Study On The Sharia Base Modes Of Finance Finance Essay

Islamic banking is a worldwide phenomenon affecting a assortment of establishments and Instruments offering Sharia base manners of finance, during the last few decennaries acquiring advancement and facing challenges. Now most normally there are three Islamic finance school of ideas using into the Islamic universe they are Pakistani, Gulf and Malayan school of ideas.

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Islamic finance have a large market but there are some challenges both in secondary and primary market most normally risk direction and liquidness of financess is a large issue but in the Pakistan Islamic Bankss acquiring groom over the period of clip by presenting alone Islamic manner of finance instruments. The graphical presentation of the different manner of Islamic finance and procedure.

Furthermore, all the Islamic Institutes proctor by the State Bank of Pakistan regulative authorization and working over the guidelines for hazard direction and polishing their public presentation and play a critical function for the growing of state economic system. Comparison of bing Islamic institutes and their public presentation over the period of clip and how the Bankss trades with the delinquent sum and how they manage these financess and seting them into the charitable work.


This study covers the issues of Islamic Banking and how State Bank of Pakistan regulates it harmonizing to the Sharia Compliance and enforces the Islamic banking establishments guidelines and principals for hazard direction. Pakistan keeping universe 2nd largest Muslim population and holding the batch of attractive force for the investor covering in Islamic base concern and the study cover the public presentation of the Islamic establishments as comparison with the conventional fiscal establishments.

Furthermore, Muslim Bankss market portion their annual bases public presentation and growing as comparison with the old old ages and during the last 10 old ages public presentation of different Bankss runing Islamic services in Pakistan and their growing comparing that shows Mezzan Islamic bank public presentation and how they offer their sharia base service like Ijarah, Mudarbah, Musharkah, Murabaha and Sukuk and their graphical presentation of bank and client procedure that helpful to understand that how Muslim manner of finance work harmonizing to the Islamic law conformity.

In twelvemonth 2010 the entire conventional banking sedimentations was $ 78bn and the jutting growing rate was 13 % p.a. while the portion of Islamic banking sedimentation in Pakistan fiscal market was $ 12bn and projected growing rate was 81 % p.a. with 440 Islamic operational subdivisions.

Need For Islamic Banking:

Recent survey published in United States stated that the growing rate of universe Muslim population is higher than the universe non Muslim population and it is believed and projected that it will be the one-fourth of the universe population near 2030.

Pakistan, which has seen a rise in extremist Islam in current months, will trail Indonesia as the universe ‘s most thickly settled Muslim state. Majority of the people seeking to put into the Hala manner of funding and people fad up with the traditional fiscal system where establishments based on involvement.

Furthermore, Islamic fiscal system based on the principal of Sharia, which mean they believe and follow the Islamic school of ideas “ prohibition on the payment and receiver of involvement ” this is the basic ground that make difference between the Islamic fiscal establishments and their Western opposite numbers.

Government Regularity:

Pakistan was among the three states in the universe that had been seeking to implement involvement free banking at national degree. Islamic Banking is one of the lifting field in planetary fiscal market and holding the possible all around the universe. The Islamic Banking is one of the lifting field in planetary fiscal market and first full flag Islamic Banking Department was established under the supervising of State Bank of Pakistan ( SBP ) in 2003 and holding undertaking to advance or established fiscal aid harmonizing to the Sharia Complaint.

SBP ‘s Islamic banking constabularies allow the people to set up their fiscal relationship with Islamic Bankss harmonizing with their Islamic beliefs. SBP feels the duty for the publicity of Islamic Banking and they work on three schemes.

Allow the conventional Bankss to set up their Islamic banking subdivisions throughout the state.

Support the private sector to set up Islamic Bankss.

Enforce the bing conventional Bankss to unfastened stand entirely Islamic banking subdivisions.

Before beginning of concern a reputed Islamic law adviser has to be appointed harmonizing to the given SBP policy.

Banks guarantee all their papers “ services ” authorised by their Islamic law advisers.

Banks are required to set about comprehensive internal audit at least one time in a twelvemonth.

Islamic and commercial Bankss both shell have a separate agenda of charges authorised by their Islamic law advisers.

Hazard Management:

SBP enforce the Islamic Banking Institutions to follow the guiding rules of hazard direction established by the Islamic Financial Services Board ( IFSB ) that helpful to minimise the fiscal hazard and these principals are applied over the six classs of hazard they are.

Market Hazard

Recognition Hazard

Operational Hazard

Liquid Hazard

Rate of Return Risk

Equity Investment Hazard

Sharia Compliance Framework:

Shariah conformity is the most of import characteristic of Islamic finance. SBP established a comprehensive Islamic law conformity construction for the credibleness of the Islamic Banking Institutions and the construction consists of.

Sharia Board at SBP

Sharia Advisor Forum

Sharia Advisor

Model understanding of Islamic manner of funding

Guidelines for Islamic law conformity in IBI ‘s

Sharia conformity review

Industry Progress and Market portion:

Muslim Bankss in Pakistan bring forthing astonishing consequences during the clip when conventional fiscal system to the full griped even all around the universe and holding more fiscal tools than Islamic sector. Under the current policy foremost Islamic banking license was granted on in twelvemonth, 2002.

In twelvemonth 2010 the entire conventional banking sedimentations was $ 78bn and the jutting growing rate was 13 % p.a. while the portion of Islamic banking sedimentation in Pakistan fiscal market was $ 12bn and projected growing rate was 81 % p.a. with 440 Islamic operational subdivisions.

It is besides of import to compare the Pakistani Islamic fiscal sector with the advancement in other states. Malaysia first Islamic bank was established in 1983 and till 2007 its base on 13 % , Bahrain Islamic Bank stands on 8 % during 30 old ages and Indonesia Islamic Bankss started their service scientific discipline 1990 ‘s and still it has progress around 1.67 % all the above figures shows that the public presentation of Islamic banking sector in Pakistan relatively better or satisfactory than other planetary states particularly east Asiatic states.

Banking and Finance Shariah Mode of Finance:

Islamic finance sector in Pakistan offer a broad scope of shariah base service to the investors. Following are the shariah ailment manners of banking and finance.

Trading Manner

Participatory Modes

Debt Based Mode

Other Manners

zIjarah or Ijarah wa Iqtina






Assignment of Debt


Decreasing Musharka



Equity engagement in the signifier of portions in a corporate entity



Charity Fund:

SBP, policy for the income generated by the non-Sharia based resources or the income incurred by the bases of any punishments either it ‘s a late payment charges received by the client in default or delinquent instances etc are transportation to the charity fund that income utilize for the charitable or societal public assistance intents.

Banks Offer Servicess:

Following are the twelvemonth wise entry of Islamic Bankss in Pakistan economy.banks annually entry.jpg


Market Share 2003-2007:

To analyze the market portion it ‘s of import to look into both sides of the balance sheet to deter the unethical information dramas by the history directors and some clip hearers play function to assist them merely for bring forthing accounting net income and acquire good response from the market.

SBP, maintain focussing over the accounting public presentations on both Islamic and Conventional services sector and eventually announced annual bases comparing of the both sectors for encourage the investors. The tabular array below shows the market portion public presentation comparing from 2003-2007.

Beginning: share.jpg

Branch Network Growth:

In the Pakistan economic system Islamic banking sector executing surprisingly and by offering riba free services Muslim Bankss in overall subdivision web of the industry has increased over period of clip and acquiring higher gait.

All are the major Bankss in Pakistan now offering Islamic bank services. By 30th June 2008 entire plus of Islamic banking industry in Pakistan was over Rs. 225 bn which was the 4.5 % of the entire banking industry assets.

In the four states of Pakistan and AJK, more than 330 subdivisions offering Islamic service. SBP, enforce all the conventional and non conventional to open their Islamic subdivisions in all major metropoliss and towns covering all the four states of the state and AJK.

The tabular array below shows growing in the subdivisions web of Islamic banking industry scientific discipline 2003-2007.

subdivision network.jpg


Bank wise Share and Total Assetss:

Islamic banking system see the option of the bing conventional system and the per centum value of Islamic banking assets growing in Pakistan bit by bit acquiring gait during the old ages 2003-2007 that was 85.2 % , 241.8 % , 62 % , 66.9 % and 72.6 % severally. Both IBs “ Muslim Banks ” and IBDs “ Islamic Banking Divisions ” basking growing, but rapid growing seems from twelvemonth 2004 due to the big web of full fledged Muslim Bankss over more than 50 metropoliss with the support of conventional bank IBs.

The tabular array below shows the assets of Islamic banking industry in Pakistan during the twelvemonth 2003-2007.assets.jpg


The bank wise portion of Islamic banking industry Assets is as on 31st December, share.jpg

It is interesting and noticeable the highest growing that is 32.62 % gaining by the to the full fledge Pakistan most prima Islamic bank Mezzna Bank Limited ( MBL ) while the three large commercial bank have non demoing the mark of market portion they are UBL, NBP and HBL that predict the assurance of people over Muslim Bankss in Pakistan.

Deposit and Bank wise portion:

Deposits are the key of success for any fiscal institutes chiefly it is of import for Islamic banking that aim different people from different background during the clip when conventional banking holding the big portion of market but the public presentation during the old ages 2003-2007 predict the range of Islamic banking and its success against the conventional system. Muslim banking divisions and Islamic Bankss deriving singular growing in sedimentations during the old ages 2003-2007 that is 65.3 % , 259.5 % , 65.4 % , 67.7 % & A ; 76.0 % severally.

Furthermore, rapid advancement shown in twelvemonth 2004 because aggressive banking start from Bank Alfalah Limited and the new entry of Al Barqa bank and after the twosome of twelvemonth Dubai Islamic bank, Emirates Global bank, Bank Islami and Duawood Islamic bank get down their full fledge concern and contribute to take the sedimentation place up to tag during the twelvemonth 2006 and 2007. Bank portion deposits public presentation during the twelvemonth 2003-2007 is as under.deposit.jpg


bank portion deposit.jpg


Financing and Banks Share:

Liquidity direction drama a critical function for the being of any fiscal institute. SBP provides a complete scope of instructions to all Islamic Bankss to maintain follow them for acquiring the good consequences from the market non merely supply the policy besides provide the a complete Islamic law conformity cell and Islamic law advisers for hazard direction.

During the period from 2002-2007 Islamic Bankss fiscal public presentation was astonishing that was 97.8 % while the several twelvemonth growing was 135.1 % , 218.4 % , 66.4 % , 43.4 % & A ; 63.5 % . figures show that Meezan bank capturing about one tierce of funding while Bank Alfalh once more leads the class of conventional Bankss holding Islamic banking subdivisions with the add-on of BankIslami, Emirates Global, Dubai Islamic and Dawood Islamic annually financing growing rate acquiring good gait every year.financing gross.jpg

funding graph.jpg


Composition of different manner of Islamic funding that shows salvaging sedimentation ab initio grew at high gait but latterly fixed sedimentation public presentation comparatively better turning rate. By offering the believable sharia law conformity, aid to develop the involvement of the clients.

For the Islamic Banking Institutions ideal manners of funding belong to the low hazard portion category i.e. those which normally generate a fixed return. Among these

Murabaha ( cost plus reciprocally in agreement net income border ) .

Ijara ( renting ) are the most attractive and popular manners of funding.

However, recently the portion of Decreasing Musharaka has besides grown at a rapid gait taking towards variegation of the Islamic Bankss financing portfoliocomposition of financing.jpg



Islamic Mode of Financing:


Ijarah is a term of Islamic Fiqh Literally, it means “ To give something on rent ” The term “ Ijarah ” is used in two state of affairss:

It means ‘To employ the services of a individual on rewards ‘ e.g. “ A ” hires a porter at the airdrome to transport his baggage

Another type of Ijarah relates to paying rent for usage of an plus or belongings defined as “ LAND ” in Islamic Economicss

Ijarah is an Muslim option of Leasing.

Renting backed by an acceptable contract is an acceptable dealing under Shariah.

The inquiry of whether or non the dealing of leasing is Shariah compliant depends on the footings and conditions of the contract.

Several features of conventional understandings may non conform to Shariah therefore doing the dealing un-Islamic and thereby raising a prohibition.

Hazard and wagess of ownership lies with the proprietor i.e. any loss to the plus beyond the control of the leaseholder should be borne by the Lessor.

Late payment punishment can non be charged to the income of the Lessor.

Lease and Sale understanding should be separate and non contingent.

Bank Ijarah Process:

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The client approaches the Bank with the petition for funding and enters into a promise to rent understanding.

The Bank purchases the point required for leasing and receives rubric of ownership from the seller

The Bank makes payment to the seller

The Bank leases the plus to the client after executing of lease understanding.

The client makes periodic rental payments as per the contract

At the terminal of the term of office client can buy the plus from the bank with the aid of separate Sale understanding.

In instance of sale, rubric of belongings is transferred to Buyer

In instance of Ijarah, rubric remain with the Lessor

Merely the usage of the belongings is transferred to Lessee

Murabaha funding:

Murabaha is a peculiar sort of sale and non a funding in its beginning. Where the dealing is done on a “ cost plus net income ” footing i.e. the marketer discloses the cost to the purchaser and adds a certain net income to it to get at the concluding merchandising monetary value. The marketer discloses the cost to the purchaser and a known net income is added. Payment of Murabaha monetary value may be:

At topographic point

In installments.

In ball amount after a certain clip

Some basic regulations should be the portion of Murabaha base funding, they are

Sale monetary value should be determined.

Asset to be sold must be.

Sale must be unconditioned.

Assetss to be sold:

a ) Should non be used for un-Islamic intent.

B ) Should be in ownership of the marketer at the clip of sale, physical

Measure by Step Murabaha Procedure:

Following are the stairss that a bank takes during offering Murabah base services.

The client and the bank sign an overall understanding whereby the establishment promises to sell and the client promises to purchase the trade good from clip to clip on an agreed ratio of net income added to the cost. This understanding may stipulate the bound up-to which the installation may be availed.

An bureau understanding is signed by both parties in which the establishment appoints the client as his agent for buying the trade good on its behalf.

The client purchases the trade good on behalf of the establishment and takes ownership as the agent of the establishment.

The client informs the establishment that it has purchased the trade good and at the same time makes an offer to buy it from the establishment.

The establishment accepts the offer and the sale are concluded whereby ownership every bit good as hazard is transferred to the client.

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Decreasing Musharakah:

Musharkah is the signifier of “ Shirakat ” partnership and following are the types of Musharkah.


Joint ownership of two or more individuals in a peculiar belongings


A partnership affected by common contract. It can besides be translated as a joint commercial endeavor

In Diminishing Musharkah the moneyman and the client have a joint ownership of equipment, belongings or a commercial endeavor.

The portion of the moneyman will be divided into a figure of units

The client will buy these units one by one sporadically until he is the exclusive proprietor of the belongings

Bank and Diminishing Musharkah Procedure:

These are the constituents that a Bank perform during Decreasing Musharkah contract or understanding.

Joint ownership of the Bank and client

Customer as a leaseholder uses the portion of the bank

Redemption of the portion of the Bank by the client

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Istisna’a is the 2nd exclusion to the regulations of sale where a sale is allowed without immediate bringing of the goods sold. Istisna’a is a contract of sale of specified points to be manufactured, with an demand on the portion of the maker to present them to the Customer upon completion.

It is non allowable that the entity of an Istisna’a contract be a touchable “ bing and identified capital plus ” . An Istisna’a contract is permitted merely for natural stuffs that can be transformed from their natural province by a fabrication or building procedure affecting labour.

The clip of bringing of goods does non needfully hold to be fixed in Istisna’a nevertheless, a maximal clip may be agreed upon between the parties. The Istisna’a monetary value can either be paid in progress, or in installments or at the clip of bringing of goods. The monetary value of Istisna’a minutess may change in conformity with fluctuations in the bringing day of the month.

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For the liquidness direction offered “ sukuk ” into the Islamic finance money market which is fundamentally the certification of equal value stand foring proportionate ownership of touchable assets. This ownership comes in consequence after the completion of payment and with the investing of standard financess.

Sukuk stand foring equity portion in a peculiar concern or investing portfolio ( based on Musharakah/ Mudarabah ) . Sukuk stand foring receivable or future goods ( based on Murabaha or Salam or Istisna ) .

Salam and Murabah base Sukuk are the non tradeable while tradable Sukuk are touchable assets or proportionate ownership of a concern or investing portfolio are tradable for case Ijarah or Musharkah/ Mudarbah base Sukuk.

Furthermore, Sukuk usage for the liquidness demand but still it has some expostulation or limitation during offering into the market.

Sukuk holders have the complete ownership rights.

Manager can non impart money when the existent net income is less than the expected.

Before offering the sukuk into the market must stay by the Sharia supervisory board.

Sukuk should be issue over the new industrial and commercial venture.


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