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Summer Islamic Banking in Pakistan 2008

Financial Institutions Syed Zaid Bin Javed Mr. Sharique Ayubi IoBM, Korangi Creek, Karachi 09th August 2008

LETTER OF TRANSMITTAL
December 17, 2008 Ms. Shehnaz Meghani Institute of Business Management Korangi Creek, Karachi, Pakistan

Respected Madam: Here is the Report pertaining to the Gaps in Service at Service Stations you asked us to prepare. We, Syed Zaid-Bin-Javed, Omer Mirza and Arshila submit this report to you on December 17, 2008. The purpose of this report is to get an insight on the current state of service provided at the selected PSO Service Station and the gaps in service and how they can be removed. We have made this report using different sources, such as floating questionnaires and having informal interviews with the service manager and random customers. One week were devoted to the above investigations. We hope that the report is acceptable as per your requirements. We found the report making process interesting, challenging and most of all, enabling us to get an in depth knowledge on the state of service provided at the PSO service station.

Sincerely, Syed Zaid-Bin-Javed Omer Mirza Arshila ID: 2006-1-64-6222

ACKNOWLEDGEMENT

I would first like to thank Almighty Allah who gave me the strength to complete this report. This report assignment has enabled me to get an insight on where the Islamic mode of banking stands in Pakistan. All credit goes to our respected course instructor Mr. Sharique Ayubi who is conducting the Financial Institutions Course and who not only encouraged us to learn about the course but also helped us out at our weaknesses. I thank him again for providing his valued guidelines in not only the completion of the report but also his pragmatic insight into the course.

TABLE OF CONTENTS
Letter of Transmittal...................................................................................3 Acknowledgement.......................................................................................4 Table of contents........................................................................................5 Executive Summary....................................................................................6 PRINCIPLES OF PAKISTAN ECONOMIC SYSTEM............................................9 ISLAMIC BANKING IN PAKISTAN.................................................................14 ISLAMIC BANKS IN PAKISTAN.....................................................................18 CHALLENGES FOR GROWTH......................................................................33 CONCLUSION/RECOMMENDATION.............................................................35 bibliography..............................................................................................36 Gulf economist..........................................................................................36 References................................................................................................36

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EXECUTIVE SUMMARY
The report Islamic Banking in Pakistan evaluates the current state of the Islamic banking industry in Pakistan. The report emphasizes on how the Islamic banks affect the banking sector as a whole. From the report we come to know that although that although the Islamic mode of banking is relatively new in Pakistan but despite of it, it has shown commendable progress over the last few years. Especially in the last couple of years there has been a great boom in the business of Islamic banks In depth analysis of the topic leads us to the fact that Islamic banking is the only type of banking that is Halaal in the eyes of God and that all other types of banking systems that involve Riba are prohibited in Islam. There is huge appetite for Islamic financial services. The growth, is however, constrained by the lack of infrastructure support & dearth of professional Islamic Bankers. Currently, there are 6 licensed full fledged Islamic Banks with 145 branches 12 conventional banks with standalone Islamic Banking Branches with the total branch network of 86 branches operating in different cities of all the four provinces in the country, Applications for a few more banks are under consideration. The Government of Pakistan intends to continue promoting Islamic Banking in the country while keeping in view its linkages with the global economy &existing commitments to local & foreign investors. However there is a great need to develop instruments for liquidity management by banks & monetary management by the SBP. There is need for innovative products i.e., development of financial instruments on the basis of Musharika, Mudaraba, Leasing, & Salam related to wide spectrum of maturities, projects & issuing entities if one wants to see Islamic banking progress in Pakistan.

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INTRODUCTION TO ISLAMIC ECONOMIC SYSTEM

Introduction
One of the forms of capitalism, which has been flourishing in non-Islamic societies, is the interest-based investment. There are normally two participants in such transactions. One is the Investor who provides capital on loan and the other Manager who runs the business. The investor has no concern whether the business runs into profit or loss; he automatically gets an interest (Riba) in both outcomes at a fixed rate on his capital. Islam prohibits this kind of trading and the Holy Prophet enforced the ruling, not in the form of some moral teaching, but as the law of land. It is very important to know the definition and forbiddance of Riba and the injunctions relating to its unlawfulness from different angles. On the one hand, there are severe warnings of the Qur'an and Sunnah and on the other, it has been taken today as an integral part of the world economy. The desired liberation from it seems to be infested with difficulties. The problem is very detail oriented and has to be taken up in all possible aspects. First of all we have to deliberate into the correct interpretation of the Quranic verses on Riba and what has been said in authentic Ahadith and then determine what Riba is in the terminology of the Quran and Sunnah, what transaction it covers, what is the underlying wisdom behind its prohibition and what sort of harm it brings to society. We will start from looking at the economic philosophy of Islam vis--vis interest.

Definition of Riba or Interest

The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars.

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Types of Riba
There are two types of Riba, identified to date by these scholars namely 'Riba An Nasiyah' and 'Riba Al Fadl'. 'Riba An Nasiyah' is defined as excess, which results from predetermined interest (sood) which a lender receives over and above the principle (Ras ul Maal) 'Riba Al Fadl' is defined as excess compensation without any consideration resulting from a sale of goods. 'Riba Al Fadl' will be covered in greater detail later.

During the dark ages, only the first form (Riba An Nasiyah) was considered to be Riba. However the Holy Prophet also classified the second form (Riba Al Fadl) as Riba. Explanation through Quran: The meaning of Riba has been clarified in the following verses of Quran: "O those who believe fear Allah and give up what still remains of the Riba if you are believers. But if you do not do so, then be warned of war from Allah and His Messenger. If you repent even now, you have the right of the return of your capital; neither will you do wrong nor will you be wronged." Al Baqarah 2:278-9 These verses clearly indicate that the term Riba means any excess compensation over and above the principal which is without due consideration. However, the Quran has not altogether forbidden all types of excess; as it is present in trade as well, which is permissible. The excess that has been rendered haram in Quran is a special type termed as Riba. In the dark ages, the Arabs used to accept Riba as a type.

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PRINCIPLES OF PAKISTAN ECONOMIC SYSTEM

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh alMuamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah). Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. However, in practice, this is not always the case. Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).

Shariah Advisory Council/Consultant

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish Shariah advisory committees/consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles.

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Investments through principles

Bai' al-Inah (Sale and Buy Back Agreement)
The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency.

Bai' Bithaman Ajil (Deferred Payment Sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest.

Bai muajjal (Credit Sale)

Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

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Hibah (Gift)
This is a token given voluntarily by a creditor to a debtor in return for a loan. Hibah usually arises in practice when Islamic banks involuntarily pay their customers interest on savings account balances.

Ijarah
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

Ijarah Thumma Al Bai' (Hire Purchase)

These are variations on a theme of purchase and lease back transactions. There are two contracts involved in this concept. The first contract, an Ijarah contract (leasing/renting), and the second contract, a Bai contract (purchase) are undertaken one after the other. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed rental over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed price. In effect, the bank sells the product to the debtor, at an above marketprice profit margin, in return for agreeing to receive the payment over a period of time; the profit margin on the lease is equivalent to interest earned at a fixed rate of return.

Ijarah-Wal-Iqtina
A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.

Mudarabah (Profit Sharing)

Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. The entrepreneur provides expertise, labor and management. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. INSTITUE OF BUSINESS MANAGEMENT

Financial Institutions / Term Report In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits.

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Murabahah (Cost Plus)

This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term however, the asset remains as a mortgage with the bank until the Murabaha is paid in full.

Musawamah
Musawamah is a general and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, however, the seller in Musawamah is not obliged to reveal his cost. Both the parties negotiate on the price. All other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be used where the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell. musawah.

Joint Venture
Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).

Qard Hassan (Good Loan)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the INSTITUE OF BUSINESS MANAGEMENT

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loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.

Sukuk (Islamic Bonds)

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

Takaful (Islamic Insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers.

Wadiah (Safekeeping)
In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with a hibah (gift) as a form of appreciation for the use of funds by the bank. In this case, the bank compensates depositors for the timevalue of their money (i.e. pays interest) but refers to it as a gift because it does not officially guarantee payment of the gift.

Wakalah (Agency)
This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney.

Islamic Equity Funds

Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is INSTITUE OF BUSINESS MANAGEMENT

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growing by 1215% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products.

In short Islamic bank deals with Asset management for purpose of income generation Depositors will receive halal income against the trading being done by bank on halal basis.

ISLAMIC BANKING IN PAKISTAN

History of Islamic Banking in Pakistan
Islamic finance incepted in Pakistan in 1977-78, which included the elimination of interest from the operation of specialized institution and commercial banks. Soon after Financial and corporate system was amended on June 26, 1980 to permit issuance of new interest-free instrument of corporate financing named Participation Term Certificate (PTC). In the same time Ordinance was promulgated to allow the establishment of Mudarabah companies and floatation of Mudarabah certificates for rising risk based capital. On July 1, 1985, all commercial banks in Pak Rupee was made interest free which was mark-up technique with or without buy-back agreement. This was however declared un-Islamic by the Federal Shariat Court (FSC) in Nov 1991. Commission for Transformation of Financial System (CTFS) was constituted in January 2000 in the State Bank of Pakistan. It introduced Shariah compliant modes of financing which included creating legal infrastructures conductive for working of Islamic financial system, launching a massive education and training program for bankers and their clients and an effective through media for the general public to create awareness about the Islamic financial system.

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Financial Institutions / Term Report It also dealt with major products of banks and financial institution , both for assets and liabilities side.

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In September 2001 it was decided by Government that the shift to interest free economy would be made in a gradual and phased manner and without causing any disruptions and was also agreed that state bank Pakistan would consider for: Setting up subsidiaries by the commercial banks for the purpose of conducting Shariah compliant transactions Specifying branches by the commercial banks exclusively dealing in Islamic products, and Setting up new full-fledged commercial banks to carry out exclusively banking business based on proposed Islamic products. Eventually In January, 2002 State Bank of Pakistan gave first Islamic Banking License to Meezan Bank Ltd.

Present state of Islamic banking in Pakistan

Islamic Banking has come a long way since 2002 when it started with a single bank and has now grown to six full-fledged Islamic Banks (IBs) and 12 conventional banks operating Islamic Banking branches. As a result of continuous growth over the last 5 years, size of Islamic banking system has grown to 3.6 percent of the total assets of the banking sector in September, 2007. Major development regarding the Islamic banking sector has been the shift from the Murahaba financing, which is still the major type of financing, to other modes like Diminishing Musharika. With improving asset quality and profitability coupled with capital adequacy above the required ratio and expanding branch network, the IBs appear to be firmly placed to gain further share in the banking system.

Around 90 per cent of the Pakistani population is Muslim, and the provision of Shariah-compliant banking products is an important area to

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Financial Institutions / Term Report help people comply with their faith. The provision of Islamic banking has in turn led to an increase in the branch network for Islamic banks.

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The most favoured form of Islamic financing in Pakistan is murabaha. This mirrors a global trend where murabaha leads the field with the majority of Islamic banks. In Pakistan it accounts for almost 40 per cent of the total financing done by Islamic banking institutions. The second most widely used form of financing is ijara. With this accounting for 30 per cent, these two financing models represent nearly three-quarters of the financing from Islamic banks in Pakistan.

Asset and Liability structure

The expansion of the Islamic banking industry is complemented by a considerable growth in its assets and liabilities .Expanding at an annual growth rate of 67 percent, the industrys assets have increased to Rs.119 billion in CY06 (and to Rs. 159 billion by end-June CY07), from Rs.71 billion in CY05. The deposit base has increased from Rs. 50 billion in CY05 to Rs. 84 billion in CY06 (and further to Rs. 108 billion by end-June CY07). With this expansion, the share of the Islamic Banking industry in the overall assets of the financial sector increased to 3.4 percent by end-June CY07. The expansion also gives an indication of the sustainability of these institutions.

Regulation of Islamic capital and money market

Currently, Islamic Banking Sector operates under the existing laws and regulations for conventional banks. The State Bank of Pakistan (SBP) INSTITUE OF BUSINESS MANAGEMENT

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established the Islamic Banking Department on 15 September 2003. The Department was given the task of promoting & developing the Shariah Compliant Islamic Banking as a parallel & compatible banking system in the country. Currently, the Islamic Banking Department (IBD) consists of the following three divisions:
o o o

Policy Division Shariah Compliance Division Business Support Division

To regulate & supervise the Islamic Banking Sector SBP is working on the areas of Risk Management, Corporate Governance, Prudential Regulations, Accounting & Shariah Standards etc.

Performance of Islamic Banks

The Islamic Banking industry which started with two dedicated institutions now comprises of 6 full fledged banks offering a range of shariah compliant services, with a combined network of 145 branches, and 86 Islamic Banking branches of conventional banks, reflecting an extended degree of outreach of Islamic banking in comparison with previous years. Initially, 2 new Islamic banks with 10 branches each started operations. First Dawood Islamic Bank is the latest entrant in the field In terms of strength of players; Meezan Bank is the oldest and biggest player in the market, while Dubai Islamic Bank and Emirates Global denote foreign presence in the sector.

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ISLAMIC BANKS IN PAKISTAN

AlBaraka Islamic Bank (AIB) has the honor of being the pioneer of Islamic banking in Pakistan and has been operating in the country as branches of AlBaraka Islamic Bank Bahrain since 1991. Over the years, the bank has successfully developed and maintained its identity as one of the leading providers of a host of banking products and services in strict compliance with Shariah principles.

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Currently operating with 18 branches in 10 major cities of the country, AIB offers a wide array of Islamic financing products such as Murabaha, Ijara, Musharaka and Islamic Export Refinance, catering to a diverse crosssection of the economy, including the Corporate, SME and Consumer sectors. Moreover, various Shariah compliant deposit schemes are available for customers to invest their funds in, along with a variety of other ancillary services such as online banking, ATM/debit card, safe deposit lockers and utility bill payments etc. AlBaraka Islamic Bank is a member of Albaraka Banking Group (ABG) which is a Bahraini Joint Stock Company listed on Bahrain and Dubai stock exchanges and one of the well-known leading international Islamic banks. ABG is the biggest Islamic banking group listed on the Bahrain Stock Exchange in terms of capitalization. It has been rated by Standard & Poor's as BBB- with a short-term rating of A-3. ABG offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Shari. The authorized capital of ABG is US$1.5 billion, while the total equity amounts to about US$ 1.5 billion. The Group has a wide geographical presence in the form of subsidiary banking Units in 12 countries, which in turn provide their services through more than 240 branches. These banking Units are Jordan Islamic Bank/ Jordan, Al Baraka Islamic Bank/ Bahrain, Al Baraka Islamic Bank/ Pakistan, Banque Al Baraka D'Algerie/ Algeria, Al Baraka Bank Sudan/Sudan, Al Baraka Bank Ltd/ South Africa, Al Baraka Bank Lebanon/Lebanon ,Bank Et-Tamweel AlTunisi Al Saudi/ Tunisia,The Egyptian Saudi Finance Bank/Egypt, Al Baraka Turk Participation Bank/Turkey, Albaraka Bank Syria (under establishment), and representative office, Indonesia. ABG is committed to expanding its presence in Pakistan, which is evident from the rapid growth being undertaken by AlBaraka Islamic Bank in the country. Building on the expertise and experience of its workforce and the growing awareness of Shariah compliant banking solutions among the masses, AIB has successfully developed itself as a major unit of ABG operating in the region, capitalizing on the Groups geographical presence and high quality research and development in Islamic financial products for its business expansion in the country. Faced with growing challenges in this rapidly developing market, AIB strongly relies on its ability to be an effective and efficient market player through renewed focus on superior customer service, development of Islamic alternatives to conventional financing facilities, and strict adherence to Shariah rulings and principles.

AlBarakas Commitment to Islamic banking

AlBaraka Islamic Bank and Albaraka Banking Group are fully committed to develop and promote an integrated Islamic Financial System. Compliance with the rules and principles of Islamic Shariah is the core of the banking and financial activities and its philosophy. All its banking activities are very closely regulated by a Board of Shariah Advisors based at the Head

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Financial Institutions / Term Report Office in Bahrain and a Shariah Advisor based in Pakistan, to ensure strict compliance with the highest standards of Islamic Banking principles

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AlBarakas range of products and services

AlBaraka Islamic Bank in Pakistan offers a comprehensive range of banking products and services, to suit and serve customers in individual, retail, corporate, SME and consumer categories.

BankIslami Pakistan Limited (BankIslami) is the first bank to receive Islamic Banking license under the new Islamic Banking policy of 2003. BankIslami offers full range of Shariah compliant commercial banking products and services including Liability products such as Current &

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Financial Institutions / Term Report Saving accounts, Term deposits and Asset products such as Auto Ijarah, MUSKUN Home financing, Murabaha finance, Trade finance including Islamic Export Refinance as well as services which include Biometric ATM facility, Internet banking service etc The Bank's fast growing nationwide network consists of 36 branches. The Bank envisages to be the first Islamic Financial institution in Pakistan to focus on Wealth Management as its core area of business. The following products and services are provided at BankIslami: Deposit Products
o o o o o

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Islami Islami Islami Islami Islami

Current Account Bachat Account Dollar Bachat Account Amadni Certificate Mahana Munafa Account

Corporate Banking
o o o o

Working Capital Finance Medium & Long Term finance Leasing /Ijarah Islamic Export Refinance

Investment Banking
o o o o o o o o o o

Advisory Private Placement Sukuk Arrangement Syndication Underwriting Trusteeship Structured Finance Listing on Capital Markets Project Financing Mergers & Acquistions

Trade Financing
o o o o

Letter of Credit (Sight & Usance) Letter of Guarantee Forward Cover Bill Purchase

Consumer Banking
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Financial Institutions / Term Report MUSKUN Home Financing

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Wealth Management Services *Soon to be launched

o o o

Integrated financial planning solutions Proprietary products Third party products

Services
o o o o o o o o

Biometric ATM services Internet Banking Nationwide Online Banking Round the clock self service Phone Banking 24/7 Call Center at 111-ISLAMI (475-264) Lockers Interbank Fund Transfer (IBFT) facility eStatement Facility

Pakistan's sixth full-fledged Islamic commercial bank, Dawood Islamic Bank Limited, officially commenced its operations on Friday, April 27, 2007. The Bank is the result of an initiative of the First Dawood Group who teamed up with Islamic Corporation for the Development of the Private Sector (ICD) Jeddah, Unicorn Investment Bank - Bahrain, Al Safat Investment Company - Kuwait, Gargash Enterprises (LLC) - Dubai, Mr. Azam Essof Kolia - a Singapore based entrepreneur and Shaikh Abdullah Mohammad Al-Romaizan, an entrepreneur from the KSA.

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Financial Institutions / Term Report With an initial paid-up capital of Rs. 3 billion (US$ 50 million), the Bank has a vision of establishing a network of state-of-the-art branches all over the country which will provide financial solutions to all segments of the society. DIBL will provide its customers with Shari'ah compliant solutions at an affordable cost and will also offer superior levels of service. The Bank is poised to assume a leadership position through its superior technology and unrivalled customer centricity. In addition to the standard and innovative products in retail and corporate banks, DIBL focuses on the growing segment of importers and exporters that are reluctant of utilizing bank financing with the fear of breaching Islamic laws as defined in the Holy Qur'an and Sunnah. This segment is still substantially untapped, even by existing Islamic Financial Institutions hence this will be the core focus of the Bank's marketingstrategy.

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DIBL will be present throughout Pakistan wherever the institution can transact sustainable its retail and corporate business. This presence will not only be achieved through full fledged branches but also through designated service centres in which the Bank will also offer a limited amount of retail products which will allow it to focus on deposit mobilization and trade finance at the same time.

The State Bank of Pakistan (SBP) awarded to Dubai Islamic Bank Pakistan Limited (DIBPL), the license for the establishment of its operations in Pakistan on Saturday, November 26, 2005. Since then, DIBPL has undertaken major initiatives to expand its branch network across the country. Under its consumer banking division, the bank is offering stateof-the-art Sharia compliant products that effectively compete with those being offered in the market by conventional banks. This is not the Banks only strength though. It also has expertise in providing Retail, Private, INSTITUE OF BUSINESS MANAGEMENT

Financial Institutions / Term Report Small and Medium Enterprises, Corporate, Investment Banking and Advisory services. The Bank has launched Pakistan's first Islamic Visa Debit Card and introduced financial products covering Home Financing, Auto Financing, and Depository products. DIBPL has also introduced Priority Banking and Internet Banking, both of which are being recognized as benchmark products in their respective categories. Besides regular banking services, the Bank is committed to bringing foreign investment to the country. DIBPL's corporate wing has actively pursued foreign investors and convinced world renowned giants from the GCC to be part of Pakistan's economy. DIBPL is a Public Limited company. Its total worth is Rs. 5.1 billion which will gradually increase to Rs. 6 billion. DIBPL is 100% owned by Dubai Islamic Bank PJSC (Public Joint Stock Company) and its nominated shareholders. The parent company is a listed company in Dubai.

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Products and services

o o o o Internet Banking Visa debit card Lockers Phone Banking

Emirates Global Islamic Bank Limited, a dedicated Islamic Commercial Bank, commenced operations in February 2007. The bank has a network of branches operating across all four provinces in urban and rural areas of Pakistan.

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Financial Institutions / Term Report Incorporated in Pakistan and sponsored by leading investors from the United Arab Emirates and Saudi Arabia, Emirates Global Islamic Bank Limited (EGIBL) is a major player in the rapidly growing Islamic banking industry, offering Riba-free yet highly competitive banking products, based on the teachings of the Quran and Sunnah. EGIBL believes in making a positive contribution to society by continuously striving to provide Halal alternatives to conventional banking products, complemented with superior service and cutting-edge technology.

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EGIBs range of products and services

Emirates Global Islamic Bank deals in the following products and services:

Deposit products
o o o

Current account Basic banking account Saving account INSTITUE OF BUSINESS MANAGEMENT

Financial Institutions / Term Report Term deposit

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Alternate channels
o o o

ATM card eStatement phone banking

Others include
o o o o

lockers consumer financing business banking investment banking

Meezan Bank Limited is a publicly listed company, first incorporated on January 27, 1997. It started operations as an Islamic investment bank in August of the same year. In January, 2002, in an historic initiative, Meezan Bank was granted the Nations first full-fledged commercial banking license dedicated to Islamic Banking, by the State Bank of Pakistan Meezan Bank, stands today at a noteworthy point along the evolution of Islamic Banking in Pakistan. The banking sector is showing a significant INSTITUE OF BUSINESS MANAGEMENT

Financial Institutions / Term Report paradigm shift away from traditional means of business, and is catering to an increasingly astute and demanding financial consumer who is also becoming keenly aware of Islamic Banking. Meezan Bank bears the critical responsibility of leading the way forward in establishing a stable and dynamic Islamic Banking system replete with dynamic and cutting-edge products and services.

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The Banks main shareholders are leading local and international financial institutions, including "Pak Kuwait Investment Company", the only AAA rated financial entity in the country, the Islamic Development Bank of Jeddah, and the renown Shamil Bank of Bahrain. The established position, reputation, strength and stability, of these institutions add significant value to the Bank through Board representation and applied synergies.

History
During 1997, Al-Meezan Investment Bank is established as the first Islamic bank of Pakistan. Mr. Irfan Siddiqui appointed as first and founding Chief Executive Officer. During 2002, the Shariah Supervisory Board is established at Al-Meezan Investment Bank led by Justice (Retd.) Muhammad Taqi Usmani as chairman. State Bank sets criteria for establishment of Islamic commercial banks in private sector and subsidiaries and stand-alone branches by existing commercial banks to conduct Islamic banking in the country. During 2003, A Musharaka-based Export Refinance Scheme has been designed by the State Bank in coordination with Meezan Bank Limited, in order to provide export finance to eligible exporters on the basis of Islamic modes of financing. Efforts are underway to develop Islamic money market instruments like Ijarah Sukuk to facilitate the banks in respect of liquidity and SLR management. Pakistans first Shariah compliant Mortgage facility is launched by Meezan Bank. Approved by the Shariah Supervisory Board, the product enables home purchase, home construction, renovation, as well as replacement of any existing mortgage. Al Meezan Investment Management Limited (AMIM), a group company of Meezan Bank, introduces Meezan Islamic Fund (MIF). MIF is an open-end mutual fund that is Shariah compliant. Meezan Banks asset management arm, Al Meezan Investment Management Limited (AMIM), launches the Meezan Balance Fund (MBF). The offering was oversubscribed 1.25 times. In March 2005, to further strengthen & ensure strict Shariah compliance in banks operation a dedicated and full fledged Product Development & Shariah Compliance (PDSC) department was formally setup. The role of this research department is centralization of Product development activities, new product research, Islamic banking training and Shariah INSTITUE OF BUSINESS MANAGEMENT

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Compliance functions. The department works under the guidance & supervision of banks Shariah Advisor Dr. Muhammad Imran Usmani and the Shariah Supervisory Board of the Bank. PDSC now plays a very critical and vital role at the bank by actively supporting new product development activities, refining existing products menu, preparing product policies & standardize agreements, imparting Islamic banking knowledge at various levels to new & existing staff members, corporate customers and general public, coordinating with banks Shariah Board, conducting regular Shariah audits & reviews During 2005, Meezan Bank launches the Meezan Islamic Institution Deposit Account (MIIDA), a unique product tailored exclusively for Islamic Financial Institutions (IFIs). The facility is the first of its kind in Pakistan, whereby Islamic Banks (including dedicated, as well as conventional Islamic windows) now have the opportunity to manage excess liquidity by maintaining a checking account with Meezan Bank specifically designed for this purpose. Meezan Bank becomes the first customer of Islamic Insurance (Takaful) by signing the first Memorandum of Understanding MoU with Pak Kuwait Takaful Company Limited (PKTCL). The signing of this MoU has ushered Pakistan into a new era of Islamic Insurance (Takaful).

Functions
Service
o o o o o o o o

Personal Banking and Finance Corporate Finance Commercial Finance Structured finance Treasury Car Ijarah - Car Financing Easy Home - Home Financing Asset Management

Product Development & Shariah Compliance (PDSC) Department

Product Development & Shariah Compliance (PDSC) is one of the important departments of the bank that reflects strong commitment of the bank towards Islamic banking and research. PDSC works directly under the supervision of banks Shariah Advisor Dr. Muhammad Imran Usmani and is managed by Mr. Ahmed Ali Siddiqui. The function is vital in ensuring strict Shariah Compliance in all area of banks operations.

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Financial Institutions / Term Report PDSC role is manifold and comprises facilitating new Product Development activities, refining existing products & procedures, providing Islamic Banking training to new recruits and existing staff members, conducting regular Shariah Audit & reviews of branches & departments, coordinating with Banks Shariah Board and providing Islamic Banking Advisory Services to both local and foreign financial institutions.

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In the area of Product Development, the bank has initiated several new structured Islamic Sukuk transaction, developed a new investment avenue of local Commodity Murabaha to manage excess liquidity of the bank is a Shariah compliant manner. The bank is also conducting research on several new Islamic products in the areas of consumer, corporate & retail banking level. PDSC has played a vital role in imparting Islamic banking training to bank employees, customers, Ulemas & scholars throughout Pakistan. The department regularly carries out training sessions ranging from basic to in-depth specialized workshops. During the year 2006, a comprehensive Islamic Banker Certification (IBC) Program was successfully introduced in Pakistan. The bank has also provided Product Development Advisory services to different financial institutions interested in offering Islamic Banking products & services around the world via its research wing. The main objective of Meezan Banks Advisory function is to help financial institutions develop Islamic Banking Products by sharing the experience, research & success stories. The bank has successfully entered into advisory arrangements with Capitas Group of USA, Al Meezan Investment Management (AMIM), Pakistan & other Islamic banks & financial institutions. The bank has also executed MoUs with INCEIF, Malaysia & Utruj Foundation, UK to collaborate in the areas of training, research and product development.

Internet banking
Meezan Banks Internet Banking system puts access to your accounts at your fingertips, anywhere in the world. Using any computer with Internet connectivity the following facilities are available by Meezan Bank;
o o o o o o

Balance inquiry Statement viewing & download (in PDF or MS Excel format) Cheque status Cheque blocking Payorder request Funds transfers between own accounts at Meezan Bank INSTITUE OF BUSINESS MANAGEMENT

Financial Institutions / Term Report Cheque book request Change of address request Complaint logging

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o o o

Shariah Supervisory Board

The Bank has an internationally renowned, very high caliber and proactive Shariah Supervisory Board presided over by Justice (Retd.) Maulana Muhammad TaqI Usmani, a renowned figure in the field of Shariah, particularly Islamic Finance. He holds the position of Deputy Chairman at the Islamic Fiqh Academy, Jeddah and in his long and illustrious career has also served as a Judge in the Shariat Appellate Bench, Supreme Court of Pakistan. The Bank also has a resident Shariah advisor, Dr. Imran Usmani, who strictly monitors the regular transactions of the Bank. The board also includes Sheikh Essam M. Ishaq (Bahrain), and Dr. Abdul Sattar Abu Ghuddah (Saudi Arabia).

EFFORTS OF STATE BANK OF PAKISTAN TO ENHANCE & DIVERSIFY THE COVERAGE OF FINANCIAL INSTITUTIONS IN THE COUNTRY
State Bank of Pakistan has introduced the Improving Access to Financial Services Programme (IASP) in the country with the help of the Asian Development Bank (ADB). One of the important clauses8 of this programme is the provision of Islamic Microfinance Services and products by financial institutions including Islamic banks, commercial banks and micro finance banks. It is expected that this decision would help in enhancing the integration and deepening of the financial sector.

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Financial Institutions / Term Report State Bank of Pakistan wants to develop a progressive and sound Islamic banking system that is in line and compatible with the global financial sector, providing innovative Shariah compliant products and services so as to achieve equitable economic growth. One of the biggest challenges being faced by this growing industry is the dearth of professional Islamic Bankers and capacity building in this regard is one of the top most priorities for the promotion of Islamic Banking. In order to play our regulatory and supervisory role more efficiently we are working on the areas like Risk Management, Corporate Governance, Prudential Regulations, Accounting & Shariah Standards etc. regarding Islamic Banking

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Currently the Islamic Banking Department (IBD) consists of following four divisions: 1. Policy Division 2. Shariah Compliance Division 3. Business Support Division 4. Shariah Board Secretariat

1. Policy Division:
Objectives:
Devise a vision and strategy paper and work for the promotion of the Islamic banking industry. o Study the best international practices being applied in the field and work upon their possible application in local market. o To deal with legal, regulatory, taxation and accounting issues faced by IBIs. o To steer the Task Force on R&D and deal with issues relating to Islamic economics. o

2. Shariah Compliance Division:

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Objectives:
o o o o o To strengthen the supervisory aspect of Islamic banking industry through implementation of Shariah Compliance Inspection Manual. To analyze the financial data received from the banks and review the same. To coordinate with different departments in preparing various SBP publications. To develop new products for liquidity management and interbank market To liaison with international institutions involved in Islamic finance

3. Business Support Division:

Objectives:
o To provide administrative support to the department. o To make arrangements for various meetings o To make arrangements for the training and video conferences

4. Shariah Board Secretariat:

Objectives:
To arrange Shariah Board meetings, preparing agenda and minutes of the meetings and conduct due diligence of Shariah Advisors of IBIs.

Policies for Promotion of Islamic Banking

In order to promote Islamic Banking in Pakistan, State Bank is following a three pronged strategy as under: I) Establishment of full-fledged Islamic bank(s) in the private sector; II) Setting up of subsidiaries for Islamic Banking by existing commercial banks; and III) Allowing Stand-alone branches for Islamic banking in the existing commercial banks.

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CHALLENGES FOR GROWTH

Following are some of the challenges faced by supervisors, regulators and market players in the Islamic Financial Industry.

Lack of a sovereign instrument for reserve management

Islamic Banks generally operate in an environment where they have to compete with a parallel system of conventional banks; however they face the shortcoming of managing their liquidity without the availability of the requisite sovereign instruments for this purpose which conventional banks have access to. Recognizing this limitation, SBP requires Islamic Banks to maintain CRR at 7 and

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3 percent, and SLR at 8 percent of time and demand liabilities. Furthermore, SBP has allowed Islamic Banks to include their cash in hand and current account balances with National Bank in meeting their SLR requirements.

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Gradual development in standardization of practices

Shariah boards may differ in their interpretations and opinions from institution to institution within the same country, with considerable variations in what is considered acceptable by shariah standards across countries, such that acceptability of a shariah-compliant product in Malaysia may be viewed with some skepticism in other parts of the world. Practices in the South Asian region differ from the East Asian region. These variations exist due to the prevailing schools of thought which give rise to different interpretations on the acceptability of shariah-compliant products. The pursuit of international consistency would not only ease the task of supervising internationally active institutions, but would also ultimately favor the regulated institutions, as Islamic transactions become better understood. It would also foster integration of IFIs into the international financial community.

Possibility of Regulatory Arbitrage

The disparity arising from the interpretative variation discourages the crossborder use of Islamic products. Instead of regulatory arbitrages, a level playing field should be provided for IFIs. For instance, the FSA (UK) model follows the policy of no obstacles, not special favors, for Islamic Financial Institutions. Modalities of regulatory framework with a parallel system of Islamic Finance In most jurisdictions, IFIs have to comply with regulatory requirements applicable to conventional financial institutions, for instance with respect to MCR requirements, Basle II implementation, Prudential Regulations, etc., despite the distinct nature of their business activities. This is in addition to other regulatory directives specifically tailored for their domain. SBP in the recent past has addressed some of these concerns by issuing separate guidelines for shariahcompliant micro-finance services and (draft) risk management guidelines, etc.

Nature of risks / Risk Profile of IFIs

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IFIs are exposed to a unique set of risks, and hence different types of regulations are needed to manage these risks. Terming the development of Islamic finance akin to financial innovation, Iqbal (2004) points out that financial innovation often brings with it changes in the perception of risk, and rightly argues that the emergence of a parallel system of finance presents challenges similar to financial innovation. There are concerns about this industrys inherent risks and their possible spillover on other segments of the financial sector as it is less well understood than conventional finance.

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CONCLUSION/RECOMMENDATION
The Islamic Financial Services segment is an increasingly important constituent of the financial sector in Pakistan and has grown in size and diversity in just a few years. The participants of the Islamic Banking Industry are all strong players with a sound capital base, compliant with SBPs MCR requirements uniformly applied to both conventional and Islamic Banks, which restricts entry into the sector without the requisite sound financials. The industry is still in a development phase and it is expected that with time, not only will the practice of Islamic financial intermediation converge with the conceptual foundations on which it is based, both in Pakistan and in other jurisdictions, but will also increase the

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level of financial depth and penetration by providing financial services to the unbanked segment. Government of Pakistan should take serious actions for Islamic economic system because we are Muslims and its our first duty to implement the Islamic rules and regulation in our life. Awareness must be created among the consumers; the biggest problem of Islamic banking system is that the consumer has no accurate knowledge about this system. Islamic banking industry must be transparent and accountable to their consumers. Media should play an important role in increasing the awareness of shariah. If they will take serious actions most probably the growth in the evolution of Islamic banking industry will be more than now.

BIBLIOGRAPHY
GULF ECONOMIST

REFERENCES
www.wikipedia.com www.statebank.org

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