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Before moving on to explore the Islamic financial products on offer, we would like to give our readers a background of the Islamic financial system. Sumaira Dada gives us its background and reports the current status of Islamic banking in Pakistan.
Background of the system
The first experiment of Islamic banking started in1963, when Mit Ghamr Saving Bank began a project offering interest free banking in Egypt. The project was a success and led the bank to open four new branches by 1967. In the same year, eight new banks started offering interest free banking.
It was the Organization of Islamic Countries (OIC) summit in 1974, in Lahore, Pakistan that fostered the concept of an “Islamic bank” and recommended the creation of an Islamic Development Bank. There are estimated to be over 200 Islamic financial institutions all over the world. The industry is said to be growing at rate of 15% per annum. Not only do a number of Islamic countries such as, Kuwait, Dubai, Saudi Arabia, Iran, Malaysia, Brunei, Bangladesh and Pakistan have Islamic financial institutions, but many non-Muslim countries also house Islamic institutions. Some of these non-Muslim countries include USA, UK, Canada, Switzerland, Australia, and Sri Lanka. Major international conventional banks, such as Citibank, ANZ Grindlays, ABN Amro, HSBC, and Standard Chartered also have Islamic windows.
Islamic banking in Pakistan
Financial institutions in Pakistan seem to follow a cautious “wait and see” approach towards Islamic banking. A number of key players have obtained a license for conducting Islamic banking operations. These include: Meezan Bank Limited, Faysal Bank Limited, Al Baraka Islamic Bank and First Islamic Investment Bank. Meezan Bank is already operating as the first Islamic bank of Pakistan since May 1, 2002 when it acquired the Pakistani operations of Societe Generale. Other banks, including Habib Bank, Habib Bank AG Zurich, National Bank of Pakistan and United Bank Limited, are in the process of initiating Islamic banking products. Muslim Commercial Bank has already set up a dedicated Islamic banking branch.
Efforts towards establishing an Islamic economic system really took off after the Supreme Court’s judgment in the latter half of 1999, ordered the government to abolish the ‘interest-based system’ and establish an alternative Shariah-based system. For the launch of Islamic banking in the country, the State Bank of Pakistan (SBP) has given three options, i.e., to establish an independent Islamic bank, to establish subsidiaries of the existing banks or any commercial bank or to set up stand-alone branches. The stand-alone branches would have to carry business only in the Islamic banking area where both deposit and grant of loans would be according to Islamic injunctions. The development of Prudential Regulations for Islamic banking is already in process. The SBP is also working towards the establishment of an Islamic banking division. The launch of Islamic T-bills, known as Ijarah Sukook, is already under serious consideration in order to solve the liquidity problems of Islamic banks.
These instruments are being developed at a rapid pace. The huge market potential for Islamic products is proof of the fact that the efforts of these entities are bearing fruit. Moreover, while the current conventional financial system has had years to reach the maturity it enjoys now, a modern model of Islamic finance has only been developing over the past few decades. As difficulties arise and are resolved, the industry is sure to ripen.