The Evolution Of Islamic Banking System In Pakistan Finance Essay

This research will assist us to understand the induction and development stage of Islamic Banking in Pakistan. This research aims to reply inquiries about the launch of Islamic Banking in Pakistan. It will assist to foreground the factors that have paved the manner for its development. It will besides lucubrate upon the procedure through which this system has flourished in our state. The intent of this survey is to reexamine and understand the assorted factors associated with the development of Islamic Banking system in Pakistan.

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Research Aims

More specifically the aims will be:

To reexamine the history and development of Islamic Banking in Pakistan since the clip of its origin. This will assist to analyse the development of this system during assorted political and military governments.

To stress on the growing tendencies of Islamic banking system in comparing with the Conventional banking system. This will accordingly assist to estimate the degree of acknowledgment and popularity, this sector enjoys in Pakistan.

To foreground a assortment of factors or variables and analyze their positive or negative influences upon the development of Islamic Banking in Pakistan.

To understand the function of the authorities and other province establishments in supplying an enabling environment for the development every bit good as the execution of Islamic Banking system in our state.

To estimate the degree of credence and attraction of Islamic Banking for local or foreign conventional Bankss.

To analyse the corporate and single clients ‘ attitude towards Islamic Banking every bit good as the degree of consciousness of the public sing Islamic Banking constructs and patterns, in order to measure the success of this system in Pakistan.

Khan ( 2009 ) ; is of the position that the construct of Islamic Banking emerged in Pakistan as a response to both spiritual and political factors. Attempts for a complete riddance of Riba based system were initiated during the 1970s and most of the practical stairss were taken in 1980s. However due to the deficiency of political penetration and an absence of Shariah conformity mechanism this system had to confront major hurdlings. In any instance this attempt was highly helpful because it provided a valuable experience which was contributing in the development of the present State Bank ‘s policies for the re-launch of Islamic Banking in the state.

Khan ( 2009 ) ; believes that the enterprise to reintroduce the Islamic Banking system was launched in 2001. In 2001 the authorities developed a consensus for a gradual publicity of this system as a analogue and compatible system in line with the best international patterns. This flexible attack purposes at developing a wide fiscal system in the state that is targeted towards the multitudes belonging to all sections of the population.

For this research Khan utilized primary every bit good as secondary resources for informations aggregation. He evaluated the fiscal statements of assorted major Bankss in the state and he besides analyzed the studies of the State Bank of Pakistan over the old ages. For the primary research he carried out studies from bank clients of both the Islamic and conventional Bankss in order to understand market tendencies and patterns. Some interviews were besides carried out with banking professionals to develop a thorough apprehension of this system.

Harmonizing to Khan ( 2009 ) ; the set of variables that have influenced Islamic Banking in Pakistan, chiefly include extended spiritual force per unit areas and political motivations. In decision Khan ( 2009 ) ; provinces that over the old ages the consequences prove that the scheme for the debut of Islamic Banking has worked truly good due to careful planning and difficult work.

Lodhi and Kalim ( 2005 ) ; have identified a assortment of other factors that have influenced the development of Islamic Banking in Pakistan which were non included by Khan in his research. They have explored the strategic policy orientation needed for the publicity of Islamic Banking. Contrary to Khan ‘s proposition ( 2009 ) about the believable steps taken by the SBP for the development of this system, Lodhi and Kalim ( 2005 ) have hypothesized that the current policy steps are non easing Islamic Banking in Pakistan. The writers have discussed the development of Islamic Banking in Pakistan with primary focal point upon the advancement made in this sector.

Lodhi and Kalim ( 2005 ) ; have besides highlighted the factors hindering the development of this system in Pakistan. Furthermore the writers have discussed the strategic waies and have presented the positions of different bankers, related to the obstructions in the executing of Islamic rules in the Banking Sector. Last the paper concludes by discoursing the impact of assorted policies that may better the Islamic Banking system in our state.

The wide set of variables ; that have influenced Islamic Banking in Pakistan ; explained by Lodhi and Kalim ( 2005 ) ; include Political Resolve, Judicial Rulings and State Bank ‘s policy steps. They believe that the construct of Islamic Banking in Pakistan was brought into lime light during Zia-ul-Haq ‘s Islamist Regime. In the epoch of 1980s involvement free banking in Pakistan on net income and loss sharing ( PLS ) footing was initiated officially. Furthermore the Federal Shariah Court ‘s original opinion in 1999 declared all signifiers of involvement charged during fiscal minutess as Riba, which is prohibited in Islamic instructions. Therefore the tribunal ordered the authorities to complete all traffics based upon involvement. Furthermore the Commission for Transformation of Financial System ( CTFS ) was founded in the twelvemonth 2000, under the supervising of the State Bank of Pakistan, to establish a new fiscal system based upon the Shariah rules.

Moin ( 2008 ) ; discovered that the alterations in the fiscal system to publish new involvement free instruments, development of an regulation for the constitution of Mudaraba companies and floatation of Mudaraba Certificates, fundamental law of Commission of Transformation of Financial System ( CTFS ) and the constitution of an Islamic Banking Department are some of the cardinal determinations by the State Bank of Pakistan which have paved the manner for smooth development of Islamic Banking System in the state.

Moin ( 2008 ) ; stated that although Islamic Banking system developed its roots in the 1970s, nevertheless the most noteworthy attempts were made rather late through the policy measures laid down by State Bank of Pakistan in the twelvemonth 2000 and onwards. These policy steps include the issue of the first Islamic Banking License to Meezan Bank Limited in January 2002.

This survey is aimed at researching the comparative public presentation of Islamic Banking when compared with conventional banking system of Pakistan. Therefore the writer has analyzed the fiscal ratios of assorted Bankss in the state. These ratios have been loosely categorized into four groups, viz. , solvency ratios, liquidness ratios, profitableness ratios hazard and efficiency ratios. The overall analysis between assorted Bankss reveals that conventional Bankss are so making good concern, nevertheless Muslim Bankss are catching up at an first-class gait.

Moin ( 2008 ) ; stated that, although Islamic Banking is still in its nascent phase yet the hereafter appears to be bright. Some of the major Muslim Banks in the state challenger with conventional Bankss in footings of diverseness of merchandises and big client base. If the tendency continues and the SBP supports on supplying an enabling environment to the Islamic Banking sector, so in the close future both banking systems would run parallel in footings of fiscal success and there is a strong chance that Islamic Banking may even outweigh the Conventional Banking system.

Hassan ( 2007 ) ; has intricately analyzed the steps taken by the authorities for Islamizing the economic system, specifically fiscal and banking establishments in Pakistan. A scrupulous scrutiny of the nature, effects and the impacts of strategic steps by the authorities reveal that the political resoluteness of some leaders has fostered Islamic Banking system in Pakistan. [ Hassan ( 2007 ) ]

However, harmonizing to Hassan ( 2007 ) ; certain factors have besides hindered the Islamization procedure in Pakistan. These factors include absence of reliable political support, deficiency of professional direction, and exploitatory socio-economic ambiance of the country.etc. On the other manus certain factors have so endorsed the development of Islamic Banking system in Pakistan such as decentalisation of administrative power, economic growing and engagement of Islamic/Religious parties in politics.etc. The variables identified by Hassan ( 2007 ) ; include political resoluteness, judicial opinions, State Bank ‘s policy enterprises and force per unit area of spiritual political parties and other groups.

Turning through the pages of history Hassan ( 2007 ) ; stated that the ulama of the subcontinent played a critical function in the origin of Pakistan. Therefore they had a political standing even before the divider. They influenced the Objectives Resolution every bit good as the fundamental laws. Finally these ulema stepped into formal political relations and developed a party named as Jamaat-e-Islami. These parties and other force per unit area groups have widely influenced Islamic banking in Pakistan and have provided this system with a batch of support and political backup.

Mehmood ( 2002 ) ; indicated that involvement is the anchor of the modern economic system. The universe is so entrenched in this system that it is difficult to conceive of for any state to extinguish involvement. However Pakistan stands among those brave states who have the differentiation of flatly showing the desire of stoping this unjust system. To turn this dream into world the authorities and certain non authorities establishments have played a major function to set up an Muslim Economy by extinguishing involvement and integrating the rules of Zakat and Ushr.

Harmonizing to Mehmood ( 2002 ) ; Pakistan has decidedly made some advancement on the route to Islamization. However after the determination of the Shariah Appellate Bench of the Supreme Court of Pakistan the progressive position of Islamization procedure suffered a terrible reverse. The deadlines that were enforced for a complete passage from an involvement based economic system to a sharia law sanctioned system were lifted. Due to this really ground Pakistan landed on the same base from which we started off in the seventiess. But the present province of personal businesss merit hopes because late the authorities has expressed its policy committedness to the debut of a parallel Islamic Banking system in the state. Equally long as unneeded political intercession is avoided it is hoped that Pakistan would non be detracted from this revived promise.

Mehmood ( 2002 ) ; evaluated that there is an extended demand for research based development of Islamic Banking in the state so that a steadfast foundation can be established from the start. Lack of research and cognition development would finally take to chaos. This system should besides be in conformance with the sentiments of erudite Muslim bookmans in order to avoid any ambiguities. Furthermore the people must understand that the authorities might non be able to implement this system entirely hence other public and private sector establishments should come forward and work together for the development of this system.

Wouters ( 2008 ) ; has shed light upon the Islamic Banking sectors of three states viz. Turkey, Indonesia and Pakistan. The writer developed a comparative analysis of two secular economic systems.i.e. Turkey and Indonesia with Pakistan.

Foregrounding assorted differences in the attack ; adopted by the authoritiess of these states ; towards the development of Islamic Banking, Wouter ( 2002 ) ; stated that Islamic Banking began in Turkey by the launch of ‘Albaraka Turk ‘ in 1985. The focal point of Islamic Banking was upon the population as a whole and non upon the ‘convinced ‘ Muslims merely. On the other manus, in Indonesia Islamic Banking started with the gap of Bank Muamalat Indonesia. From the really start Islamic Banking merchandises were aimed at ‘convinced ‘ Muslims. The authorities had besides taken impressive enterprises to assist this sector flourish alongside the conventional banking.

Wouters ( 2008 ) ; highlighted that although Islamic Banking had been introduced in Pakistan since the 1980s, yet the first Islamic Banking licence was granted in 2002. Pakistan adopted an aggressive attack to Islamise the economic system and the banking sector, during Zia ‘s Regime. However due to assorted proficient, legal, political and infrastructural restraints Islamic Banking could n’t develop deep roots.

Wouters ( 2008 ) ; discovered that the State Bank ‘s policy steps and enterprises taken by conventional Bankss are the major driving force in the development of Islamic Banking system. Under the Islamic Banking policy ( December 2001 ) of the State Bank, Islamic Banking is promoted parallel to conventional banking. Furthermore Implementation of AAOIFI and IFSB criterions is on the manner. Assorted conventional Bankss have besides taken the enterprise and opened up Muslim Bankss subordinates and even stand entirely Islamic Banking subdivisions.

Inayat ( 1993 ) ; stated that since the induction of involvement free fiscal instruments there has been minimum advancement in the domain of Islamization of the whole Banking System. This is chiefly due to the fact that we have adopted a disconnected attack to Islamise banking without understanding the complexnesss involved in this procedure and without taking into history the pre-requisites of the Islamic Economic Order. Therefore Pakistan has been able to develop Islamic Banking system merely on the surface.

Inayat ( 1993 ) ; concedes to the fact that the most of import demand of an Islamic Economic system is the obliteration of involvement. However he is besides of the position that riddance of involvement is non the conclusive status for a successful operation of Islamic Economic System.

Inayat ( 1993 ) ; stated that Islamic Banking started in Pakistan in 1979, nevertheless the procedure of Islamization was non initiated with proper planning. While foregrounding the jobs hindering the development of Islamic Banking system, Inayat ( 1993 ) ; concluded that inconsistent authorities policies and deficiency of public consciousness are at the fore-front. But the job can be resolved by rectifying the institutional alterations that deal with the legal model, supplying extended preparation to the banking staff about sharia law patterns, explicating a sharia law conformity mechanism.etc. More significantly a entire committedness to the cause is required which should be in complete consistence with the Divine Law.

Inayat ( 1993 ) ; evaluated that the State Bank of Pakistan has made extended attempts to do Islamic Banking system compatible with the present economic environment. Furthermore the Judicial Opinions by the Federal Shariah Court is another move in the right way. These attempts have resulted in heightening the assurance of the multitudes with this new system. Therefore several Islamic Banks are in the procedure of origin and it is believed that the new millenary would be earmarked as an epoch of Islamic Financial system.

Zaher and Hassan ( 2001 ) ; stated that the initial acknowledgment of the rules of Islamic Finance can be indicated by the development of a nest eggs bank in Egypt in the twelvemonth 1963. In Pakistan, Islamic Banking system was initiated in the early 1980s under Zia-ul-Haq ‘s government. Since so Judicial Rulings, popular sentiments and the State Bank ‘s policies have influenced the development of this sector. Soon the SBP is working to set up a regulative model for better direction of Islamic Banks.

Zaher and Hassan ( 2001 ) ; are of the position that in the modern times extended preparation of banking professionals, bank clients and the general multitudes is of extreme importance, if we intend to advance this system. For Pakistan some of the major jobs in the development of this system include the issue of pull offing liquidness for Bankss and pecuniary direction by the SBP.

Zaher and Hassan ( 2001 ) evaluated that Political Resolve, Court Rulings and Policy determinations by the State Bank are the primary factors that have positively influenced the development of Islamic Banking system in the state. In this respect an regulation was issued which sanctioned the development of Mudaraba companies and permitted the floatation of Mudaraba Certificates. A alteration was introduced in the Banking companies Ordinance ( BCO ) in 1962 to let markup pricing, permit the proviso of money on PLS footing and let rental understandings. Separate counters free from involvement started operations in 1981. Furthermore the State Bank under the counsel of Court opinions decided that Pakistani Economy would switch from an involvement based economic system to a shariah compliant economic system bit by bit, in order to avoid any incommodiousnesss. For this intent SBP considered puting up Islamic Banking subordinates by conventional Bankss, stipulating subdivisions entirely covering in Islamic merchandises and puting up fully fledged commercial bank to transport out banking concern based on proposed Islamic merchandises.

Hussain ( 2004 ) ; discussed that the tools that are required to accomplish socio-economic aims of the Islamic Economic system are based upon the rules of the Quran. These tools include the system of Zakat and prohibition of involvement. Hussain ( 2004 ) ; besides highlighted assorted steps taken for Islamization of the Economic System in Pakistan such as the creative activity of the Council of Economic Ideology in 1962, the debut of zakat and ushr, the constitution of a fully fledged Islamic Banking Department in the State Bank.etc.

Hussain ( 2004 ) ; stated that Islamic Banks by nature were less likely to prosecute in money laundering, theft or other illegal activities. In the present times the function of Islamic Banks is non limited to a inactive moneyman concerned merely with timely involvement payments instead an Islamic bank is a spouse in trade and it has to concern itself with the nature of the concern and profitableness place of its clients.

Hussain ( 2004 ) ; identified three major variables that have positively influenced the development of Islamic Banking system in the state, these were, State Bank ‘s policy steps, debut of zakat and ushr and the development of a legal model. State Bank of Pakistan took sufficient steps and introduced a Shariah board comprising of three experts in the countries of banking and accounting, two sharia law bookmans every bit good as legal model was established. The zakat and ushr regulation of 1980 besides stimulated the development of an Islamic Economic system which finally led to the creative activity of Islamic Banks. State Bank besides issued the standards for constitution of Islamic Bankss in private sector, subordinates and stand-alone subdivisions by bing commercial Bankss to pattern Islamic Banking in the state. Legal Framework was besides provided by the Objectives Resolution. Furthermore the Council for Transformation of Financial System was setup by the State Bank to guarantee a smooth passage from the involvement based system to a shariah ailment involvement free system.

Siddiqi ( 2006 ) ; stated that the 1960s saw the constitution of the first involvement free bank in Karachi. However the bank could non last for long because at that clip it was still a wholly new construct and it could n’t derive impulse with the general multitudes. Subsequently on the Islamic Development Bank started operation in 1975. This bank was entirely designed to function Muslim states and communities by set uping finance for trade and development on non-interest footing. This indicates that ab initio Islamic Banking developed entirely on the footing of advancing involvement free fiscal instruments.

Siddiqi ( 2006 ) ; believes that the most important development took topographic point during the early 1980s with the coming of Mudaraba and Murabahah based funding. This was the clip when Pakistan officially committed itself to involvement free fiscal system. Siddiqi ( 2006 ) ; stated that the primary ground for the development of Islamic Financial system is based upon our spiritual commandments that declare involvement or riba based minutess as ‘haram ‘ . The 2nd ground is based upon morality which entails that alternatively of the mercenary, capitalistic chase of money and wealth we need to larn the rules of sharing and giving to our fellow brethren.

Harmonizing to Siddiqi ( 2006 ) ; public consciousness and demand has enhanced the popularity of Islamic banking in the state. Due to this ground today many conventional Bankss are runing Islamic Banking subdivisions alongside their conventional subdivisions. Furthermore assorted spiritual cabals have besides expressed their desire every now and so for the origin of an Islamic Economic system in the state, entirely based upon Islamic Financial instruments and Net income and loss sharing footing.

Siddiqi ( 2006 ) ; evaluated that the present tendencies would turn out to be fruitful for the success of this system as a big figure of people are turning dissatisfied from the involvement based system.

Theoretical Model


H0: Political Resolve did non hold an impact upon the development of Islamic Banking in Pakistan

H0: Judicial Opinions did non hold a positive impact upon the development of I.B System

H0: SBP ‘s policy steps did non impact the formation of Islamic Banking System in Pakistan

H0: Public Awareness and Demand did non significantly affect the development of I.B System

H0: Enterprises by conventional Bankss did non impact the formation of Islamic Banking System

H0: Pressure of Religious groups did non hold a positive impact upon the growing of I.B System


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