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Islamic banking
Islamic banking is banking or banking activity
that is consistent with the principles of Islamic
law (Sharia) and its practical application through
the development of Islamic economic.
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Objective of Islamic Banking
Objective of Islamic Banking is to make positivecontribution to the fulfillment of socio-economic
objectives of the society
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Islamic Bank
Islamic Bank is a financial and social
institution which identifies itself with theprinciples of Shariah, as laid down by Holy
Quran and Sunnah, as regards its
objective, principles, practices andoperations.
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Principles of Islamic Banking
Transactions must be free of interest (riba)
Risk sharing
Goods and services that are illegal (haram) from theIslamic point of view cannot be produced or
consumed.
Activities or transactions involving speculation
(gharar) must be avoided.
Zakat (the compulsory Islamic tax) must be paid.
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Islamization Of Banking In Pakistan
in 1948, Mr. Muhammad Ali Jinnah emphasized the virtues of Islamic
principles and in his address at the inauguration of the State Bank of
Pakistan (SBP), said:
I shall watch with keenness the work of your Organization in
evolving banking practices compatible with Islamic ideas of
social and economic life. We must work our destiny in our own
way and present to the world an economic system based on
true Islamic concept of equality of manhood and socialjustice.
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Islamization Of Banking In Pakistan
In 1977-1978, the process of Islamization of banking
system was started. In October, 1977 the council of
Islamic Ideology was charged with responsibility ofbringing about Islamic economic and banking system.
The Islamic Ideological Council presented its report
in 1980, later there was a criticism on the report too.
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Implementation Of Islamic Banking In
Pakistan Stage-1
Interest was first eliminated from July, 1979 from the
transactions of NIT. Stage-2
From first January, 1981, profit and loss sharing saving
and term deposits was introduced by commercial
banks in place of simple saving and fixed deposit
scheme.
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Stage-3:
In August, 1981, HBFC was allowed to provide finance on rentsharing basis for house building. Students were allowed Qarz-
e-Hasana without interest.
Stage-4:
In 1983, hire purchase system of financing was introduced.
Stage-5:
From July 1, 1984 to December 31,1984 all banks in the
country were to make finance available also on the basis of
Islamic modes of financing in addition to existing interest
based system.
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Stage-6:
From January 1985, all types of finances provided by the bank tothe government and their agencies were permissible on Islamic
basis only.
Stage-7:From April 1985, all types of finances provided by the bank to all
clients were to be on Islamic basis only.
Stage-8:
From July 1985, all deposits were to be on the basis of
participation in profit and loss of banks except current account.
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The Commission for Transformation ofFinancial System (CTFS) was constituted in
January 2000, in SBP to transform the financial
system.
Later in FY02 finance minister declared some
regulations for the elimination of Riba/Interestfrom the financial system of Pakistan.
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SBPs contribution towards Islamic
Banking
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The profit or loss shall be distributed inproportion to the value of shares of each partnerin banking business.
The bank should confine itself to providing capitalto entrepreneurs on Shirakah or Modarba basis.
To enhance its income the bank can provide
various services to the general public orgovernment.
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All decisions regarding the bank shall be taken in consultationwith all its shareholders or representative committee.
The financial liability of the banks shareholders shall be
unlimited.
Every shareholder shall be free to terminate his Shirakah.
At the death of a partner, his Shirakah will come to an end.
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Difference between conventional& Islamic banking
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CONVENTIONAL BANKING
1. Money is a commodity besidesmedium of exchange and store
of value. Therefore, it can be
sold at a price higher than its
face value and it can also berented out.
2. Time value is the basis forcharging interest on capital.
ISLAMIC BANKING
1. Money is not a commoditythough it is used as a medium
of exchange and store of
value. Therefore, it cannot be
sold at a price higher than itsface value or rented out.
2. Profit on trade of goods orcharging on providing service
is the basis for earning profit.
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3. Interest is charged even in casethe organization suffers lossesby using banks funds.Therefore, it is not based onprofit and loss sharing.
4. While disbursing cash finance,running finance or workingcapital finance, no agreementfor exchange of goods &services is made.
3. Islamic bank operates on thebasis of profit and loss sharing.In case, the businessman hassuffered losses, the bank willshare these losses based onthe mode of finance used(Mudarabah, Musharakah).
4. The execution of agreementsfor the exchange of goods &services is a must, while
disbursing funds underMurabaha, Salam & Istisnacontracts.
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5. Conventional banks use
money as a commodity
which leads to inflation.
5. Islamic banking tends to
create link with the real
sectors of the economic
system by using trade
related activities.
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Bank Clientmoney
money + money (interest)
Conventional
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Bank Client
Islamic
money
Goods &
Services
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Business of Islamic Bank
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1. Customers Deposits
a) Current Accounts
(b) Savings Accounts(c) General Investment
(d) Special Investment Accounts
2. Financing
(a) Al-Mudharabah;
(b) Al-Musharakah;
(c) Al-Bai bi Thaman Ajil;
(d) Al-Ijara;
(e) Al-Bai al Takjiri;
(f) Al-Qardul Hasan
C stomers Deposits
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Customers Deposits
Current Accounts
The Bank accepts deposits from its customers looking for the safecustody of their funds and absolute convenience in their use in theform of current accounts on the Islamic principle of Al-Wadiah.
Savings AccountsThe Bank accepts deposits from the customers looking for safe custodyof their funds and a degree of convenience in their use together withthe possibility of some profits in the form of savings account on theIslamic principle of Al- Wadiah. The Bank provides its customers withSavings Pass Books and other usual services connected with SavingsAccounts.
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General investment AccountsThe Bank accepts deposits from its customers looking for investmentopportunities for their funds in the form of general investment accounts on
the Islamic principle of Al-Mudarabah. The deposits will have to be for a
specified period. The Bank acts in this case as the entrepreneur and the
customers as the provider of capital.
Special Investment Accounts
Bank may also selectively accept deposits from its Government or Corporate
customers in the form of Special Investment Accounts. These accounts are
also operated on the principle of Al-Mudarabah.
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Financing
financing under the principle of al-Mudharabah
The Bank may undertake to finance acceptable projects under the
principle of al-Mudharabah. In this case, the Bank is the providerof the capital and will provide 100% financing for the relevant
project. The initiator of the project is the entrepreneur who will
manage the project. The Bank cannot interfere in the management
of the project but has the right to undertake the follow-up andsupervision tasks.
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financing under the principle of al-musharakah
The Bank may undertake to finance acceptable projects under
the principle of al-musharakah. In this case the Bank togetherwith the initiator or initiators of the relevant project will provide
the whole financing for the project in agreed proportions. All
parties including the Bank have the right to participate in the
management of the project but all parties have the option to
surrender such right.
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Financing under the principles of al-bai
Bithamin ajil (deferred sale)
The Bank may finance its customers who wish to
acquire a given asset but to defer the payment for the
asset for a given period or to pay by installments under
the principle of al-bai Bithamin ajil.
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Financing under the principle of al-Ijara (leasing)
The Bank may finance its customers to acquire the right to use
the services of a given asset under the principle of al-Ijara. TheBank first purchases the asset required by the customers.
Subsequently the Bank leases the asset to the customer for a
fixed period subject to lease rentals and other terms and
conditions as agreed by both parties.
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Financing under the principle of al Bai ul Takjiri
The Bank may finance its customers who initially wish to
use the services of a given asset but subsequently to own
the asset under the principle of al-bai ul Takjiri. The
procedure is the same as in ijara or leasing, except that
both parties agree that at a point of time, the customers
will purchase from the Bank the asset-concerned at anagreed price with all the lease rentals previously paid
constituting part of such price.
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Qard al-hassan (Benevolence loan)
A unique product of the Islamic bank, is a zero-return loan (a
negative investment). All Islamic banks are urged or required tomake these benevolence loans to needy and poor people.
if u loan to ALLAH, a beautiful loan, He will double it
to your(Credit)(64:17)
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Other Services
Trade financing including letters of credit and letters of
guarantee.
Islamic Export Credit Refinancing Scheme.
Remittance and transfer of funds.
Sale and purchase of foreign currency.
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Financial assistance from the bank
the central bank,serving both as a lender of last resortas well as provider of refinance, can advance to theapplicant Islamic bank the liquidity requiredascertaining the magnitude of its urgent needs. such aliquidity support operation can be conducted on thebasis of MUDARABAH and MUSHARAKAH.
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Participation in the clearing house
Islamic bank should be allowed to participate in the claearing
house operations.Since participation in the clearing house requires that the
bank should have current account with the central bank, short
term overdraft facilities, free of interest, should be allowed
by the central bank to Islamic bank to cover shortfalls for any
short time period.
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Central banks control
permission to establish banks, to practice banking activities
and to open new branches. Specifying the terms governing the designation of board of
directors.
Commitment to submit required statements to monetary
authorities.
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Correspondence services
Each of them can open an operating account
with no interest.Each of the two banks will collect bills, drafts.
Cheques of other banks.
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Exchange of fundsIslamic banks can accept funds on the basis of MUDARABAH
from conventional bank in the form of an investment accountwith a return. Such return will be same as paid by Islamic bank totheir clients.
joint financing.
A large number of the conventional banks have openedinterest free windows that can be helpful in promotion offinancial cooperation between the interest free and interestbased institutions.
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Exchange of information:
clients dealing with Islamic banks may also be dealing with
commercial bank. There must be exchange of information about
such clients by banks.
Joint training program:
Islamic banks can participate with other banks in the training
programs.
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Current Status of Islamic Banking in Pakistan
While the number and operations of Islamic banks are fast expanding, thissegment of the market is still small relative to the appetite for Islamicfinance.
Pakistan is launching a gradual and steady approach to Islamic banking.
Despite rapid expansion in industry, the share of Islamic banking in thetotal banking system is a modest 3.2%.
It only caters for around 23,000 borrowers through around 170 branchesrelative to the country-wide 5 million borrowers (or 4.8 million excludingmicrofinance borrowers) tapped through 7,700 branches by conventionalbanks.
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Current Status of Islamic Banking in Pakistan
Financing and investment levels of Islamic banks barely range around Rs77
billion, which is below 3% of the total banking systems advances.
On the product side, Islamic banks so far offer about 75% of productscurrently available in conventional banking while clean lending for
consumer financing products, like personal loans and credit cards.
Islamic banks operate exclusively in large cities with some now venturing
into secondary cities but they are absent from rural areas where there isgreat potential for business growth.
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Islamic Banking In Global Scenario
Islamic Development Bank (IDB): First Islamic Bank established in 1975 in
Jeddah, by the persuasion finance ministers
of Islamic Countries with an authorized
capital of 6 billion Islamic Dinars.
56 member countries worldwide.
IDB and Pakistan: Pakistan has 127.26 million Islamic Dinars which
is 3.06% of the whole subscription.
IDB has helped Pakistan in its Nuclear Program.
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Islamic Banks and Financial Institutions
According to the General Council for Islamic Banks and Financial Institutions
there are currently 275 institutions worldwide that follow Islamic bankingand financing principles, collectively managing in excess of $200 billion.
These institutions are spread throughout 75 countries, including Europeand the United States.
Twenty institutions now offer a variety of Islamic financial services in theUnited States.
An increasing number of western financial institutions now offer Islamicinvestment products to Muslim investors.
Growing at the rate of 15percent per annum.
f
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Role of Islamic Banks in Economy
Islamic banks work as a trading concern and financial intermediary toperform interest-free activities.
Islamic banks perform activities in the right direction towards economicdevelopment.
Islamic banks perform a variety of fund-based and non-fund basedfunctions to facilitate their customers.
Islamic banks play a vital role in the economy to promote productive
activities that enhance economic growth and prosperity.
Islamic banks ensure stable economy;fair distribution of income; reduceinjustice; risk sharing,
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What do we need now
Revival of (House of Wealth), a
system which expresses the glorious days of
Muslim rule.
Financial institution for administration of taxes.
Royal treasury of Sultans and Caliphs.
Administered distribution of Zakah.