterly Journal ,Allied Bank of Pakistan Ltd

10. Annual Report 2006, Meezan Bank.

11. Islamic Banking Bulletin, July, 2007&September, 2007