Issues and Problems in Islamic Banking
Three decades have passed since the first Islamic bank began its operations in MitGhamr, Egypt, and more than a decade has passed since the Islamic Republics ofIran and Pakistan adopted a non-interest-based financial system. Profit Loss Sharing (PLS) dominates the theoretical literature on Islamic finance. Broadly, PLS is a contractual arrangement between two or more transacting parties, which allows them to pool their resources to invest in a project to share in profit and loss. Islamic economists contend that PLS based on two major modes of financing, namely Mudaraba and Musharaka, is desirable in an Islamic context wherein reward-sharing is related to risk-sharing between transacting parties. Depositors in Islamic banking can be compared to investors or shareholders, who earn dividends when the bank makes a profit or lose part of their savings if the bank posts a loss. The rationale is to link the return in an Islamic contract to productivity and the quality of the project, thereby ensuring a more equitable distribution of wealth. Like conventional banks, an Islamic bank is an intermediary and trustee of other people’s money with the difference that it shares profit and loss with its depositors. This difference introduces an element of mutuality in Islamic banking, making its depositors as customers with someownership rights in it. Most Islamic banks work as joint stock firms whose shares are easily tradable. Growth of PLS requires that the ‘ownership rights’ should not be easily transferable or tradable. Today, Islamic banking is spreading and gaining acceptance in non-Muslim countries as well as Muslim ones. Islamic Banking an alternate to interest-based banking is not banking in the traditional sense of the word. It derives its inspiration and guidance from the religious edicts of Islam and has to conduct its operations strictly in accordance with the directives of Shariah. Islamic financial system employed the concept of participation in the enterprise, utilizingthe funds at risk on a profit-and-loss-sharing basis. At present, the Islamic Banking market is worth in excess of $1.35 trillion and annual growth rate of more than 20 percent, the Islamic financial industry now comprises 430 Islamic banks and financial institutions and around 191 conventional banks having Islamic banking windows operating in more than 75 countries. To avoid interest, Islamic Banks have developed profit-sharing schemes in tapping and mobilization their resources. Both Islamic Banks lending policy and lending principles are excellent tools for creating and developing entrepreneurs. In relation to entrepreneurs, the status of the Islamic Bank is either of partner or investor, whereas, for conventional banks the relationship is more of creditor-debtor. Entrepreneurs who maintain a relationship with Islamic Banks are expected to be more ethical and not be involved in businesses that are prohibited by the Islamic laws.
First of all we are very thankful to Allah Rabulizzat who gives us such power, knowledge and ability to accomplish our goals without His kind help we would be unable to do this report We are grateful to our teacher Dr.SHOUKAT MALIK (Director IBFF,BZU Multan) and Mr.Aammar Ali for teaching us this course of money and banking.their versatile knowledge in this discipline and unique teaching style has developed our knowledgr and cleared many ambiguities. We are all very grateful to him for assigining us this report and presentation which will further help us in evaluating many interrelated dimensions in understandings economic system in Pakistan.
“MAY ALLAH,THE ALMIGHTY BLESS ALL THE PERSONALITIES WHO HAD DIRECTLY OR IN-DIRECTLY HELPED US TO ACHIEVE OUR GOAL”
Table of contents:-
2. Islamic banking