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).
Pakistan has population of over 190 million and more than 96% are Muslims, which provide a huge market for the Islamic banking (Ahmad et al 2010, p138). This paper will survey and evaluate the development of Islamic banking in Pakistan during the past two decades.
Limitations of the study
Because it is hard to find the early figures of Islamic banking in Pakistan, the author will evaluate the early years according to the development of Islamic framework, and evaluate the recent years based on the figures.
The author read the following three articles, and reviews the first article. Khan and Bhatti (2008) Developments in Islamic Banking: The Case of Pakistan. SBP (2007) Pakistan’s Islamic Banking Sector Review 2003 to 2007 Ahmad (2010) Islamic Banking Experience of Pakistan: Comparison between Islamic and Conventional Banks
Khan and Bhatti (2008) claimed that Pakistan tried to Islamize the economy since 1977 the president Mohammed, Ziaul Haq directed the Council of Islamic Ideology (CII) to formulate a blueprint for an interest-free economy within 3 years. In 1980 CII published a report that was recognized in the Muslim world as the first comprehensive attempt to eliminate interest from the economy and financial sector of an Islamic state. In the early 1980s the Ministry of Finance of Pakistan advised the State Bank of Pakistan (SBP) and Pakistan Banking Council (PBC) to implement the CII’s recommendations in the economy of Pakistan (Khan and Bhatti 2008, p.77-124).
However, interest is deeply rooted in the entire economic and financial system of Pakistan, in practice due to lack of an appropriate Islamic framework and infrastructure, banks still operate under interest based. Hence, in 1991 the Federal Shariat Court (FSC) gave the verdict that the existing banking and finance practice and a number of fiscal laws in Pakistan were based on interest. Nevertheless for their own interests, government and the financial institutions of Pakistan lodged appeals...