Islamic Finance-Pakistan

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Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed, in addition to the conventional good governance and risk management rules, by the principles laid down by Islamic Shariah (SBP). Following Shariah requirements, there are six key principles driving the activities of Islamic banks (Kettell 2011, p.33). * Any predetermined loan repayments as interest (riba) is prohibited. * Profit and risk fairly sharing between the providers of funds (investors) and the users of funds (entrepreneurs). * All financial transactions must be asset-backed, making money out of money is unacceptable. * Gharar (uncertainty, risk or speculation) is prohibited. * Only Sharia’a-approved contracts are acceptable, for instance Islamic banks are not allowed to finance a wine factory, a casino, a night club or any other activity prohibited by Islam or known to be harmful to society. * Sanctity of contract, Islam upholds contractual obligations and the disclosure of information as a sacred duty in order to reduce the risk of asymmetric information and moral hazard. Based on these features, when the economy recession dragged down all the conventional banks, there was very little impact on Islamic banks. On the contrary, Islamic banking has shown tremendous growth in the past two decades, Siddiqi (2009) stated that there are over 300 Islamic Financial Institutions spread over 75 countries and 300 Shariah-compliant mutual funds, and about $800 billion is deposited in Islamic finance products. Currently, Islamic banks not only operate in Muslim countries but also expand to non-Muslim countries like UK, France, and Germany. Besides, the global conventional banks like HSBS, Standard Chartered Bank, Deutsche Bank etc., have also set up separate divisions to offer Islamic financial products and services to their Muslim clients and even to those non-Muslim clients (Khan et al 2012, p.25).

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