Article on Islamic Banking, Finance & Economics

by Maryam Ayaz
Manager Business Developmen t
Apvision (Private) Limited

Overview of Islamic Banking

Islamic Economics

Is lamic ban kin g is bas ed on th e pr in ciples of Islamic economics — an economic fr amewor k in ac cordan ce wit h
Is lamic law (Sha ria'h ).

Th er e are two ty pes of Is la mic economics :

 Calipha te , the Is la mic for m of gov er nment r epres ent in g the polit ic al unit y and leader ship of the
Mus lim wor ld (Islamic politica l fra mework )
 As sumin g the polit ic al fr amewor k is n on-Islamic , ther efor e, seeking t o in tegr at e some prominent
Is lamic t enets int o a s ecu la r ec on omic fr amewor k

Caliphate is the a bs olut e Islamic rule, thus the economy focu ses on dis tribu tion of resourc es in order to meet
th e basic and luxur ious n eeds of indiv idua ls in societ y, and th e sta te has a c lear r ole in policing, t axat ion,
man agin g pu blic ass ets , an d ensu rin g th e circu la tion of wealth . Such a polit ic al fr amewor k in it s true for m
does n ot ex ist in toda y's wor ld.

As sumin g non-Islamic politica l fra mework s imply proposes t wo ma in t enet s: n o int er es t can be earn ed on
loans an d s oc ia lly r espon sible inv est ing. Th is is the way c on vent iona l ban kin g is Islamiz ed—th e firs t step
t owar ds an Islamic ec on omic fra mework .

M oder n day Islamic schola rs and a ca demics hav e developed v ariou s modes of Shar ia 'h c omplaint fina ncing
th at ar e design ed to wor k wit hin the preva ilin g c apit alis t ec on omic fra mework . In or der t o ach ieve this
balan ce nu merous conc ess ions hav e been a ffor ded to fin an cial ins titution s that wou ld n ot a pply if a viable
interest fr ee ec on omic syst em exist ed. Th e int ent ion behind mak in g thes e c onc ess ions is to en cour age the
evolu tion of this type of a lt ern at iv e syst em.

Islamic Banking

Is lamic ban kin g r efer s to a sys tem of ban kin g or ba nk ing act iv it y that is consistent with Is la mic law
(Sh aria’ h) pr in ciples and guided by Is la mic economics . In par ticu la r, Is la mic law prohibits usu ry, the
c ollect ion and pay ment of int er est , also common ly ca lled r iba. Genera lly, Islamic la w als o prohibits tra ding in
fin an cial ris k (wh ic h is seen as a for m of ga mbling). In a ddit ion, Is la mic law prohibits investing in bus in ess es
th at ar e considered unlawfu l, or har aa m.

Is lamic fin an ce ha s been gainin g momen tum on a globa l sc ale for the last 30 y ear s.

Many Islamic Ba nks ha ve s prun g up over the last few y ea rs. Thes e chan ges ar e oc cur ring bot h in Mus lim an d
in west ern c ount ries , and ar e dr iv en by a global t ren d amon gs t Muslims t o become mor e obs er van t of their
faith . It might ha ve been the r eas on why Is la mic Bank in g emer ged, h owev er , t oday Islamic Ban king is sou ght
by Muslims an d non-Muslims du e to th e benefits it offer s.

In dust ry s ize is curr ent ly estima ted a t more than $400 billion , wit h pr oj ect ed gr owth of 15% per annum.

F inan cial ins titution s ar oun d the globe ar e try ing to k eep pac e with th e gr owin g dema nd for Sha ria’ h
c ompliant pr oduc ts an d ser vices.
Islamic Banks in Pakistan

Name Bran ches

Meezan Bank L imit ed 62

Al Barak a Islamic Ba nk 11

Bank Islami Pak is tan L imit ed 10

Du bai Is lamic Bank Pak ist an Limited 10

Emir at es Globa l Is la mic Bank L imit ed 6

First Dawood Is la mic Bank L imit ed 1

   
 

Islamic Banking Branches in Pakistan

Name Bran ches

MCB Ban k Limited 6

Bank of Kh yber 5

Bank Alfalah L imit ed 23

Habib Metr o Bank 4

Stan dard Cha rtered Bank 3

Bank Al Habib L imit ed 3

Habib Ban k Limited 1

Son er i Bank L imit ed 2

Pr ime Commerc ia l Ba nk 2

Ask ar i Commer cial Ban k 6

Nation al Bank of Pak is tan 1

Un it ed Ban k Limited 1

ABN AMRO Ba nk 1

Modes of Islamic Finance

Murabaha

L it er ally it means a s ale on mutua lly a gr eed profit. Techn ic ally , it is a contr act of sale in wh ich th e seller
dec lares his c os t and profit. Islamic ba nks ha ve a dopt ed th is as a mode of fina nc in g. As a fina nc ing
t echn ique, it inv olves a requ est by the c lien t to th e ba nk to pur chas e cert ain goods for him. The bank does
th at for a definite pr ofit over the c os t, which is stipu la ted in a dv anc e.

Ijarah

Ij arah is a contr ac t of a kn own and pr opos ed usu fr uct a ga in st a spec ified an d la wful r etur n or c ons ider at ion
for the s erv ic e or return for the ben efit pr opos ed t o be tak en , or for th e effort or wor k proposed to be
ex pended. In oth er wor ds , Ijar ah or leas ing is th e trans fer of usufruc t for a c ons ider at ion which is rent in
c ase of hirin g of assets or thin gs an d wage in cas e of h iring of pers ons .

Ijarah-Wal-Iqtina

A c ont ract under which an Is la mic bank provides equ ipment , buildin g or other ass ets t o the c lien t against an
agr eed r ent al t oget her with a unila tera l un der ta kin g by the bank or the c lien t that a t the en d of th e leas e
per iod, the own er ship in th e ass et wou ld be tran sfer red t o the less ee. Th e undert ak in g or the pr omis e does
n ot bec ome a n int egra l part of the lea se c ont ra ct to ma ke it condit iona l. Th e rent als as well a s the pu rch ase
price are fixed in such ma nner that th e ban k gets ba ck its principa l sum a long with profit ov er th e period of
lease.
Musharakah

Mush ar akah means a rela tion ship esta blis hed un der a contr act by the mutua l c ons ent of the pa rt ies for
sh aring of pr ofit s and los ses in the j oint bus in ess . It is an a gr eement un der wh ich th e Islamic ba nk provides
funds, wh ich a re mix ed with th e fun ds of the bus in ess en terprise an d ot hers. All providers of ca pita l a re
en titled to par ticipa te in mana gement , bu t not n ecessa rily required t o do s o. Th e pr ofit is distr ibut ed amon g
th e partn ers in pr e-agreed rat ios, wh ile the loss is born e by ea ch pa rtn er str ic tly in proport ion to r espec tive
c apit al contr ibut ions.

Musawamah

Mus awamah is a genera l and regular kin d of s ale in which pr ic e of the c ommodity t o be tra ded is ba rgained
bet ween seller an d the buy er wit hout any r efer en ce t o the price pa id or cost in curr ed by th e former . Thus, it
is differ en t fr om Mur abaha in res pect of pr ic in g for mu la . Un like Mura bah a, seller in Musa wa ma h is n ot
obliged t o rev ea l h is cost . Both th e pa rties n egot ia te on th e pr ic e. All other condit ions r elev ant t o Mur abaha
are v alid for Musawamah as well. Musa wa ma h c an be us ed wh ere the seller is n ot in a pos it ion t o asc er tain
precisely th e costs of commodit ies tha t he is offer in g t o sell.

Istisna'a

It is a contr act ua l agreemen t for manu fa ctu ring goods an d c ommodities , a llowin g c ash pa ymen t in advance
an d futur e delivery or a fut ure pay ment an d fu tur e delivery . Is tisna 'a c an be us ed for providing th e fa cility of
fin an cin g th e manu fa ct ur e or c ons tru ction of houses , pla nts , pr oj ec ts and bu ilding of bridges , roads and
h igh ways .

Bai Muajjal

L it er ally it means a c redit sa le. T echn ic ally , it is a fin an cin g t echn ique a dopt ed by Islamic ba nks th at tak es
th e form of Mura bah a Muajj al. It is a contr act in wh ich th e ba nk earns a profit ma rgin on his purch as e pr ic e
an d allows the bu yer to pay th e pr ic e of the commodity at a futu re dat e in a lu mp sum or in inst allmen ts. It
has to ex pr ess ly men tion c os t of the c ommodity and th e ma rgin of pr ofit is mutu ally agreed. Th e pr ic e fix ed
for the c ommodit y in such a tr ans act ion can be th e same as th e spot price or h igher or lower th an the spot
price.

Mudarabah

A for m of part ner ship where one par ty pr ov ides the fun ds while the other pr ov ides exper tise an d
man agement . Th e la tter is r efer red t o as the Mu da rib. Any profits a ccru ed ar e shar ed between the t wo
par ties on a pr e-agreed ba sis, while los s is born e only by th e pr ov ider of th e ca pita l.

Bai Salam

Salam means a contr act in wh ic h advan ce pay ment is made for goods t o be delivered lat er on. The seller
un dertakes t o su pply s ome s pecific goods to th e buy er a t a futu re dat e in ex cha nge of an a dv anc e price fully
paid at the t ime of c on tra ct . It is necessa ry tha t the qu alit y of th e commodit y int en ded t o be pur cha sed is
fully spec ified leav in g n o ambigu it y lea ding to dis pu te. The obj ec ts of th is sa le are goods and c annot be
gold, silv er or cur ren cies . Ba rr in g this, Bai Salam covers almost ev ery thing, which is c apable of being
defin it ely descr ibed as t o qu ant it y, qua lity an d wor kmans hip.

Islamic Banking Issues

Human resource for Sharia'h compliance
Users of Is lamic finan cial ser vices ass ign pr imar y import an ce to Sha ria'h c omplia nc e of th e ser vices th ey us e.
It is unders tan da ble th at Sha ria'h n onc omplia nc e ent ails a s eriou s oper at iona l ris k and can result in
wit hdrawal of fu nds fr om an d ins ta bility of an Is la mic bank , irr espec tive of it s initial fina nc ia l s oundness.
Sharia' h complian ce is hence a ser ious matt er for an Islamic bank , in a ddit ion to its complian ce wit h oth er
r egulat or y requirements .

Unresolved Fiqh Issues

L ack of stan da rd fina ncial contr ac ts and pr oduc ts can be a c ause of ambigu it y an d a sourc e of dis pu te an d
c os t. In addit ion, wit hout a common un der stan ding of c ert ain ba sic foun da tion s, fur ther developmen t of
bank in g produ cts is hin dered.

Legal framework

An appropr iate legal, ins titution al an d tax fra mework is a ba sic requirement for est ablish in g s ound finan cial
inst itut ions an d mark ets . Is la mic jur is pru denc e offers its own fra mework for th e implemen ta tion of
c ommerc ial and fina ncial contr ac ts and trans ac tion s.

Nev er theless , commer cial, bank in g and compan y la ws appr opriat e for th e enfor cement of Is la mic bank in g an d
fin an cial contr acts do not exis t in many c ount ries .

Excess Liquidity

Is lamic ban ks hav e ov er 60 % excess liqu id funds wh ic h cann ot be properly ut iliz ed du e to n on -av aila bility of
Sharia' h Complian t produ cts a nd instru ments .

Th e compet it iv en ess a nd s oun dness of fin an cial inst itu tion s depend on the a va ilabilit y of effic ient fin an cial
produ cts . Is la mic bank s urgent ly need Shar ia 'h c omplia nt pr oduc ts to meet a number of pressing needs .

Technology

Des igning t echn ologic a l s olution s ar oun d a conc ept requ ir es ext ens iv e knowledge of th e doma in .
Con ven tion al ban king t oday is technologic ally advan ced; however, for cra ft in g Is la mic fin an cial solut ions ,
c ons ider able t ime an d ex pert ise are r equired.

Is lamic Bank in g — Poss ible Solut ions

 Es tablis hment of Shar i' ah Govern an ce Syst ems

 Settlin g unr es olved F iqh Issues

 A su ffic ient number of well- tra in ed, c ompetent , high -c aliber Islamic fin anc e pr ofes sion als and
man agement t ea ms wit h the requ ir ed exper tise

 Well- infor med indiv idua l an d c or pora te con sumers , kn owledgea ble abou t Islamic bank in g and tak aful
  Th e av aila bility of Shar ia 'h complian t produ ct s (Shar ia 'h Complian t Stocks , Suku ks, etc .)

 Dev elopment of a L egal, Regulat or y, and Ins titut iona l Fr amewor k c omplying wit h Shar ia 'h

 Adv anc ed tec hnology s olution s design ed to su ppor t Is la mic F inan ce

R efer en ces :
WIKIPEDIA.org
St ate Ban k of Pa kist an
Int ern at ional Is la mic F inan cial Mar ket (IIFM)