History of Islamic Banking in Pakistan

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  • Topic: Islamic banking, Sharia, Bank
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  • Published : April 29, 2011
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C,x7ik y7ku`w2History of Islamic Banking in Pakistan Efforts to Islamize the economy of Pakistan started in the mid 60s. However a significant attempt was made in the mid 80s1 to convert the banking system to an Islamic banking system. The Banking Companies Ordinance (BCO, 1962) was amended to accommodate non-interest based transactions and the industry was given a specific timeline to convert to the non-interest based system. In early 90s, the whole exercise was challenged in the Federal Shariat Court which declared some products and processes being used by the banking system un-Islamic. Prior to the re-launch, to study the experience of different countries in Islamic banking, a delegation from Ministry of Finance (MoF), led by Advisor to Finance Minister, Dr. Tariq Hassan visited Malaysia, Egypt and Saudi Arabia in September 20012. Based on the recommendations of this delegation and the past experience of SBP, the policies for promotion of Islamic banking were formulated. Accordingly, State Bank of Pakistan issued detailed criteria for setting up of Islamic banks in December 2001. Al-Meezan Investment Bank Limited applied under the criteria issued by SBP to convert itself into an Islamic commercial bank. They were issued a license in the name of Meezan Bank Limited to operate as full-fledged Islamic bank in January, 20023. Current Status of Islamic Banking Industry in Pakistan As at end of the year 2003 only one bank operated as a full-fledged Islamic bank and three conventional banks were operating Islamic banking branches. Today there are 6 full fledge licensed Islamic banks (IBs) and 12 conventional banks have licenses to operate dedicated Islamic banking branches (IBBs).4 The total assets of the Islamic banking industry are over Rs. 225 billion as of 30th June, 2008 which accounts for a market share of 4.5% of total banking industry assets. The market share of deposits stands at 4.2%. Total branch network of the industry comprises of more than 330 branches with presence in over 50 cities & towns covering all the four provinces of the country and AJK5. 1

Aurangzeb Mehmood, “Islamisation of Economy in Pakistan: Past, Present and Future” Islamic Studies.

2 Strategic Plan for Islamic Banking Industry of Pakistan, by Islamic Banking Department of State Bank of Pakistan

3 www.meezanbank.com

4 PAKISTAN ISLAMIC BANKING: PAST, PRESENT AND FUTURE OUTLOOK Bu Dr. Shamshad Akhtar (Governor State Bank of Pakistan, 11 September 2007)


Islamic Banking Products Islamic Banking Institutions of Pakistan are offering a wide range of compliant products & services. Murabaha is dominating the financing portfolio of Islamic Banking Institutions (IBIs), Similarly, Ijara, Musharaka and Diminishing Musharaka are also used noticeable share in total financing of IBIs. However, Mudaraba, Salam and Istisna portfolios still needs to be triggered. Murabaha Originally, Murabaha was a particular type of sale and not a mode of financing. The ideal modes of financing according to Shariah are Mudaraba or Musharaka. However in the perspective of the current economic circumstance there are certain practical difficulties in using Mudaraba and Musharaka as instruments in every type of financing. Therefore, the contemporary Shariah experts have allowed, subject to certain conditions, the use of Murabaha on a deferred payment basis as a mode of financing. MURABAHA is a particular kind of sale in which seller honestly discloses the cost incurred on the sale of commodities to be sold and sell to the buyer at disclosed cost plus mutually agreed profit margin ratio. The agreed profit ratio varies from bank to bank. MURAHABAH is being used to purchase any tangible asset: Real Estate, Stocks, Machinery, Equipments, furniture, building materials, vehicles or any identifiable and tangible goods which are in Shariah complains. More than 60% of Islamic Financing transactions all over the world are through Murabaha financing. Scope of Murabaha • • • •...
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