Banking, Insurance and Financial Sector: A vision of the Future*
G. N. Bajpai
Introduction
Financial markets are a part of the changing business paradigms, across the globe. In fact, the financial markets are the first to unleash the creativity and imagination and lead the revolution. Today, globalization of competencies, thinking and perspectives has been the part of Strategic Action Plan of all the major players in the financial markets, globally.
The cut throat competition across the market operators and the pressure to perform by the stakeholders has resulted in competition being fiercer than ever before. I think, both the business landscape and chemistry of the competition has changed significantly over the period of time. All around, there is a fresh thinking on the financial products, structure of market players and possibilities for value creation. I would say financial markets are being redefined, reinvented and reconfigured on a persistent basis.
Speech by Shri G. N. Bajpai, Chairman, Securities and Exchange Board of India at 15th All India Conference of Chartered Accountants held at New Delhi on January 4, 2003.
Monday, June 8, 2009
Thursday, June 4, 2009
Extreme Bodies - Most Fingers and Toes - Living Person
Extreme Bodies - Most Fingers and Toes - Living Person: "Most Fingers and Toes - Living Person
WHO:
Pranamya Menaria and Devendra Harne
WHAT:
25
WHERE:
India
WHEN:
There are two holders for this record:
Pranamya Menaria (India; born August 10, 2005) has 25 in total (12 fingers and 13 toes). This is as a result of the condition Polydactyly and Syndactyly.
Devendra Harne, pictured above, (India; born January 9, 1995) also has 25 in total (12 fingers and 13 toes) as a result of the condition polydactylism."
WHO:
Pranamya Menaria and Devendra Harne
WHAT:
25
WHERE:
India
WHEN:
There are two holders for this record:
Pranamya Menaria (India; born August 10, 2005) has 25 in total (12 fingers and 13 toes). This is as a result of the condition Polydactyly and Syndactyly.
Devendra Harne, pictured above, (India; born January 9, 1995) also has 25 in total (12 fingers and 13 toes) as a result of the condition polydactylism."
Extreme Bodies - Tallest Man
Extreme Bodies - Tallest Man: "Tallest Man
WHO:
Robert Pershing Wadlow
WHAT:
2.72 m (8 ft 11 in)
WHERE:
Alton, Illinois, USA
WHEN:
Last measured on July 15, 1940
The tallest man in medical history for whom there is irrefutable evidence is Robert Pershing Wadlow. He was born at Alton, Illinois, USA, on February 22, 1918, and when he was last measured on June 27, 1940, was found to be 2.72 m (8 ft 11.1 in) tall.
Wadlow died at 1:30 a.m. on July 15, 1940, in a hotel in Manistee, Michigan, as a result of a septic blister on his right ankle caused by a brace, which had been poorly fitted only a week earlier. He was buried in Oakwood Cemetery, Alton, in a coffin measuring 3.28 m (10 ft 9 in) long, 81 cm (32 in) wide and 76 cm (30 in) deep.
Wadlow's greatest recorded weight was 222.71 kg (35 st 1 lb) on his 21st birthday and he weighed 199 kg (31 st 5 lb) at the time"
WHO:
Robert Pershing Wadlow
WHAT:
2.72 m (8 ft 11 in)
WHERE:
Alton, Illinois, USA
WHEN:
Last measured on July 15, 1940
The tallest man in medical history for whom there is irrefutable evidence is Robert Pershing Wadlow. He was born at Alton, Illinois, USA, on February 22, 1918, and when he was last measured on June 27, 1940, was found to be 2.72 m (8 ft 11.1 in) tall.
Wadlow died at 1:30 a.m. on July 15, 1940, in a hotel in Manistee, Michigan, as a result of a septic blister on his right ankle caused by a brace, which had been poorly fitted only a week earlier. He was buried in Oakwood Cemetery, Alton, in a coffin measuring 3.28 m (10 ft 9 in) long, 81 cm (32 in) wide and 76 cm (30 in) deep.
Wadlow's greatest recorded weight was 222.71 kg (35 st 1 lb) on his 21st birthday and he weighed 199 kg (31 st 5 lb) at the time"
Guinness World Records - Human Body - Home Page
Guinness World Records - Human Body - Home Page: "Human Body
MOST TATTOOED PERSON
The ultimate in multi-layered tattooing is represented by the chainsaw juggling, unicycling, sword-swallowing Lucky Diamond Rich (Australia, born New Zealand), who has spent over 1,000 hours having his body modified by hundreds of tattoo artists. He began by having a full collection of colourful designs from around the world tattooed over his entire body. But not content with stopping there, Lucky next opted for a 100% covering of black ink, including eyelids, the delicate skin between the toes, down into the ears, and even his gums. He is now being tattooed with white designs on top of the black, and coloured designs on top of the white!"
MOST TATTOOED PERSON
The ultimate in multi-layered tattooing is represented by the chainsaw juggling, unicycling, sword-swallowing Lucky Diamond Rich (Australia, born New Zealand), who has spent over 1,000 hours having his body modified by hundreds of tattoo artists. He began by having a full collection of colourful designs from around the world tattooed over his entire body. But not content with stopping there, Lucky next opted for a 100% covering of black ink, including eyelids, the delicate skin between the toes, down into the ears, and even his gums. He is now being tattooed with white designs on top of the black, and coloured designs on top of the white!"
Extraordinary Animals - Most Calves - Single Birth
Extraordinary Animals - Most Calves - Single Birth: "Most Calves - Single Birth
WHO:
Maximo Jr. Olivares
WHAT:
Five
WHERE:
Reynosa, Tamaulipas, Mexico
WHEN:
March 18, 2005
The most calves born in a single birth is five, all of whom were born on March 18, 2005 at the Santa Clara Ranch, Congregacion Garza, Reynosa, Tamaulipas, Mexico. The owners are Mr Guadalupe Olivares Garza & Sons."
WHO:
Maximo Jr. Olivares
WHAT:
Five
WHERE:
Reynosa, Tamaulipas, Mexico
WHEN:
March 18, 2005
The most calves born in a single birth is five, all of whom were born on March 18, 2005 at the Santa Clara Ranch, Congregacion Garza, Reynosa, Tamaulipas, Mexico. The owners are Mr Guadalupe Olivares Garza & Sons."
Extraordinary Animals - Highest Ranking Camel
Extraordinary Animals - Highest Ranking Camel: "Highest Ranking Camel
WHO:
Bert
WHAT:
Reserve Deputy Sheriff
WHERE:
Los Angeles, California, USA
WHEN:
April 5, 2003
The world's highest ranking law-enforcement camel is Bert, who was accepted as Reserve Deputy Sheriff for the Los Angeles County Sheriff's Department, San Dimas, USA on April 5, 2003 and regulary goes on patrol with his handler Nance Fite (USA)."
WHO:
Bert
WHAT:
Reserve Deputy Sheriff
WHERE:
Los Angeles, California, USA
WHEN:
April 5, 2003
The world's highest ranking law-enforcement camel is Bert, who was accepted as Reserve Deputy Sheriff for the Los Angeles County Sheriff's Department, San Dimas, USA on April 5, 2003 and regulary goes on patrol with his handler Nance Fite (USA)."
Guinness World Records - Natural World - Home Page
Guinness World Records - Natural World - Home Page: "Natural World
LARGEST MONKEY
The male mandrill (Mandrillus sphinx) or man-ape of equatorial West Africa has an average head and body length of 61-76 cm (24-30 in) and a tail length of 5.2-7.6 cm (2-3 in). Adult males weigh an average of 25 kg (55 lb), although specimens weighting up to 54 kg (119 lb) and measuring 50.8 cm (20 in) to the shoulder have been known. The mandrill is also one of the most colourful mammals, recognized by its naked vivid-blue rump, red-striped face and yellow beard."
LARGEST MONKEY
The male mandrill (Mandrillus sphinx) or man-ape of equatorial West Africa has an average head and body length of 61-76 cm (24-30 in) and a tail length of 5.2-7.6 cm (2-3 in). Adult males weigh an average of 25 kg (55 lb), although specimens weighting up to 54 kg (119 lb) and measuring 50.8 cm (20 in) to the shoulder have been known. The mandrill is also one of the most colourful mammals, recognized by its naked vivid-blue rump, red-striped face and yellow beard."
Internet - Largest Wireless Internet Provider
Internet - Largest Wireless Internet Provider: "Largest Wireless Internet Provider
WHO:
NTT DoCoMo
WHAT:
45,687,117 subscribers
WHERE:
Japan
WHEN:
January 2006
NTT DoCoMo (Japan) is the world's largest wireless internet provider, with 45,687,117 subscribers to their i-mode service as of January 2006."
WHO:
NTT DoCoMo
WHAT:
45,687,117 subscribers
WHERE:
Japan
WHEN:
January 2006
NTT DoCoMo (Japan) is the world's largest wireless internet provider, with 45,687,117 subscribers to their i-mode service as of January 2006."
Structures - Highest Library
Structures - Highest Library: "Highest Library
WHO:
JW Mariott Hotel
WHAT:
230.9 m
(757 ft 6 in)
WHERE:
Shanghai, China
WHEN:
2004
The library on the 60th floor of the JW Marriott Hotel at Tomorrow Square in Shanghai, China, is situated at 230.9 m (757 ft 6 in) above street level. Membership is available to members of the public and the 103 shelves in the library contains an ever-expanding collection of Chinese and English books. The library measures 57 m² (614 ft²). To walk to the library from the lobby would entail climbing around 1,435 steps."
WHO:
JW Mariott Hotel
WHAT:
230.9 m
(757 ft 6 in)
WHERE:
Shanghai, China
WHEN:
2004
The library on the 60th floor of the JW Marriott Hotel at Tomorrow Square in Shanghai, China, is situated at 230.9 m (757 ft 6 in) above street level. Membership is available to members of the public and the 103 shelves in the library contains an ever-expanding collection of Chinese and English books. The library measures 57 m² (614 ft²). To walk to the library from the lobby would entail climbing around 1,435 steps."
Structures - Highest Concrete Dam
Structures - Highest Concrete Dam: "Highest Concrete Dam
WHO:
Grande Dixence
WHAT:
285 m (935 ft)
WHERE:
River Dixence, Switzerland
WHEN:
1961
Grande Dixence, on the river Dixence in Switzerland, is the highest concrete dam in the world. It was built between 1953 and 1961 to a height of 285 m (935 ft), with a crest length of 700 m (2,297 ft), using 5,960,000 m³ (7,800,000 yd³, 210,400,000 ft³) of concrete."
WHO:
Grande Dixence
WHAT:
285 m (935 ft)
WHERE:
River Dixence, Switzerland
WHEN:
1961
Grande Dixence, on the river Dixence in Switzerland, is the highest concrete dam in the world. It was built between 1953 and 1961 to a height of 285 m (935 ft), with a crest length of 700 m (2,297 ft), using 5,960,000 m³ (7,800,000 yd³, 210,400,000 ft³) of concrete."
Buildings - Largest Offshore Gas Platform
Buildings - Largest Offshore Gas Platform: "Largest Offshore Gas Platform
WHO:
Troll
WHAT:
656,000 tonnes
WHERE:
Off Norway, North Sea.
WHEN:
1996
The Troll Offshore Gas Platform, located off Norway in the North Sea, is the heaviest man made mobile object ever made, with a dry weight of the gravity base structure at 656,000 tonnes. Standing 369m tall, it was made from 245,000m3 of concrete, (the equivalent to 215,000 foundations for ordinary homes) and 100,000 tonnes of steel (approximately 15 Eiffel towers).
Owned by Shell Oil, the platform was constructed by Norwegian Contractors from July 1991 at a cost of NOK4,150million."
WHO:
Troll
WHAT:
656,000 tonnes
WHERE:
Off Norway, North Sea.
WHEN:
1996
The Troll Offshore Gas Platform, located off Norway in the North Sea, is the heaviest man made mobile object ever made, with a dry weight of the gravity base structure at 656,000 tonnes. Standing 369m tall, it was made from 245,000m3 of concrete, (the equivalent to 215,000 foundations for ordinary homes) and 100,000 tonnes of steel (approximately 15 Eiffel towers).
Owned by Shell Oil, the platform was constructed by Norwegian Contractors from July 1991 at a cost of NOK4,150million."
Buildings - Heaviest Building Moved Intact
Buildings - Heaviest Building Moved Intact: "Heaviest Building Moved Intact
WHO:
Fu Gang Building
WHAT:
15,140.4 metric tones
(33.3 million lb)
WHERE:
Guangxi Province, China
WHEN:
November 10, 2004
The heaviest building moved intact is the Fu Gang Building at West Bank Road Wuzhou, in the Guangxi Province of China. It was successfully relocated by the Guangzhou Luban Corporation on November 10, 2004.The building weighs 15,140.4 metric tones (33.3 million lb) and is 34 m (111 ft) tall. The building was moved 35.62 metres horizontally and it took eleven days to complete the relocation."
WHO:
Fu Gang Building
WHAT:
15,140.4 metric tones
(33.3 million lb)
WHERE:
Guangxi Province, China
WHEN:
November 10, 2004
The heaviest building moved intact is the Fu Gang Building at West Bank Road Wuzhou, in the Guangxi Province of China. It was successfully relocated by the Guangzhou Luban Corporation on November 10, 2004.The building weighs 15,140.4 metric tones (33.3 million lb) and is 34 m (111 ft) tall. The building was moved 35.62 metres horizontally and it took eleven days to complete the relocation."
Amazing Science - Largest Dental Caps
Amazing Science - Largest Dental Caps: "Largest Dental Caps
WHO:
Spike
WHAT:
50 cm (19 in) long
WHERE:
Calgary Zoo, Alberta, Canada
WHEN:
July 4, 2002
The world's largest dental caps measure 50 cm (19 in) long, 13 cm (5 in) in diameter and weigh 13 kg (28 lb) each. They were fixed onto a pair of cracked tusks belonging to Spike, a resident Asian elephant, at the Calgary Zoo, Alberta, Canada during a 3 hour 30 minute operation on July 4, 2002. The stainless steel caps were designed and manufactured by the Southern Alberta Institute of Technology with metal donated by Corus Steel and adhesive by 3M (all Canada)."
WHO:
Spike
WHAT:
50 cm (19 in) long
WHERE:
Calgary Zoo, Alberta, Canada
WHEN:
July 4, 2002
The world's largest dental caps measure 50 cm (19 in) long, 13 cm (5 in) in diameter and weigh 13 kg (28 lb) each. They were fixed onto a pair of cracked tusks belonging to Spike, a resident Asian elephant, at the Calgary Zoo, Alberta, Canada during a 3 hour 30 minute operation on July 4, 2002. The stainless steel caps were designed and manufactured by the Southern Alberta Institute of Technology with metal donated by Corus Steel and adhesive by 3M (all Canada)."
Amazing Science - Largest Plate Inserted in Human Skull
Amazing Science - Largest Plate Inserted in Human Skull: "Largest Plate Inserted in Human Skull
WHO:
Tom Thompson
WHAT:
15 x 11 cm
(5.9 x 4.33 in)
WHERE:
Decatur, Georgia, USA
WHEN:
April 30, 1971
Tom Thompson (USA) had a titanium plate measuring 15 x 11 cm (5.9 x 4.33 in) inserted into the left side of his head by neurosurgeons at DeKalb General Hospital, Decatur, Georgia, USA on April 30, 1971. The surgery took place after he had been struck by a car and pronounced dead on arrival at the local hospital."
WHO:
Tom Thompson
WHAT:
15 x 11 cm
(5.9 x 4.33 in)
WHERE:
Decatur, Georgia, USA
WHEN:
April 30, 1971
Tom Thompson (USA) had a titanium plate measuring 15 x 11 cm (5.9 x 4.33 in) inserted into the left side of his head by neurosurgeons at DeKalb General Hospital, Decatur, Georgia, USA on April 30, 1971. The surgery took place after he had been struck by a car and pronounced dead on arrival at the local hospital."
Gadgets - Largest Mobile/Cell Phone
Gadgets - Largest Mobile/Cell Phone: "Largest Mobile/Cell Phone
WHO:
Cricket Communications and Samsung Mobile
WHAT:
4.57 x 3.42 x .74 m (15 x 11.2 x 2.5 ft)
WHERE:
Illinois, USA
WHEN:
11 March 2009
The largest functioning mobile phone is a scaled up Samsung SCH-r450. It measures 4.57 x 3.42 x .74 m (15 x 11.2 x 2.5 ft), was achieved by Cricket Communications and Samsung Mobile, and was unveiled at an event coordinated by creative agency Neverstop (all USA) in Chicago, Illinois, USA, on 11 March 2009."
WHO:
Cricket Communications and Samsung Mobile
WHAT:
4.57 x 3.42 x .74 m (15 x 11.2 x 2.5 ft)
WHERE:
Illinois, USA
WHEN:
11 March 2009
The largest functioning mobile phone is a scaled up Samsung SCH-r450. It measures 4.57 x 3.42 x .74 m (15 x 11.2 x 2.5 ft), was achieved by Cricket Communications and Samsung Mobile, and was unveiled at an event coordinated by creative agency Neverstop (all USA) in Chicago, Illinois, USA, on 11 March 2009."
People & Places - Largest Human Chain
People & Places - Largest Human Chain: "Largest Human Chain
WHO:
Bangladesh Awami League
WHAT:
5 milion people
1,050 km (652.4 miles)
WHERE:
From Teknaf to Tentulia, Bangladesh
WHEN:
December 11, 2004
On December 11, 2004, over 5 million people joined hands to form a human chain, 1,050 km (652.4 miles) long from Teknaf to Tentulia, Bangladesh."
WHO:
Bangladesh Awami League
WHAT:
5 milion people
1,050 km (652.4 miles)
WHERE:
From Teknaf to Tentulia, Bangladesh
WHEN:
December 11, 2004
On December 11, 2004, over 5 million people joined hands to form a human chain, 1,050 km (652.4 miles) long from Teknaf to Tentulia, Bangladesh."
Big Money - Most Valuable Pair of Jeans
Big Money - Most Valuable Pair of Jeans: "Most valuable pair of jeans
WHO:
Levi Strauss & Co
WHAT:
$60,000 (£33,230)
WHERE:
USA
WHEN:
June 15, 2005
An original pair of Levi Strauss & Co (USA) 501 jeans aged over 115 years old were sold by Randy Knight (USA) to an anonymous collector (Japan) for $60,000 (£33,230) through internet auction site eBay on June 15, 2005."
WHO:
Levi Strauss & Co
WHAT:
$60,000 (£33,230)
WHERE:
USA
WHEN:
June 15, 2005
An original pair of Levi Strauss & Co (USA) 501 jeans aged over 115 years old were sold by Randy Knight (USA) to an anonymous collector (Japan) for $60,000 (£33,230) through internet auction site eBay on June 15, 2005."
Big Money - Most Valuable Guitar
Big Money - Most Valuable Guitar: "Most valuable guitar
WHO:
Reach Out To Asia
WHAT:
US$2.7 million (then £1.57 million)
WHERE:
Ritz-Carlton Hotel, Doha, Qatar
WHEN:
November 17, 2005
A Fender Stratocaster guitar signed by a host of music legends fetched US$2.7 million (then £1.57 million) at a charity auction for Reach Out To Asia at the Ritz-Carlton Hotel, Doha, Qatar, on November 17, 2005. Stars who signed the guitar included Mick Jagger, Keith Richards, Eric Clapton, Paul McCartney, Jimmy Page and Brian May (all UK). The Reach Out To Asia campaign seeks to support worthy causes around the world, with particular emphasis on the Asian continent."
WHO:
Reach Out To Asia
WHAT:
US$2.7 million (then £1.57 million)
WHERE:
Ritz-Carlton Hotel, Doha, Qatar
WHEN:
November 17, 2005
A Fender Stratocaster guitar signed by a host of music legends fetched US$2.7 million (then £1.57 million) at a charity auction for Reach Out To Asia at the Ritz-Carlton Hotel, Doha, Qatar, on November 17, 2005. Stars who signed the guitar included Mick Jagger, Keith Richards, Eric Clapton, Paul McCartney, Jimmy Page and Brian May (all UK). The Reach Out To Asia campaign seeks to support worthy causes around the world, with particular emphasis on the Asian continent."
Guinness World Records - Modern Society - Home Page
Guinness World Records - Modern Society - Home Page: "Modern Society
FASTEST GAME OF OPERATION
The fastest time to complete the game of Operation was 21.87 seconds achieved by Maharoof Decibels (India) at the Guinness World Records Pavilion in Global Village, Dubai, UAE, on 28 November 2008."
FASTEST GAME OF OPERATION
The fastest time to complete the game of Operation was 21.87 seconds achieved by Maharoof Decibels (India) at the Guinness World Records Pavilion in Global Village, Dubai, UAE, on 28 November 2008."
Golden Oldies - Oldest Tandem Parachute Jump (Female)
Golden Oldies - Oldest Tandem Parachute Jump (Female): "Oldest Tandem Parachute Jump (Female)
WHO:
Estrid Geertsen
WHAT:
100 years 60 days
WHERE:
Roskilde, Denmark
WHEN:
September 30, 2004
Estrid Geertsen (Denmark, b. August 1, 1904) made a tandem parachute jump on September 30, 2004 from an altitude of 4,000 m (13,100 ft) over Roskilde, Demark, at the age of 100 years 60 days."
WHO:
Estrid Geertsen
WHAT:
100 years 60 days
WHERE:
Roskilde, Denmark
WHEN:
September 30, 2004
Estrid Geertsen (Denmark, b. August 1, 1904) made a tandem parachute jump on September 30, 2004 from an altitude of 4,000 m (13,100 ft) over Roskilde, Demark, at the age of 100 years 60 days."
Golden Oldies - Oldest Wall of Death Rider
Golden Oldies - Oldest Wall of Death Rider:
WHO:
Jerry De Roye
WHAT:
September 4, 1927
WHERE:
USA
WHEN:
As of 1956
The oldest rider to regularly perform in public on the Wall of Death is Jerry De Roye (USA, b. Gerald Jones, September 4, 1927). He continues to present his Trick'n'Stunt performances on the vertical Wall of Death riding a 1927 V-Twin Indian Type 101 'Scout' motorcycle.
Jerry first watched a Wall of Death stunt when he was 11 years old on a visit to a local musement park and immediately decided it was all he wanted to do in life. However, when he approached riders to ask to be trained many were reluctant as competition in the business was fierce and the last thing they wanted was another rider on the circuit. By chance though, during a stay in hospital, he was browsing through a magazine when he saw an ad that asked for a Wall of Death rider. As soon as he left hospital he went to the address not expecting Eddie Monte to open the door. Monte a.k.a. Speedy Williams was Jerry's idol when he had regularly visited fair grounds as a youngster. After a few months of training Jerry was ready but there was one thing missing: a name. Shortening Gerald to Jerry, picking out Roye from a magazine about musician"
WHO:
Jerry De Roye
WHAT:
September 4, 1927
WHERE:
USA
WHEN:
As of 1956
The oldest rider to regularly perform in public on the Wall of Death is Jerry De Roye (USA, b. Gerald Jones, September 4, 1927). He continues to present his Trick'n'Stunt performances on the vertical Wall of Death riding a 1927 V-Twin Indian Type 101 'Scout' motorcycle.
Jerry first watched a Wall of Death stunt when he was 11 years old on a visit to a local musement park and immediately decided it was all he wanted to do in life. However, when he approached riders to ask to be trained many were reluctant as competition in the business was fierce and the last thing they wanted was another rider on the circuit. By chance though, during a stay in hospital, he was browsing through a magazine when he saw an ad that asked for a Wall of Death rider. As soon as he left hospital he went to the address not expecting Eddie Monte to open the door. Monte a.k.a. Speedy Williams was Jerry's idol when he had regularly visited fair grounds as a youngster. After a few months of training Jerry was ready but there was one thing missing: a name. Shortening Gerald to Jerry, picking out Roye from a magazine about musician"
Unusual Skills - Strangest Diet
Unusual Skills - Strangest Diet: "Strangest Diet
WHO:
Michel Lotito
(aka Mr Mangetout)
WHAT:
900 g (2 lb) of metal per day
WHERE:
France
WHEN:
As of 1959
Michel Lotito (aka Monsieur Mangetout) from Grenoble, France, has been eating metal and glass since 1959. Gastroenterologists have described his ability to consume 900 g (2 lb) of metal per day as 'unique'. Mangetout - Michel's nickname - literally translates as 'eats everything'. Michel says bananas and hard-boiled eggs make him sick."
WHO:
Michel Lotito
(aka Mr Mangetout)
WHAT:
900 g (2 lb) of metal per day
WHERE:
France
WHEN:
As of 1959
Michel Lotito (aka Monsieur Mangetout) from Grenoble, France, has been eating metal and glass since 1959. Gastroenterologists have described his ability to consume 900 g (2 lb) of metal per day as 'unique'. Mangetout - Michel's nickname - literally translates as 'eats everything'. Michel says bananas and hard-boiled eggs make him sick."
Longest Cricket Marathon
Longest Cricket Marathon
WHO:
Raymond Terrace District Cricket Club
WHAT:
66 hr 16 min
WHERE:
New South Wales, Australia
WHEN:
24-27 January 2009
The longest cricket marathon is 66 hr 16 min and was achieved by Raymond Terrace District Cricket Club at the King Park Sports Complex, Raymond Terrace, New South Wales, Australia, on 24-27 January 2009.
Surpassed the old record by more than 6 hours.
WHO:
Raymond Terrace District Cricket Club
WHAT:
66 hr 16 min
WHERE:
New South Wales, Australia
WHEN:
24-27 January 2009
The longest cricket marathon is 66 hr 16 min and was achieved by Raymond Terrace District Cricket Club at the King Park Sports Complex, Raymond Terrace, New South Wales, Australia, on 24-27 January 2009.
Surpassed the old record by more than 6 hours.
Friday, May 22, 2009
AGRICULTURE INCOME TAX
Agriculture Income Tax
It is high time that modus operandi of Provincial and Federal Sales Tax be adopted in respect of Provincial Agriculture Income Tax under the Income Tax Ordinance, 2001. The Income Tax Department of Federal Board of Revenue should be entrusted to convert this dream into reality. However, it is suggested that the gross revenue less collection charges based on time-spent basis must be transferred to provinces on monthly basis. In furtherance, given the cyclical nature of agriculture, it is suggested that agriculture income be taxed on two years average basis.
Article courtesy of Muhammad Ashraf
It is high time that modus operandi of Provincial and Federal Sales Tax be adopted in respect of Provincial Agriculture Income Tax under the Income Tax Ordinance, 2001. The Income Tax Department of Federal Board of Revenue should be entrusted to convert this dream into reality. However, it is suggested that the gross revenue less collection charges based on time-spent basis must be transferred to provinces on monthly basis. In furtherance, given the cyclical nature of agriculture, it is suggested that agriculture income be taxed on two years average basis.
Article courtesy of Muhammad Ashraf
SALES AND EXCISE TAX
Sales and Excise Tax
It is strongly suggested that the rates of sales be brought within the range of 10 to 12 percent instead of existing range of 15% to 21% in order to align the rates with the rates prevailing in the region. It is suggested that concerned member of FBR must identify potential sectors other than textile, beverages, tobacco, cement, sugar, telecommunication, oil and gas exploration and imports not merely individual businesses. This could only be possible in close liaison with federal bearue of statistics and State Bank of Pakistan.
It is further suggested that a minimum of at least 0.5% or 1% sales tax be levied on agriculture produce to collect the data relating to supply chain. This could be done through the sales tax collection agents, which include government departments and purchaser of such produce.
It is further suggested that the issue of tax fraud in supply chain management and black listing require fresh thought in consultation with the business community. It is suggested that refunds need only to be blocked to the extent of black listed supplier or customer. It is worthwhile here to note that a similar provision exists in all developing countries and the decision of European Court of Justice is worth considering for any such negotiation and new modus operandi.
Currently, FBR is monitoring the collection of sales tax on services, which is promulgated through the Provincial Sales Tax Ordinances. It is suggested that FBR should identify new service sectors and extend the existing list of five items. The potential sectors may include professional services.
Moreover, it is suggested that input and output relating to sales and excise tax should be made adjustable by amending section 7 and omitting second schedule of the Federal Excise Act, 2005.
Article courtesy of Muhammad Ashraf
It is strongly suggested that the rates of sales be brought within the range of 10 to 12 percent instead of existing range of 15% to 21% in order to align the rates with the rates prevailing in the region. It is suggested that concerned member of FBR must identify potential sectors other than textile, beverages, tobacco, cement, sugar, telecommunication, oil and gas exploration and imports not merely individual businesses. This could only be possible in close liaison with federal bearue of statistics and State Bank of Pakistan.
It is further suggested that a minimum of at least 0.5% or 1% sales tax be levied on agriculture produce to collect the data relating to supply chain. This could be done through the sales tax collection agents, which include government departments and purchaser of such produce.
It is further suggested that the issue of tax fraud in supply chain management and black listing require fresh thought in consultation with the business community. It is suggested that refunds need only to be blocked to the extent of black listed supplier or customer. It is worthwhile here to note that a similar provision exists in all developing countries and the decision of European Court of Justice is worth considering for any such negotiation and new modus operandi.
Currently, FBR is monitoring the collection of sales tax on services, which is promulgated through the Provincial Sales Tax Ordinances. It is suggested that FBR should identify new service sectors and extend the existing list of five items. The potential sectors may include professional services.
Moreover, it is suggested that input and output relating to sales and excise tax should be made adjustable by amending section 7 and omitting second schedule of the Federal Excise Act, 2005.
Article courtesy of Muhammad Ashraf
Compensations, Additional Tax, Notional Interest and Refunds
Compensations, Additional Tax, Notional Interest and Refunds
The Federal Board of Revenue must emerge as standing with those revenue authorities that provides greater scope of tax payment deferrals where viable businesses are having difficulty in meeting tax payments due because of economic conditions. The recent trend of having conducting audits under section 177 and reluctance of Commissioners of Income Tax in not exercising deferral powers provided under section 137 in order to achieve their targets are nothing but adding fuel to fire.
It is suggested that compensation on refunds to small and medium sized businesses be issued at regular intervals as currently refunds of Rs50,000 or less are issued more rapidly. In furtherance, it is also suggested that the rate of compensation, benchmark of notional interest on interest free loan and additional tax be aligned with KIBOR. These steps will provide a sigh of relief during liquidity crises and help in generating economic activities.
Article courtesy of Muhammad Ashraf
The Federal Board of Revenue must emerge as standing with those revenue authorities that provides greater scope of tax payment deferrals where viable businesses are having difficulty in meeting tax payments due because of economic conditions. The recent trend of having conducting audits under section 177 and reluctance of Commissioners of Income Tax in not exercising deferral powers provided under section 137 in order to achieve their targets are nothing but adding fuel to fire.
It is suggested that compensation on refunds to small and medium sized businesses be issued at regular intervals as currently refunds of Rs50,000 or less are issued more rapidly. In furtherance, it is also suggested that the rate of compensation, benchmark of notional interest on interest free loan and additional tax be aligned with KIBOR. These steps will provide a sigh of relief during liquidity crises and help in generating economic activities.
Article courtesy of Muhammad Ashraf
Banking Industry
Banking IndustryThe banking industry has expanded itself very rapidly in the urban areas while the rural areas were neglected. It is also a part of corporate social responsibility that branches need to be set up in rural areas, however, this would have serious implications over the profitability of banks who may not be ready to compromise over the shareholders value. It is suggested that the cost of setting up the branches in rural areas be allowed as tax deductible expenditure while the three years losses relating to branches set up in rural areas be allowed at one hundred and thirty five percent.
Further, the seventh schedule has not proved to be separatim legislation as in the case of fourth and fifth schedule and the very purpose remain unresolved. Special provision relating to banking industry in the main enactment like section 28, 29A, 30 and 31 of Income Tax Ordinance, 2001 were not specifically embodied in seventh schedule. Consequently, the certainty is still lacking!
Further, the non-alignment of SBP and FBR policies in relation to irrecoverable debt and issue of forced sale value has seriously affected the banking industry. These issues need to be resolved in consultation with banking industry for future purposes. Further, during this recessionary period the three percent limit prescribed in section 29A in respect of consumer loans requires a revisit.
In furtherance, it is interesting to note that UK revenue authorities have amended its stamp duty act to facilitate the Islamic Banking. It is high time that provincial governments do consult the Islamic Banks to eliminate the excessive collection of stamp duty on shariah compliant financial products as part of the provincial budget exercise.
Article courtesy of Muhammad Ashraf
Further, the seventh schedule has not proved to be separatim legislation as in the case of fourth and fifth schedule and the very purpose remain unresolved. Special provision relating to banking industry in the main enactment like section 28, 29A, 30 and 31 of Income Tax Ordinance, 2001 were not specifically embodied in seventh schedule. Consequently, the certainty is still lacking!
Further, the non-alignment of SBP and FBR policies in relation to irrecoverable debt and issue of forced sale value has seriously affected the banking industry. These issues need to be resolved in consultation with banking industry for future purposes. Further, during this recessionary period the three percent limit prescribed in section 29A in respect of consumer loans requires a revisit.
In furtherance, it is interesting to note that UK revenue authorities have amended its stamp duty act to facilitate the Islamic Banking. It is high time that provincial governments do consult the Islamic Banks to eliminate the excessive collection of stamp duty on shariah compliant financial products as part of the provincial budget exercise.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (WHT Regime Rates and Refund)
WHT Regime Rates and RefundOld assesses and now the taxpayers dont know that two provisions of WHT imported from Income Tax Act, 1922 now spread over existing Income Tax Ordinance, 2001 to cater the taxability of transactions. Although the WHT provisions cover almost all major types of transactions but FBR failed to facilitate the business that are currently facing two major problems.
Firstly, the payer businesses normally add up the WHT rate on top of the value of invoices just to remain in businesses and in need of supply or service. Secondly, the taxpayer being prospective recipient of WHT payment receipt cannot oblige the payer of to provide him or her either WHT deduction certificate or Tax Payment receipt, as there is no redresser or penal provision to compel them. Consequently, the refunds are not always verified.
FBR must incorporate a modus operandi to curb this menace. A suggested modus operandi may include appearance of such grossing up either on the face of WHT payment receipt or statement under section 165 apart from redresser or penal provision for obtaining the WHT receipt. Please check my detailed article on WHT problems published earlier.
Article courtesy of Muhammad Ashraf
Firstly, the payer businesses normally add up the WHT rate on top of the value of invoices just to remain in businesses and in need of supply or service. Secondly, the taxpayer being prospective recipient of WHT payment receipt cannot oblige the payer of to provide him or her either WHT deduction certificate or Tax Payment receipt, as there is no redresser or penal provision to compel them. Consequently, the refunds are not always verified.
FBR must incorporate a modus operandi to curb this menace. A suggested modus operandi may include appearance of such grossing up either on the face of WHT payment receipt or statement under section 165 apart from redresser or penal provision for obtaining the WHT receipt. Please check my detailed article on WHT problems published earlier.
Article courtesy of Muhammad Ashraf
FAVORABLE BUSINESS ENVIRONMENT
FAVORABLE BUSINESS ENVIRONMENT
The budget need to introduce measure designed to provide support to Pakistani businesses and help stimulate the economy in what are recognized as very difficult times.
Transfer Pricing and Advance Pricing AgreementsThe present rules relating to transfer pricing are provided in Income Tax Rules, 2002 that are not in line with specific transfer pricing legislation in developed countries. Given the global trend of tax reduction and the growth in popularity of use of international business vehicles which, if appropriately structured, pay little or no tax anywhere, there has been continuous drain of profit by way of transfer pricing out of Pakistan.
Moreover, international trade has inevitably called for the need of exchange of goods or services amongst group entities in different jurisdictions. Cross border activities are no longer confined to the transfer of goods and materials, but evolving in variety and sophistication.
Multinational companies engage in transfer of intellectual properties and provision of management and consultancy services, whilst financial institutions engage in projects with their international partners in fund raising, asset management and financial product trading.
All these activities involve allocation of income among parties different jurisdictions, and businesses are thus exposed to tax risks on transfer pricing either locally in Pakistan or in location where those entities operate. Consequently, double taxation may also arise in the absence of proper transfer pricing rules.
Lack of clear and unambiguous transfer pricing rules in Pakistan creates uncertainties in international and regional businesses in structuring their businesses or making commercial decisions. Businesses may also tend to allocate profits to jurisdictions with lower tax cost or to location they fear they may be challenged by tax authorities and thus depriving Pakistans fair share of revenue.
It is strongly suggested that the uncertainties surrounding the transfer pricing rules need to be eliminated by adopting the international practice in transfer pricing which includes allowing taxpayer to apply for Advance Transfer Pricing Agreement [APA] with the Inland Revenue department and other departments of FBR as Advance Ruling can not be equated with an APA.
Proper transfer pricing legislation can ensure the predictability of tax liabilities of taxpayers in their cross border transactions as well as they are not doubly taxed in Pakistan and other jurisdictions. Certainty in taxation of cross border activities is essential in promoting international trade and businesses while ensuring businesses that engage in cross border activities with related entities do pay their fair share of tax in Pakistan.
Article courtesy of Muhammad Ashraf
The budget need to introduce measure designed to provide support to Pakistani businesses and help stimulate the economy in what are recognized as very difficult times.
Transfer Pricing and Advance Pricing AgreementsThe present rules relating to transfer pricing are provided in Income Tax Rules, 2002 that are not in line with specific transfer pricing legislation in developed countries. Given the global trend of tax reduction and the growth in popularity of use of international business vehicles which, if appropriately structured, pay little or no tax anywhere, there has been continuous drain of profit by way of transfer pricing out of Pakistan.
Moreover, international trade has inevitably called for the need of exchange of goods or services amongst group entities in different jurisdictions. Cross border activities are no longer confined to the transfer of goods and materials, but evolving in variety and sophistication.
Multinational companies engage in transfer of intellectual properties and provision of management and consultancy services, whilst financial institutions engage in projects with their international partners in fund raising, asset management and financial product trading.
All these activities involve allocation of income among parties different jurisdictions, and businesses are thus exposed to tax risks on transfer pricing either locally in Pakistan or in location where those entities operate. Consequently, double taxation may also arise in the absence of proper transfer pricing rules.
Lack of clear and unambiguous transfer pricing rules in Pakistan creates uncertainties in international and regional businesses in structuring their businesses or making commercial decisions. Businesses may also tend to allocate profits to jurisdictions with lower tax cost or to location they fear they may be challenged by tax authorities and thus depriving Pakistans fair share of revenue.
It is strongly suggested that the uncertainties surrounding the transfer pricing rules need to be eliminated by adopting the international practice in transfer pricing which includes allowing taxpayer to apply for Advance Transfer Pricing Agreement [APA] with the Inland Revenue department and other departments of FBR as Advance Ruling can not be equated with an APA.
Proper transfer pricing legislation can ensure the predictability of tax liabilities of taxpayers in their cross border transactions as well as they are not doubly taxed in Pakistan and other jurisdictions. Certainty in taxation of cross border activities is essential in promoting international trade and businesses while ensuring businesses that engage in cross border activities with related entities do pay their fair share of tax in Pakistan.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Equal Opportunity for Accountants)
Equal Opportunity for Accountants
It is suggested that members of Association of Chartered Certified Accountants, Institute of Chartered Accountants of Pakistan and Institute of Cost and Management Accountants of Pakistan should be treated at par within the direct and indirect tax code, that is, Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005 because ACCA is offering Pakistan tax and corporate law as part of its syllabus while ICMAP has a long professional history. Sales Tax Act, 1990 read with Chapter IX of Sales Tax Rules, 2006 be aligned with Section 223(11) of the Income Tax Ordinance, 2001 read with rule 225 of the Income Tax Rules, 2002.
These include the provision related to outsourcing of audit, appointment of experts and alternate dispute resolution committees. Further, part III of ICMAP and Intermediate examination are eligible to apply for Income Tax Practitioners. It is suggested that students clearing Foundation examination of ACCA should also be treated at par and be allowed to apply for Income Tax Practitioner.
It is surprising to note that even an illiterate person can audit the accounts of a private limited company not being a subsidiary of a public limited company having paid up capital of less than three million. It is suggested that keeping an eye over the inflation since the introduction of this limit in 1999, the limit of three million be enhanced to three hundred million in case of limited companies. Further, the members of ACCA, ICMAP and ICAP members be specified as auditors for private limited companies having paid up capital upto 300 million, guarantee limited and partnership having more than 20 members.
Article courtesy of Muhammad Ashraf
It is suggested that members of Association of Chartered Certified Accountants, Institute of Chartered Accountants of Pakistan and Institute of Cost and Management Accountants of Pakistan should be treated at par within the direct and indirect tax code, that is, Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005 because ACCA is offering Pakistan tax and corporate law as part of its syllabus while ICMAP has a long professional history. Sales Tax Act, 1990 read with Chapter IX of Sales Tax Rules, 2006 be aligned with Section 223(11) of the Income Tax Ordinance, 2001 read with rule 225 of the Income Tax Rules, 2002.
These include the provision related to outsourcing of audit, appointment of experts and alternate dispute resolution committees. Further, part III of ICMAP and Intermediate examination are eligible to apply for Income Tax Practitioners. It is suggested that students clearing Foundation examination of ACCA should also be treated at par and be allowed to apply for Income Tax Practitioner.
It is surprising to note that even an illiterate person can audit the accounts of a private limited company not being a subsidiary of a public limited company having paid up capital of less than three million. It is suggested that keeping an eye over the inflation since the introduction of this limit in 1999, the limit of three million be enhanced to three hundred million in case of limited companies. Further, the members of ACCA, ICMAP and ICAP members be specified as auditors for private limited companies having paid up capital upto 300 million, guarantee limited and partnership having more than 20 members.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Broadening Of Tax Base)
Broadening Of Tax Base
Civic Sense has never been part of our primary and secondary school syllabus although, nowadays good private schools are teaching this as part of their syllabus. Similarly, Federal Board of Revenue need to start negotiation with Ministry of Education to incorporate basic income, sales and excise tax computations as part of the syllabus of Mathematics while a considerable part of economics syllabus need to be negotiated for incorporation of basic rationale of direct and indirect tax code with specific reference to the names of the laws. Further, Income and Sales Tax Practitioner certificate need to be given to only those graduates who have studied corporate and tax laws of Pakistan as part of their syllabus being two full-fledged subjects instead of a mere part.
In furtherance, a new member Member Broadening of Tax Base be devoted. The member needs to be equipped with appropriate work force and work in close liaison with DG Withholding Taxes. The prime responsibility of such member may include liaising with various chambers and local association of various segments of businesses association to identify inducement for tax registration. The issue of new registrants prior years tax issues may be dealt within the panorama of section 120A and 146B. However, it is also suggested that the salaries of such staff be compensated through potential tax recovery also in the shape of bonus on realization of tax. The scope of such member should include direct and indirect tax code.
It is strongly suggested that the withholding tax statements under section 165 of the Income Tax Ordinance, 2001 be analyzed carefully. The NTN number column needs to be checked with NTN database to identify potential new taxpayers. This would help in identifying non-filers of return of total income and sales tax returns. Further exercise should also be extended to PACCS database. Moreover, the sales tax registration numbers should be replaced with Taxpayer Identification numbers which will be one point of identification.
Article courtesy of Muhammad Ashraf
Civic Sense has never been part of our primary and secondary school syllabus although, nowadays good private schools are teaching this as part of their syllabus. Similarly, Federal Board of Revenue need to start negotiation with Ministry of Education to incorporate basic income, sales and excise tax computations as part of the syllabus of Mathematics while a considerable part of economics syllabus need to be negotiated for incorporation of basic rationale of direct and indirect tax code with specific reference to the names of the laws. Further, Income and Sales Tax Practitioner certificate need to be given to only those graduates who have studied corporate and tax laws of Pakistan as part of their syllabus being two full-fledged subjects instead of a mere part.
In furtherance, a new member Member Broadening of Tax Base be devoted. The member needs to be equipped with appropriate work force and work in close liaison with DG Withholding Taxes. The prime responsibility of such member may include liaising with various chambers and local association of various segments of businesses association to identify inducement for tax registration. The issue of new registrants prior years tax issues may be dealt within the panorama of section 120A and 146B. However, it is also suggested that the salaries of such staff be compensated through potential tax recovery also in the shape of bonus on realization of tax. The scope of such member should include direct and indirect tax code.
It is strongly suggested that the withholding tax statements under section 165 of the Income Tax Ordinance, 2001 be analyzed carefully. The NTN number column needs to be checked with NTN database to identify potential new taxpayers. This would help in identifying non-filers of return of total income and sales tax returns. Further exercise should also be extended to PACCS database. Moreover, the sales tax registration numbers should be replaced with Taxpayer Identification numbers which will be one point of identification.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Regional Hub)
Regional Hub
PortsKarachi, Bin Qasim and Gawadar ports are the entrance points into the region. Unfortunately, these un-quantifiable natural resources had not been transformed into effective multinational regional hub points for creation of regional headquarters.
Currently, tax incentives for regional headquarters are provided by many jurisdictions including Singapore, Malaysia and the Philippines. In Singapore, a wide range of tax and other initiatives are in place to promote financial services including asset management services. These include tax exemptions and concession on trading and fee income made by financial services companies and fund management companies.
Tax incentive scheme is also available to encourage businesses to undertake high value added peripheral services to support financial institutions. All these measures are meant to encourage financial institutions to set up their operations in Singapore.
Given Pakistans geo strategic location coupled with natural ports, investors would be more willing to set up their regional headquarters in Pakistan in serving their investment in Central Asian Republics and Afghanistan subject to the provision of specific tax incentives for regional headquarters.
Attracting such new investments in regional headquarters would provide jobs and to maintain prosperity. Government should come up with to provide Pakistan the competitive edge by providing concessionary tax rates Half of existing tax rates for regional headquarters activities which are of substantial scale and are of the nature of investment, general and financial management and marketing with a broad geographic coverage of CARs.
Article courtesy of Muhammad Ashraf
PortsKarachi, Bin Qasim and Gawadar ports are the entrance points into the region. Unfortunately, these un-quantifiable natural resources had not been transformed into effective multinational regional hub points for creation of regional headquarters.
Currently, tax incentives for regional headquarters are provided by many jurisdictions including Singapore, Malaysia and the Philippines. In Singapore, a wide range of tax and other initiatives are in place to promote financial services including asset management services. These include tax exemptions and concession on trading and fee income made by financial services companies and fund management companies.
Tax incentive scheme is also available to encourage businesses to undertake high value added peripheral services to support financial institutions. All these measures are meant to encourage financial institutions to set up their operations in Singapore.
Given Pakistans geo strategic location coupled with natural ports, investors would be more willing to set up their regional headquarters in Pakistan in serving their investment in Central Asian Republics and Afghanistan subject to the provision of specific tax incentives for regional headquarters.
Attracting such new investments in regional headquarters would provide jobs and to maintain prosperity. Government should come up with to provide Pakistan the competitive edge by providing concessionary tax rates Half of existing tax rates for regional headquarters activities which are of substantial scale and are of the nature of investment, general and financial management and marketing with a broad geographic coverage of CARs.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Exploitation of Natural Resources)
Exploitation of Natural Resources
Sind, NWFP and Balochistan are the hub of natural resources Salt, Gold, Copper, coal oil and gas reserves whilst rice and wheat is shared generously by Punjab and Sind apart from industrial infrastructure duly management. All this is nothing but mutual sharing as in isolation every one is the net looser! For the past more than six decades, the Governments had not effectively and effectively discharged their development expenditure and are the hottest question in town now.
It is suggested that special provisions need to be introduced in direct and indirect tax codes whereby new exploitation of natural resources zones be set up in Sind, NWFP and Balochistan which need to be exempted from tax through the concession agreement subject to certain conditions. The prime condition need to be adherence of corporate social responsibility for instance hiring of unskilled local labor to the extent of at least 50%, development of one local school and one technical school of mining or exploration in the area within a time frame.
Article courtesy of Muhammad Ashraf
Sind, NWFP and Balochistan are the hub of natural resources Salt, Gold, Copper, coal oil and gas reserves whilst rice and wheat is shared generously by Punjab and Sind apart from industrial infrastructure duly management. All this is nothing but mutual sharing as in isolation every one is the net looser! For the past more than six decades, the Governments had not effectively and effectively discharged their development expenditure and are the hottest question in town now.
It is suggested that special provisions need to be introduced in direct and indirect tax codes whereby new exploitation of natural resources zones be set up in Sind, NWFP and Balochistan which need to be exempted from tax through the concession agreement subject to certain conditions. The prime condition need to be adherence of corporate social responsibility for instance hiring of unskilled local labor to the extent of at least 50%, development of one local school and one technical school of mining or exploration in the area within a time frame.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Unaligned Monetary and Fiscal Policies)
Unaligned Monetary and Fiscal Policies
The points discussed identify the key factors of current account deficit and reasons of loss in budgeted figures. It is high time that these policies be aligned by having effective interaction among concerned ministries and organization that is FBR, SBP, EPB, SECP etc instead of individual heuristic approach. Consequently, the fiscal laws and monetary / fiscal regulators efforts need to be coordinated.
Article courtesy of Muhammad Ashraf
The points discussed identify the key factors of current account deficit and reasons of loss in budgeted figures. It is high time that these policies be aligned by having effective interaction among concerned ministries and organization that is FBR, SBP, EPB, SECP etc instead of individual heuristic approach. Consequently, the fiscal laws and monetary / fiscal regulators efforts need to be coordinated.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Balance of Payment)
Balance of PaymentFirstly, it is really sad to state that role of EPB was an inactive body instead of a proactive body. EPB fails to identify the new exportable items and little has been done to promote cement etc. EPB fails to provide the exporter the data relating to competitive prices offered by neighboring countries and strategically making Pakistans export survive in competitive environment.
Secondly, custom department of the FBR was busy in merely unearthing the under invoicing and misapplication of correct duty rates instead of providing any data compiled after due brain storming session to identify imports of items which are already available in Pakistan, items which are luxurious in nature, etc. The core reason is that either there is no such department or if there is then they are not effectively trained on this count. Such a process of analysis could easily be undertaken after the computerization that has not been used effectively in the past.
Thirdly, the non-alignment of import, export and trade policy was another core reason. Fourthly, the speculation gain (Capital Gain) exemption even to non-residents has seriously affected the foreign currency reserves.
Last but not least, imported trading items are taxed at 2% Income Tax while locally manufactured items are taxed at 3.5%. Further, commercial importer is not only immune from Sales and Income Tax Audit but by implication from record keeping. What a pity! Further, it is imperative that unnecessary imports be reduced next to zero while the commercial imported trading items be brought under normal tax regime from final tax regime under Income Tax Ordinance, 2001 and Sales Tax Act, 1990.
These measures would not only help us in promoting local manufacturing but would also help us in reducing the gap of balance of payments. EPB should be re-organized for a pro-active role while an analysis wing of the custom department be set up which will ultimately help in formulating a policy. The policies of individual ministries and organization need to be aligned with overall objective, that is, monetary and fiscal policy at the cost of individual heuristic approach.
Article courtesy of Muhammad Ashraf
Secondly, custom department of the FBR was busy in merely unearthing the under invoicing and misapplication of correct duty rates instead of providing any data compiled after due brain storming session to identify imports of items which are already available in Pakistan, items which are luxurious in nature, etc. The core reason is that either there is no such department or if there is then they are not effectively trained on this count. Such a process of analysis could easily be undertaken after the computerization that has not been used effectively in the past.
Thirdly, the non-alignment of import, export and trade policy was another core reason. Fourthly, the speculation gain (Capital Gain) exemption even to non-residents has seriously affected the foreign currency reserves.
Last but not least, imported trading items are taxed at 2% Income Tax while locally manufactured items are taxed at 3.5%. Further, commercial importer is not only immune from Sales and Income Tax Audit but by implication from record keeping. What a pity! Further, it is imperative that unnecessary imports be reduced next to zero while the commercial imported trading items be brought under normal tax regime from final tax regime under Income Tax Ordinance, 2001 and Sales Tax Act, 1990.
These measures would not only help us in promoting local manufacturing but would also help us in reducing the gap of balance of payments. EPB should be re-organized for a pro-active role while an analysis wing of the custom department be set up which will ultimately help in formulating a policy. The policies of individual ministries and organization need to be aligned with overall objective, that is, monetary and fiscal policy at the cost of individual heuristic approach.
Article courtesy of Muhammad Ashraf
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Inflation and Intrest)
ECONOMICS - TURNING THREATS INTO OPPORTUNITIES
Inflation and Interest Rates
The theories relating to co-relation of inflation with interest rates has inherent limitations because these theories do not consider the concept of accretion of wealth in few hands. Consequently, although the money supply was high enough but was in few capitalist hands, hence, keeping the interest rates high only hampers the generation of economic activities.
It is worthwhile here to note that OECD has given instructions to its member countries to decrease interest rates in order to generate economic activities and surprisingly UKs economist are in a process to crack the impact of recession by reducing the interest rate even at less than a single digit.
It can effectively be argued that high interest rates are not co-related with inflation in excessive money supply economic environment and keeping the interest rates at current level or merely reducing it by 200 or 250 basis point would only defer the economic recovery of Pakistan. In the recent monetary policy statement, the discount rates were reduced by 100 basis points but contrary to that during the recent auction of treasury bills, the 3 to 6 months TB rates were very much indifferent from one-year TB rates.
One fails to understand the contradictions by State Bank of Pakistan! SBP must rely on strict control through prudential regulations and not through interest rates where most of the banks are operating in private sector. The existing TB rates are nothing but will increase the cost of deficit financing.
Article courtesy of Muhammad Ashraf
Inflation and Interest Rates
The theories relating to co-relation of inflation with interest rates has inherent limitations because these theories do not consider the concept of accretion of wealth in few hands. Consequently, although the money supply was high enough but was in few capitalist hands, hence, keeping the interest rates high only hampers the generation of economic activities.
It is worthwhile here to note that OECD has given instructions to its member countries to decrease interest rates in order to generate economic activities and surprisingly UKs economist are in a process to crack the impact of recession by reducing the interest rate even at less than a single digit.
It can effectively be argued that high interest rates are not co-related with inflation in excessive money supply economic environment and keeping the interest rates at current level or merely reducing it by 200 or 250 basis point would only defer the economic recovery of Pakistan. In the recent monetary policy statement, the discount rates were reduced by 100 basis points but contrary to that during the recent auction of treasury bills, the 3 to 6 months TB rates were very much indifferent from one-year TB rates.
One fails to understand the contradictions by State Bank of Pakistan! SBP must rely on strict control through prudential regulations and not through interest rates where most of the banks are operating in private sector. The existing TB rates are nothing but will increase the cost of deficit financing.
Article courtesy of Muhammad Ashraf
Finance Bill 2009-2010: Looking into the PESTL Crystal Ball
Whilst the global economy is slowing down under the impact of the US subprime crisis, Pakistan has not remained immune from the suffering of the global turmoil. Pakistan's economic growth is declining sharply and according to International Monetary Fund, the economic growth is anticipated to be 2.5%. Liquidations, layoffs and job cuts are expected to continue. Currently, Pakistans economy is facing the threat of a prolonged recession. The situation is not merely for Pakistan only as according to a recent global survey, auditors report on 25% companies was not on going concern basis!
Under this economic scene, the Finance Bill for 2009-2010 is definitely a challenging task. However, intuitive economists are of the view that enhancing Pakistans competitiveness and regenerating the economic momentum should be the ultimate objective of the Finance Bill for 2009-2010.
Such an objective will gain the acceptance of the taxpayers, hence, the Government should ensure that the totality of governments treatment of its subject, its expenditures and its tax, is just. In achieving this, intuitive economists are of the view that the role of the government is to provide a favorable business environment to facilitate business development and free flow of capital, personnel and resources and to strengthen Pakistan as a preferred point of entry for investment flowing into the region.
Although Pakistans tax system is the most modern system after china in the region but its ranking is nowhere in fairness, simplicity or transparency and recent hoax of meeting the targets further deteriorated the principles of equity, certainty, convenience and efficiency [four cannons of Adam Smith] of our tax system.
In Pakistan, every citizen is experiencing the impact brought by the global economic downturn, every taxpayer is questioning the utilization of $35 billion in without proof war on terror while every businessman is questioning the reason of non-exploitation of natural resources in Sind, NWFP and Balochistan.
With the sluggish condition, every citizen considers that the government should play a leading role to stimulate the economy by tax and other relieves, promote a caring society, and encourage financially responsible behaviors through the tax incentives. Whilst I share the principle of fiscal prudence, every citizen considers that a package of measure is required to help relieve the citizens of Pakistan. This article is a crystal ball for the Finance Bill, 2009.
Under this economic scene, the Finance Bill for 2009-2010 is definitely a challenging task. However, intuitive economists are of the view that enhancing Pakistans competitiveness and regenerating the economic momentum should be the ultimate objective of the Finance Bill for 2009-2010.
Such an objective will gain the acceptance of the taxpayers, hence, the Government should ensure that the totality of governments treatment of its subject, its expenditures and its tax, is just. In achieving this, intuitive economists are of the view that the role of the government is to provide a favorable business environment to facilitate business development and free flow of capital, personnel and resources and to strengthen Pakistan as a preferred point of entry for investment flowing into the region.
Although Pakistans tax system is the most modern system after china in the region but its ranking is nowhere in fairness, simplicity or transparency and recent hoax of meeting the targets further deteriorated the principles of equity, certainty, convenience and efficiency [four cannons of Adam Smith] of our tax system.
In Pakistan, every citizen is experiencing the impact brought by the global economic downturn, every taxpayer is questioning the utilization of $35 billion in without proof war on terror while every businessman is questioning the reason of non-exploitation of natural resources in Sind, NWFP and Balochistan.
With the sluggish condition, every citizen considers that the government should play a leading role to stimulate the economy by tax and other relieves, promote a caring society, and encourage financially responsible behaviors through the tax incentives. Whilst I share the principle of fiscal prudence, every citizen considers that a package of measure is required to help relieve the citizens of Pakistan. This article is a crystal ball for the Finance Bill, 2009.
SBP says that Islamic banking failed to penetrate rural areas
KARACHI (January 04 2009): Although the performance and pace of branch extension by Islamic banking institutions (IBIs) seems impressive, they have largely failed to penetrate the rural areas, and no real efforts have been made in this direction by them, said State Bank of Pakistan (SBP) in its report.According to SBP report on Islamic banking industry for June 2008, Islamic banks had continued their efforts to extend their outreach and specifically the number of branches reached 326 in June 2008 from 289 branches in December 2007. Criticising the slow growth of IBIs in rural areas, the SBP said that though the overall rate of branch network extension was impressive, the IBIs had largely failed to penetrate the rural areas.It said that the agreement on extension of rural branch network and increasing focus on SMEs and microfinance was available in the form of Islamic Banking Strategic Plan chalked out by taking extensive feedback and buy-in from the IBIs, they should work on extending rural branch network, catering to the needs of financially excluded segments of the economy. But there was no real efforts made by IBIs in this direction.The report that despite the overall slowdown in banking, the Islamic banking industry continued its progress and its share of assets in the overall banking system increased by 0.3 percentage points (pp) to 4.3 percent in June 2008."The growth in IBIs is also reflected in increased share of Islamic banking deposits, and financing and investment that stood at 4.0 percent and 4.1 percent respectively at the end of first half of 2008." The deposits of IBIs as on June 30, 2008 stood at Rs 169 billion, reflecting an impressive growth of 15 percent during the first quarter of 2008.In specific terms, shares of savings, fixed and current accounts of customers' deposits were 31 percent, 38 percent and 23 percent respectively. Investment position of IBIs as on June 30, 2008 stood at Rs 34.9 billion, which showed an increase of 20 percent from January-June. The increase in investments reflected the new investment in Sukuk.SBP was expecting that investment would get a further boost in future due to largely issue of GoP 'Ijara Sukuk'. IBIs in Pakistan depict financing (net of provisions) of Rs 131.5 billion at end June 2008, while around 90 percent of financing comes through three modes of financing, that is, Murabaha 38 percent, Ijarah 21.5 percent and Diminishing Musharaka (DM) 29.4 percent.
Courtesy of Business Recorder
Courtesy of Business Recorder
Rural Economic Environment in India
The Indian economy has been passing through the trajectory of high growth for several years. The overall Gross Domestic Product (GDP) is estimated to grow at 8.4 per cent, with the agriculture and allied sector projected to bounce back with 3.9 per cent growth during 2005-06. The Government has also been consolidating its fiscal position, creating a conducive climate for investment activities. Investment demand in the economy is picking up, reflecting the growing dynamism in the industrial sector. The exports have also assumed vibrancy. Thus, the Indian economy as a whole is poised for still higher growth in the coming years.
Agriculture growth has lagged...
Agriculture growth has lagged...
3rd largest producer of food in the world but the growth of the sector has been limited
While the Tenth Plan assumed that agricultural production would grow at the rate of 4.0%, the growth has been less than 1.5% in the first three years
India’s entrepreneurial initiative has been behind growth in other sectors but it is still in a nascent stage with myriad laws coming in the way
Inadequate credit delivery mechanism to the rural sector has been the main cause
Agriculture remains mainstay of livelihood of over 60% of Indian population
3rd largest producer of food in the world but the growth of the sector has been limited
While the Tenth Plan assumed that agricultural production would grow at the rate of 4.0%, the growth has been less than 1.5% in the first three years
India’s entrepreneurial initiative has been behind growth in other sectors but it is still in a nascent stage with myriad laws coming in the way
Inadequate credit delivery mechanism to the rural sector has been the main cause
Agriculture remains mainstay of livelihood of over 60% of Indian population
Thursday, May 21, 2009
Mathodology of Islamic Banking
Methodology
For a literature review, during the search on the internet I got some valid references from the following website.
http://www.islamic-finance.com/research_f.htmhttp://www.islamic-finance.com/resources_f.htm
I would like to mention that I got a lot of e - mails ID’s of those people, who made the research on the topic of Islamic finances. Round about sixty to seventy sources are selected and email to them in the second week of December. After ten to fifteen days I got reply form some persons. And the reply tendency was only twenty percent to the mails send to them. This replies tendency raise the assumption that most of e – mails IDs of that people who made research on this topic during their studentship time and now they in practical fields and now they also have another e – mails IDs. So they are not checking their previous e – mails IDs. It is just like that during the studentship time in University of Wolverhampton I am mostly using University e – mail ID i.e. M.S.Majid@wlv.ac.uk . But prior to this, I used the ID of the bank in which I worked that was sameen.majid@mcb.com.pk . The assumption is also supported by another argument i.e. I mostly use the university ID for mailing purpose and only check hotmail or yahoo account after couples of weeks, if a person mails me on hotmail or yahoo ID it will not be possible for me to comply him within fifteen to twenty days due to non checking these accounts.The major portion of the methodology conducts through telephones in Pakistan to the different officials of the different financial institutions as mentioned acknowledgement. Some of them give the internal information verbally not on e-mail. But due to my previous experience in the field of banking and some personal contacts with the different staff member, time to time they send me the data for the purpose of review and research. But keeping in view the secrecy of internal working and key facts of the policy of the banks, they bound me and got a commitment from me not to produce the internal working papers further as it is, but can high light the issues involved, which is ethically accepted by me.
3.1Variation in Banking Procedure and Level of Development
Islam provides the banking system based on profit and risk sharing rather than the fixed payment of interest after a fixed interval. The Islamic financial institutions borrow and lend money on the basis of profit sharing. But in mortgages lending the Islamic banks also should have the edge over the conventional banking on account of the principle of non-interest. The Islamic banks should get the Fatwa from the renowned Shariah Scholars. In contravention financial system the rate of interest determine by the central bank. Here in Islamic banking context, it should be assumption that the welfare of general public should be kept in mind in making of loan repayment structure. In an Islamic perspective the bank should give the right to all people instead of their previous financial record. Like in case of late payment of monthly rentals of the payment of unit price the Islamic bank should charge some penalty from the borrower, and it should not be consider as the income and the cumulative amount should be spent the welfare work of the public. On the other hand the conventional banks charged the late payment charges (LPC) and treat this amount as income of the bank. (Banking Law, Banking Industry in Pakistan…….. 1992 The Economist Vol. 323, Iss. 7753)The minimum income level should be less than PKR 10,000/- because the majority salary class in government, semi government and privates sector is less than PKR 10,000/-. But the minimum income level for required by the conventional banks is PKR 12,000/- to 18,000/-. But the minimum income required by the Meezan Bank Limited is PKR 20,000/- which is most higher income level than the conventional banks. One side they raise the point that they are working for all masses but on the other they are targeting the rich people, which is contravenes the teachings of Islam.
3.2Banks in Pakistan
As shown in appendix E & F the more than 60 financial institutions are working in Pakistan. Being an Islamic republic the all financial institutions should deal in Islamic system. But unfortunately only four out of these are complete Islamic institutions. And out of these fours at the moment only two are functioning. A study on the growth shows that the in Asia the Islamic banks in retail market are growing tremendously and having a targeted to grow from US$ 50bn to US$ 200bn. So the other conventional institutions should take step to improve the situation. 3.3Banks in Lahore
Lahore is the second biggest city of Pakistan after Karachi. According to populations census in 1998 the Lahore’s population is 5.1 million. More than 95% of the population of the country are Muslims. Upon this ground there should be more Islamic facilities for finances should be available to the public. But the only two banks are providing the mortgage facilities to people. In the Lahore region other top ten conventional banks have more than 470 branches.
3.4Bank’s image – publicity
In the Islamic banking context the bank’s image should be on account of the service or products which it offers by keeping in view the welfare of general public. But inductive aspect the image of the bank is accounted for from their deposit, advances, equity, profit ranking, number of branches they have and from the credit rating. But main source of the bank’s image in the general public is the advertisement of the products which they offer. According to the some staff members the Islamic financial institutions are a new in the field and they are not making a big advertising campaign. By the lack of advertising campaign the Islamic financial institutions can’t create a big name as which they deserve due to the unique procedure free from interest. 3.5Interest free banking in practice (Detail of Lending)
Islam permits the riba or inter free banking and believe on the profit sharing both for the depositors and as well as borrowers. Especially in case of mortgages the bank create joint ownership of the property with the buyer and convert the bank’s finance amount into units by dividing the contribution of finance amount over the total months. And give the opportunity to the borrower to purchase these units within a specified period of time and against this service it charges the rent on the units which are held by the financial institution. In the other words (Islamic term) ‘Murabaha’ is the sale on profit, means cost plus profit. If a person has no funds to purchase a home or property it comes in financial institution and requests it then after checking his credit worthiness and credibility the bank and the borrower jointly purchase the property and financial institution gives the right to further purchase the units of the property into different part within specified period of time. On the other hand it is observed in the conventional banking the bank grant the loan to the borrower and he solely purchase the property and he paid the principal amount and the interest thereon.
3.6Zoning (Lahore, Areas, how bank treat people)
Islam talks about the welfare of whole society not the specific group or class. But according to different bankers the all banks including Islamic and other conventional should finance the amount for home and all the city area. Hence this practice not adopted by the financial institutions they are granting the loans into the specified areas, or in other words they are targeting the rich people. They viewed in that areas the property documents are not cleared and the interest of the bank will be damaged in case of defaults of the customers.
3.7Procedure of mortgage consumer finances, Credit Matrix, Important Elements for Credit Policy
According to different sales head of consumer department, the practice in Lahore, in consumer finances the financial institutions contact with the customer through their sales officers. The sales officer visits the customer or the customer contacts with bank. The customer fills the application andprovides the relevant documents to bank. The bank checks the track record of the customer from the documents to be provided and from the data check facility which is provided by the central bank. Then issue the offer and sanction letter to the customer. Prior to these the bank’s legal consultants check the copies of the documents and appraisal agency value the property. After fulfilling necessary requirement the bank disburse the loan. And after that the external agency management unit (EAMU) of the bank make the necessary arrangements for the completion of the transaction and mark the bank lien on the property. It is observed the some time people having less income proof the bank executive gave the deviation to that customers, it is only for business purposes. Some time bank’s executive gave the deviation to the customers in terms of debt burden, area, but they didn’t grant deviation to that customer which directly affects the bank’s income.
CREDIT INITIATION STRATEGY
Credit initiation checks will be built-in to ensure minimum risk acceptance criteria. These will include:
•Completion of documents – KYC is the primary responsibility of Sales Officer and concerned RM.
•Conformity with eligibility criteria
•Bank statement/tax returns. (for estimating income)
•Satisfactory property valuation
•Satisfactory legal review The credit initiation will be a case-by-case analysis against minimum acceptance criteria as per above.
3.8Context of Staff and Procedure adopted by different financial institutions.
The prime duty of the staff should be to provide the best services to the people. It is observed during the discussion that the hierarchy level in the staff and procedure of the advancing is same in all institutions but the procedure in the Islamic bank in terms of contract between customer and banks are different. Because the Islamic bank made the contract with the customer for the purchase of different units of the mortgage property.As reported by the staff members of a commercial bank the charged documents prepared by the financial institutions are the followings:
AGREEMENT FOR LONG-TERM FINANCING ON MARK-UP BASIS
AGREEMENT TO CREATE REGISTERED MORTGAGE
PROMISSORY NOTE
UNDERTAKING FROM SELLER
UNDERTAING FROM BUYER
AUTHORIZATION TO TAKE THE POSSESSION OF TITLE DOCUMENTS IN CASE OF BALANCE TRANSIn the banks dealing in Islamic operations are preparing the Sale Agreement instead of agreement of long term finance on markup basis. But in other charged they never use the word of interest and remaining charged documents are same.
For a literature review, during the search on the internet I got some valid references from the following website.
http://www.islamic-finance.com/research_f.htmhttp://www.islamic-finance.com/resources_f.htm
I would like to mention that I got a lot of e - mails ID’s of those people, who made the research on the topic of Islamic finances. Round about sixty to seventy sources are selected and email to them in the second week of December. After ten to fifteen days I got reply form some persons. And the reply tendency was only twenty percent to the mails send to them. This replies tendency raise the assumption that most of e – mails IDs of that people who made research on this topic during their studentship time and now they in practical fields and now they also have another e – mails IDs. So they are not checking their previous e – mails IDs. It is just like that during the studentship time in University of Wolverhampton I am mostly using University e – mail ID i.e. M.S.Majid@wlv.ac.uk . But prior to this, I used the ID of the bank in which I worked that was sameen.majid@mcb.com.pk . The assumption is also supported by another argument i.e. I mostly use the university ID for mailing purpose and only check hotmail or yahoo account after couples of weeks, if a person mails me on hotmail or yahoo ID it will not be possible for me to comply him within fifteen to twenty days due to non checking these accounts.The major portion of the methodology conducts through telephones in Pakistan to the different officials of the different financial institutions as mentioned acknowledgement. Some of them give the internal information verbally not on e-mail. But due to my previous experience in the field of banking and some personal contacts with the different staff member, time to time they send me the data for the purpose of review and research. But keeping in view the secrecy of internal working and key facts of the policy of the banks, they bound me and got a commitment from me not to produce the internal working papers further as it is, but can high light the issues involved, which is ethically accepted by me.
3.1Variation in Banking Procedure and Level of Development
Islam provides the banking system based on profit and risk sharing rather than the fixed payment of interest after a fixed interval. The Islamic financial institutions borrow and lend money on the basis of profit sharing. But in mortgages lending the Islamic banks also should have the edge over the conventional banking on account of the principle of non-interest. The Islamic banks should get the Fatwa from the renowned Shariah Scholars. In contravention financial system the rate of interest determine by the central bank. Here in Islamic banking context, it should be assumption that the welfare of general public should be kept in mind in making of loan repayment structure. In an Islamic perspective the bank should give the right to all people instead of their previous financial record. Like in case of late payment of monthly rentals of the payment of unit price the Islamic bank should charge some penalty from the borrower, and it should not be consider as the income and the cumulative amount should be spent the welfare work of the public. On the other hand the conventional banks charged the late payment charges (LPC) and treat this amount as income of the bank. (Banking Law, Banking Industry in Pakistan…….. 1992 The Economist Vol. 323, Iss. 7753)The minimum income level should be less than PKR 10,000/- because the majority salary class in government, semi government and privates sector is less than PKR 10,000/-. But the minimum income level for required by the conventional banks is PKR 12,000/- to 18,000/-. But the minimum income required by the Meezan Bank Limited is PKR 20,000/- which is most higher income level than the conventional banks. One side they raise the point that they are working for all masses but on the other they are targeting the rich people, which is contravenes the teachings of Islam.
3.2Banks in Pakistan
As shown in appendix E & F the more than 60 financial institutions are working in Pakistan. Being an Islamic republic the all financial institutions should deal in Islamic system. But unfortunately only four out of these are complete Islamic institutions. And out of these fours at the moment only two are functioning. A study on the growth shows that the in Asia the Islamic banks in retail market are growing tremendously and having a targeted to grow from US$ 50bn to US$ 200bn. So the other conventional institutions should take step to improve the situation. 3.3Banks in Lahore
Lahore is the second biggest city of Pakistan after Karachi. According to populations census in 1998 the Lahore’s population is 5.1 million. More than 95% of the population of the country are Muslims. Upon this ground there should be more Islamic facilities for finances should be available to the public. But the only two banks are providing the mortgage facilities to people. In the Lahore region other top ten conventional banks have more than 470 branches.
3.4Bank’s image – publicity
In the Islamic banking context the bank’s image should be on account of the service or products which it offers by keeping in view the welfare of general public. But inductive aspect the image of the bank is accounted for from their deposit, advances, equity, profit ranking, number of branches they have and from the credit rating. But main source of the bank’s image in the general public is the advertisement of the products which they offer. According to the some staff members the Islamic financial institutions are a new in the field and they are not making a big advertising campaign. By the lack of advertising campaign the Islamic financial institutions can’t create a big name as which they deserve due to the unique procedure free from interest. 3.5Interest free banking in practice (Detail of Lending)
Islam permits the riba or inter free banking and believe on the profit sharing both for the depositors and as well as borrowers. Especially in case of mortgages the bank create joint ownership of the property with the buyer and convert the bank’s finance amount into units by dividing the contribution of finance amount over the total months. And give the opportunity to the borrower to purchase these units within a specified period of time and against this service it charges the rent on the units which are held by the financial institution. In the other words (Islamic term) ‘Murabaha’ is the sale on profit, means cost plus profit. If a person has no funds to purchase a home or property it comes in financial institution and requests it then after checking his credit worthiness and credibility the bank and the borrower jointly purchase the property and financial institution gives the right to further purchase the units of the property into different part within specified period of time. On the other hand it is observed in the conventional banking the bank grant the loan to the borrower and he solely purchase the property and he paid the principal amount and the interest thereon.
3.6Zoning (Lahore, Areas, how bank treat people)
Islam talks about the welfare of whole society not the specific group or class. But according to different bankers the all banks including Islamic and other conventional should finance the amount for home and all the city area. Hence this practice not adopted by the financial institutions they are granting the loans into the specified areas, or in other words they are targeting the rich people. They viewed in that areas the property documents are not cleared and the interest of the bank will be damaged in case of defaults of the customers.
3.7Procedure of mortgage consumer finances, Credit Matrix, Important Elements for Credit Policy
According to different sales head of consumer department, the practice in Lahore, in consumer finances the financial institutions contact with the customer through their sales officers. The sales officer visits the customer or the customer contacts with bank. The customer fills the application andprovides the relevant documents to bank. The bank checks the track record of the customer from the documents to be provided and from the data check facility which is provided by the central bank. Then issue the offer and sanction letter to the customer. Prior to these the bank’s legal consultants check the copies of the documents and appraisal agency value the property. After fulfilling necessary requirement the bank disburse the loan. And after that the external agency management unit (EAMU) of the bank make the necessary arrangements for the completion of the transaction and mark the bank lien on the property. It is observed the some time people having less income proof the bank executive gave the deviation to that customers, it is only for business purposes. Some time bank’s executive gave the deviation to the customers in terms of debt burden, area, but they didn’t grant deviation to that customer which directly affects the bank’s income.
CREDIT INITIATION STRATEGY
Credit initiation checks will be built-in to ensure minimum risk acceptance criteria. These will include:
•Completion of documents – KYC is the primary responsibility of Sales Officer and concerned RM.
•Conformity with eligibility criteria
•Bank statement/tax returns. (for estimating income)
•Satisfactory property valuation
•Satisfactory legal review The credit initiation will be a case-by-case analysis against minimum acceptance criteria as per above.
3.8Context of Staff and Procedure adopted by different financial institutions.
The prime duty of the staff should be to provide the best services to the people. It is observed during the discussion that the hierarchy level in the staff and procedure of the advancing is same in all institutions but the procedure in the Islamic bank in terms of contract between customer and banks are different. Because the Islamic bank made the contract with the customer for the purchase of different units of the mortgage property.As reported by the staff members of a commercial bank the charged documents prepared by the financial institutions are the followings:
AGREEMENT FOR LONG-TERM FINANCING ON MARK-UP BASIS
AGREEMENT TO CREATE REGISTERED MORTGAGE
PROMISSORY NOTE
UNDERTAKING FROM SELLER
UNDERTAING FROM BUYER
AUTHORIZATION TO TAKE THE POSSESSION OF TITLE DOCUMENTS IN CASE OF BALANCE TRANSIn the banks dealing in Islamic operations are preparing the Sale Agreement instead of agreement of long term finance on markup basis. But in other charged they never use the word of interest and remaining charged documents are same.
Literature Review Of Islamic Banking
The Islamic PerspectiveThe fundamental sources of Islam – Quran and the Sunnah (teaching and traditions) of the Holy Prophet Muhammad (Peace Be Upon Him) – provide guidelines for economic behaviour and a blueprint of how economic system should be organized. (Khan S. Mohsin & Mirakhor, Abbas 1992)Islam is not a new religion; it is the same truth that God revealed through all His prophets. All religions are the same in essence, whether given, for example, to Noah, Abraham, Moses, or Jesus, or to the holy Prophet of Islam. For a fifth of the world’s population, Islam is both a religion and a complete code of life. Economic growth is the main transmission channel for development. Islam does not contradict growth; it promotes sustainable development and growth. The ultimate objectives of an Islamic economic system are achieving development, based on socio-economic justice, care and compassion for all, in terms of complete human personality. Tools prescribed to achieve the socio-economic objectives of the Islamic economic system are the system of Zakat, prohibition of Riba and the Islamic Law of Inheritance. Prohibition of Riba is the cornerstone of Islamic financial transactions; the basis of cooperation between capital and enterprise in Islam is sharing of the risks and gains between the two. (Hussain, Dr. Ishrat 2004) In Islam the practice of paying and receiving interest is prohibited between individuals and the state as much as between one individual to another. (Siddiqi, Muhammad Nejatullah 1983)Those interested in Islamic economics have been endeavouring to develop and crystallize economic concept and theories which confirm to the Islamic ideology and postulates. (Modeling Interest – Free Economy: A Study in Macro-Economics and Development 1991)
Concept of Interest in Islam
“Those who devour Riba shall rise up before Allah like men whom Shaitan has demented by his touch; for they claim that trading is like usury. But Allah has permitted trading and forbidden usury. He that receives an admonition from his Rabb and mends his ways may keep what he has already earned; his faith is in the hand of Allah. But he that pays no heed shall be among the people of fire and shall remain in it forever.” (Surah Al Baqarah 275)A very important pillar of this model is the prohibition of Interest or Riba, which is made clear by the following Qur’anic verse in which Allah (SWT) says:“O, believers, fear Allah, and give up what is still due to you from interest (Riba), if you are true believers. If you do not do so, then take notice of war from Allah and His Messenger. But, if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it.”
(Surah Al Baqra 278-279)Islam is a complete religion; it provides guidance for each and every aspect of human life. Economics is one of the most important aspects, as every human being needs involvement in some kind of economic activity for survival. Islam has provided a complete economic model for a establishing a healthy society. With the expanding focus and scope of Islamic finance worldwide, there is a rapid proliferation of feasible solutions that cater to almost all financial requirements. Ahmad, Khurshid (1981) &<http://www.nbp.com.pk/EcomomicBulletin/Economic%20Bulletin%20Jan-Feb%202005.pdf>Whenever a contract involves a guaranteed profit for one party, riba (interest) is involved (Aly, Remona 2005)
Mortgages Concept in Islamic Banking
According to documented Shariah jurisprudence opinion which is known as Fatwa, the proposed arrangement is having the following transactions:To create joint ownership in the property (Shirkat-al-Milk) Giving the share of the financier to the client on rent. Promise from the client to purchase the units of share of the financier. Actual purchase of the units at different stages. Adjustment of the rental according to the remaining share of the financier in the property. (Muhammad Taqi Usmani 1998) It's a transaction in which a buyer purchases a home through a rent-to-own agreement. A conventional mortgage, in which a buyer repays a loan with interest, violates the Quran, which forbids the payment or receipt of interest.http://www.islam-finance.com/FAQ.htmlThe Holy Quran forbids "riba", which is interest, or usury. Yet Muslims need money and banks need to make a living. Systems are devised to get round the ban. For example, instead of a Muslim holding a mortgage for a house, the bank can own the house and make arrangements for the Muslim gradually to buy it off the bank over a period of years. (Moore, Charles 2004) & <http://www.lariba.com/knowledge-center/faqs.htm#question1>
Government steps
As the part of the Islamization of economic structure the all commercial bank convert their some work to non – interest basis. But the procedure by their selves was un – Islamic declared by Federal Shariat Court (FSC) in 1991, the govt. and other banks were to go appeal in Supreme Court of Pakistan. The Shariat Appellate Bench of Supreme Court of Pakistan upheld the previous decision in 1999. In the light of this order government of Pakistan form a committee to judge the strength and risks of conversion of the interest based system in to Islamic finance system. Because it was not possible to implement this in short term. The State Bank of Pakistan issued criteria for the establishment of Islamic banks in private sector and it decided to promote Islamic banking parallel with the conventional banking. (Hussain, Dr. Ishrat 2004) (For further details See Appendix A)Pakistan’s government is to issue licences for new Islamic banks, the first time that new banking licences would be issued in a decade, according to Shaukat Aziz, finance minister. The decision appears to be a reversal of Pakistan's earlier policy of a cap on the number of private banks in the country with a view to encouraging mergers to build up national banking networks, replacing small, regional banks. However, it is driven mainly by concerns over the controversy surrounding the future of Islamic banking in Pakistan. (Bokhari, Farhan 2002) & (Bokhari, Farhan 2001)Despite annual growth of about 15 per cent, analysts say Islamic banking is being held back because Muslim scholars have yet to define how compatible the newest financial products are with Islam. David Waite from Gulf International Bank in London said market research had shown 20 per cent of people from Islamic countries would be attracted to investments compliant with Islamic Shariah law, but only if the right products and the necessary performance are there. “From a marketing perspective, the sharia compliance brings the customer to you. The performance sells it to them,”<http://216.109.124.98/search/cache?p=%27Islamic+Banking+in+Pakistan%27&ei=
Role of State Bank of Pakistan
Since 1991 verdict by Supreme Court that initially sought a conversion of the banking and finance system along with Islamic principles. On appeal, the court's ruling was toned down but central bank officials say that rather than converting the entire financial system to an Islamic one, the authorities are now working to create either a network of new Islamic banks or "windows" offering Islamic services within conventional banks. (Bokhari, Farhan 2003)The Governor of State Bank of Pakistan reiterated the central bank’s commitment to promote Islamic banking on sound footings, provide a comprehensive and secure regulatory framework to establish Islamic banks as a parallel banking system, comparable and compatible with the conventional banking system and at the same time making sure that it is Shariah compliant. (Hussain, Dr. Ishrat 2004)State Bank of Pakistan plans to license two overseas banks by mid 2006 to offer services that comply with Muslim principles, seeking to attract overseas lenders to offer service that comply with Shariah and promote Islamic finance.(Zamir, Haris & Nambiar, Shanthy 2005)Pakistan’s leading bankers become uncomfortable when pushed to say how they plan to cope with an Islamic system of banking. But, the central bank governor, is convinced that the change to an Islamic system would not spell disaster for the country's economy, adding that "nobody wants to see disruption". (Bokhari, Farhan 2001)
Corporate governance with reference to Islamic banking
The former Governor, State Bank of Pakistan, Dr. Ishrat Husain has pressured upon the banks to adopt best international practices in corporate governance. He said by keeping an eye on the economy that market risk is now becoming one of the major challenges faced by the financial institutions and that management boards should be vigilant in this area also. Particularly the management of Islamic institutions emphasized that sound Corporate Governance envisages setting up an environment of trust, transparency ethics, responsible behavior, checks and balances. (Hussain, Dr. Ishrat 2003)2.7
Variation in banking procedure & risk
Islamic banking is a system of finance totally based on the sharing of risk and profit, rather than on the payment of interest or the payment of predetermined rates. While in the capitalist economy the interest is the price of money when conventional banker rents / lends it. The rate of interest is determined by central bank as a result of the fiscal and monetary policy measures. Few Westerners take it seriously as a way for a modern economy to do business. In some ways, this is a mistake. In one view, the mistakes that have led Western banks and economies into their present financial troubles are precisely the errors that Islamic banking tries to avoid. Many Muslim countries have developed a variety of partnership agreements to allow lending without interest. Under such schemes, banks receive a contractual share of the profits generated by borrowing firms. Along with boosting the welfare of general public, this approach has many advantages, such as encouraging equity and discouraging debt. (Banking Law, Banking Industry in Pakistan…….. (1992) The Economist Vol. 323, Iss. 7753) & <http://www.lariba.com/knowledge-center/faqs.htm#question1>
Banks in Pakistan (total and Islamic)
Total financial institutions in Pakistan are 70, which include nationalized schedule banks, specialized banks, private schedule banks, foreign banks, developing financial institutions, investment banks, discount and guarantee houses, houses finance companies, venture capital companies and micro finance banks (Please see the appendix E & F).<http://www.finance.org.pk/survey/chapters/06-Money%20and%20Credit.PDF >The total number of banks having Islamic Banking Licence has increased to five. M/s. Meezan Bank Limited, Al Baraka Islamic Bank, Bank Islami Pakistan Limited and Emirates Global Islamic Bank Limited are the other four banks having Islamic Banking Licences. Meezan Bank and Al Baraka Islamic Bank are currently operating in Pakistan with 36 branches. In addition to these banks, 31 branches of nine conventional banks are also providing exclusive Islamic banking services to their customers in all the four provinces of the country.<http://www.sbp.org.pk/press/2005/Dubai_IBL.pdf > & Zamir, Haris & Nambiar, Shanthy (2005)In Asian economy , there are signs of growth in financial sector on the retail side. Countries such as Malaysia, Indonesia and Pakistan offer opportunities because of their large populations." Yet, while there are signs of a growing demand for Asian Islamic banking products, analysts have yet to produce credible estimates of market size and growth potential in the region. The global Islamic banking market is still a grey area, with estimates ranging from Dollars 50bn to Dollars 200bn. (Bokhari, Farhan 2004) & (Mcsheehy, Will 2004)
Image of the banks
The leading financial institutions are rapidly progressing in the country. At the end of year 2004 all local and foreign financial institutions have 6581 local and overseas branches. And they are earning huge profits and also enjoy good credit rating, maintaining huge deposits and advances portfolio. Most of the top 16 financial institution (as shown in Appendix F) are dealing in home finances. (For further details please see Appendix F, G, H & J)<http://www.nbp.com.pk/EcomomicBulletin/EB%20for%20Jul-Aug%202005.pdf>
People needs for homes, their income level and how banks treat them
According to 1998 census, the total number of housing units throughout the country was 19.3 million. The annual requirements of the houses is 820,000 units annually, this huge number become due to backlog of previous years. Particularly for the low income groups. The maximum loan amount has been increased from Rs.5 million to Rs.10 million, the debt equity ratio go down for lower income group and maximum period reached from fifteen to twenty years.After the discussion with the manager mortgages and credit initiation units heads of different banks including Islamic banks, it came into the knowledge that almost these institutions are hesitating the extension of finance to the following categories. It is surprising to come into the knowledge the one side the Islamic institutions raise the slogan for the welfare of the general public on the other hand they are not providing the facilities to below mentioned categories and treated as negative occupations.
1.Lawyers
2.Journalists (Publishers & Editors can be looked on case to case basis).
3.Agriculturists unless where agriculture income is the main source of income
4.Law enforcement personnel even if they have a business concern
5.Commission based business e.g. stockbrokers, real estate agents, commodity rokers.
6.Business involved in rental business.
7.Business involved in giving away goods on loans or instalments.
8.Businesses with pronounced cyclical trends displayed in their cash flows e.g. ice factories; cold storage & warm clothing related businesses.
9.Speculative business i.e. property buying & selling, stock purchase and selling.
10.Government contractors / suppliers dealing with or owing money to GOP.
11.Construction/Real Estate related business where there is no permanent/proper office. 12.Transporters
13.Entertainment Business
14.People related to entertainment business.
15.Jewellers (smaller ones only)
As mentioned point number three in the above category, the institutions are not granting the loans to the agriculturalist. The bank’s policy contravene the policy of the govt. because Pakistan is a agricultural country and in such country the institutions are not giving the loan facilities to the people having the main source of income from agricultural. As mentioned in the above list number 18 the institutions are not sanctioning the finance to the members of stock exchange except the Karachi stock exchange member. It is the contradiction with the policy of the bank because the members of stock exchange located in Lahore have the same worth just like Karachi stock exchange member
Comparison of instalments amount
The most expensive asset that any of us will generally purchase is our homes. The overall cost of this can vary radically depending on the mortgage product. Ensuring that you have selected the most competitive mortgage can result in substantially lower cost of borrowing. To add to the mainstream mortgage choices available there are a number of Shariah compliant products now on the market which are becoming more easily accessible and more competitive. (Mian, Hamza 2006)As mentioned in appendices K & L the comparison of instalment amount on the same amount of finance for the same period. For the comparison it isber. assumed that if a person gets finance amounting to Rs. 1,600,000/- from an Islamic financial institution for twenty years and other person gets same finance amount, for the same period from other conventional financial institution. (Please see the appendices K & L). The person took finance from an Islamic institution have to pay amounting to Rs. 3,528,000/-, on the other hand the person got finance from ordinary or conventional institution have to pay amounting to Rs. 4,248,952/-. This tendency reflects that the financing option from conventional bank is more expensive than the Islamic mode of mortgage finance. <http://www.lariba.com/knowledge-center/faqs.htm#question1
Problems of Islamic Banking
As defined by the governor of State Bank of Pakistan the followings are the challenges faced by the Islamic banking structure in Pakistan.Lack of effective enforcement of contracts.Inefficiency in the system of early recoveryIneffective code of conduct for professionalsLack of public awareness about Islamic financial system and its availability.Minimum income level.Area restrictions.Negative occupation.Minimum equity requirementCorruption In an In an article in ‘The Economist’ on the subject Islam and changes of interest rate the author explained that from a bank's point of view, mark-up loans are a relatively easy way to lend without receiving interest. In other ways, however, Islamic banks are less obviously suited to modern economies. Judging whether a company will make profits in the future is harder than
making a decision about its current ability to repay a loan.
Concept of Interest in Islam
“Those who devour Riba shall rise up before Allah like men whom Shaitan has demented by his touch; for they claim that trading is like usury. But Allah has permitted trading and forbidden usury. He that receives an admonition from his Rabb and mends his ways may keep what he has already earned; his faith is in the hand of Allah. But he that pays no heed shall be among the people of fire and shall remain in it forever.” (Surah Al Baqarah 275)A very important pillar of this model is the prohibition of Interest or Riba, which is made clear by the following Qur’anic verse in which Allah (SWT) says:“O, believers, fear Allah, and give up what is still due to you from interest (Riba), if you are true believers. If you do not do so, then take notice of war from Allah and His Messenger. But, if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it.”
(Surah Al Baqra 278-279)Islam is a complete religion; it provides guidance for each and every aspect of human life. Economics is one of the most important aspects, as every human being needs involvement in some kind of economic activity for survival. Islam has provided a complete economic model for a establishing a healthy society. With the expanding focus and scope of Islamic finance worldwide, there is a rapid proliferation of feasible solutions that cater to almost all financial requirements. Ahmad, Khurshid (1981) &<http://www.nbp.com.pk/EcomomicBulletin/Economic%20Bulletin%20Jan-Feb%202005.pdf>Whenever a contract involves a guaranteed profit for one party, riba (interest) is involved (Aly, Remona 2005)
Mortgages Concept in Islamic Banking
According to documented Shariah jurisprudence opinion which is known as Fatwa, the proposed arrangement is having the following transactions:To create joint ownership in the property (Shirkat-al-Milk) Giving the share of the financier to the client on rent. Promise from the client to purchase the units of share of the financier. Actual purchase of the units at different stages. Adjustment of the rental according to the remaining share of the financier in the property. (Muhammad Taqi Usmani 1998) It's a transaction in which a buyer purchases a home through a rent-to-own agreement. A conventional mortgage, in which a buyer repays a loan with interest, violates the Quran, which forbids the payment or receipt of interest.http://www.islam-finance.com/FAQ.htmlThe Holy Quran forbids "riba", which is interest, or usury. Yet Muslims need money and banks need to make a living. Systems are devised to get round the ban. For example, instead of a Muslim holding a mortgage for a house, the bank can own the house and make arrangements for the Muslim gradually to buy it off the bank over a period of years. (Moore, Charles 2004) & <http://www.lariba.com/knowledge-center/faqs.htm#question1>
Government steps
As the part of the Islamization of economic structure the all commercial bank convert their some work to non – interest basis. But the procedure by their selves was un – Islamic declared by Federal Shariat Court (FSC) in 1991, the govt. and other banks were to go appeal in Supreme Court of Pakistan. The Shariat Appellate Bench of Supreme Court of Pakistan upheld the previous decision in 1999. In the light of this order government of Pakistan form a committee to judge the strength and risks of conversion of the interest based system in to Islamic finance system. Because it was not possible to implement this in short term. The State Bank of Pakistan issued criteria for the establishment of Islamic banks in private sector and it decided to promote Islamic banking parallel with the conventional banking. (Hussain, Dr. Ishrat 2004) (For further details See Appendix A)Pakistan’s government is to issue licences for new Islamic banks, the first time that new banking licences would be issued in a decade, according to Shaukat Aziz, finance minister. The decision appears to be a reversal of Pakistan's earlier policy of a cap on the number of private banks in the country with a view to encouraging mergers to build up national banking networks, replacing small, regional banks. However, it is driven mainly by concerns over the controversy surrounding the future of Islamic banking in Pakistan. (Bokhari, Farhan 2002) & (Bokhari, Farhan 2001)Despite annual growth of about 15 per cent, analysts say Islamic banking is being held back because Muslim scholars have yet to define how compatible the newest financial products are with Islam. David Waite from Gulf International Bank in London said market research had shown 20 per cent of people from Islamic countries would be attracted to investments compliant with Islamic Shariah law, but only if the right products and the necessary performance are there. “From a marketing perspective, the sharia compliance brings the customer to you. The performance sells it to them,”<http://216.109.124.98/search/cache?p=%27Islamic+Banking+in+Pakistan%27&ei=
Role of State Bank of Pakistan
Since 1991 verdict by Supreme Court that initially sought a conversion of the banking and finance system along with Islamic principles. On appeal, the court's ruling was toned down but central bank officials say that rather than converting the entire financial system to an Islamic one, the authorities are now working to create either a network of new Islamic banks or "windows" offering Islamic services within conventional banks. (Bokhari, Farhan 2003)The Governor of State Bank of Pakistan reiterated the central bank’s commitment to promote Islamic banking on sound footings, provide a comprehensive and secure regulatory framework to establish Islamic banks as a parallel banking system, comparable and compatible with the conventional banking system and at the same time making sure that it is Shariah compliant. (Hussain, Dr. Ishrat 2004)State Bank of Pakistan plans to license two overseas banks by mid 2006 to offer services that comply with Muslim principles, seeking to attract overseas lenders to offer service that comply with Shariah and promote Islamic finance.(Zamir, Haris & Nambiar, Shanthy 2005)Pakistan’s leading bankers become uncomfortable when pushed to say how they plan to cope with an Islamic system of banking. But, the central bank governor, is convinced that the change to an Islamic system would not spell disaster for the country's economy, adding that "nobody wants to see disruption". (Bokhari, Farhan 2001)
Corporate governance with reference to Islamic banking
The former Governor, State Bank of Pakistan, Dr. Ishrat Husain has pressured upon the banks to adopt best international practices in corporate governance. He said by keeping an eye on the economy that market risk is now becoming one of the major challenges faced by the financial institutions and that management boards should be vigilant in this area also. Particularly the management of Islamic institutions emphasized that sound Corporate Governance envisages setting up an environment of trust, transparency ethics, responsible behavior, checks and balances. (Hussain, Dr. Ishrat 2003)2.7
Variation in banking procedure & risk
Islamic banking is a system of finance totally based on the sharing of risk and profit, rather than on the payment of interest or the payment of predetermined rates. While in the capitalist economy the interest is the price of money when conventional banker rents / lends it. The rate of interest is determined by central bank as a result of the fiscal and monetary policy measures. Few Westerners take it seriously as a way for a modern economy to do business. In some ways, this is a mistake. In one view, the mistakes that have led Western banks and economies into their present financial troubles are precisely the errors that Islamic banking tries to avoid. Many Muslim countries have developed a variety of partnership agreements to allow lending without interest. Under such schemes, banks receive a contractual share of the profits generated by borrowing firms. Along with boosting the welfare of general public, this approach has many advantages, such as encouraging equity and discouraging debt. (Banking Law, Banking Industry in Pakistan…….. (1992) The Economist Vol. 323, Iss. 7753) & <http://www.lariba.com/knowledge-center/faqs.htm#question1>
Banks in Pakistan (total and Islamic)
Total financial institutions in Pakistan are 70, which include nationalized schedule banks, specialized banks, private schedule banks, foreign banks, developing financial institutions, investment banks, discount and guarantee houses, houses finance companies, venture capital companies and micro finance banks (Please see the appendix E & F).<http://www.finance.org.pk/survey/chapters/06-Money%20and%20Credit.PDF >The total number of banks having Islamic Banking Licence has increased to five. M/s. Meezan Bank Limited, Al Baraka Islamic Bank, Bank Islami Pakistan Limited and Emirates Global Islamic Bank Limited are the other four banks having Islamic Banking Licences. Meezan Bank and Al Baraka Islamic Bank are currently operating in Pakistan with 36 branches. In addition to these banks, 31 branches of nine conventional banks are also providing exclusive Islamic banking services to their customers in all the four provinces of the country.<http://www.sbp.org.pk/press/2005/Dubai_IBL.pdf > & Zamir, Haris & Nambiar, Shanthy (2005)In Asian economy , there are signs of growth in financial sector on the retail side. Countries such as Malaysia, Indonesia and Pakistan offer opportunities because of their large populations." Yet, while there are signs of a growing demand for Asian Islamic banking products, analysts have yet to produce credible estimates of market size and growth potential in the region. The global Islamic banking market is still a grey area, with estimates ranging from Dollars 50bn to Dollars 200bn. (Bokhari, Farhan 2004) & (Mcsheehy, Will 2004)
Image of the banks
The leading financial institutions are rapidly progressing in the country. At the end of year 2004 all local and foreign financial institutions have 6581 local and overseas branches. And they are earning huge profits and also enjoy good credit rating, maintaining huge deposits and advances portfolio. Most of the top 16 financial institution (as shown in Appendix F) are dealing in home finances. (For further details please see Appendix F, G, H & J)<http://www.nbp.com.pk/EcomomicBulletin/EB%20for%20Jul-Aug%202005.pdf>
People needs for homes, their income level and how banks treat them
According to 1998 census, the total number of housing units throughout the country was 19.3 million. The annual requirements of the houses is 820,000 units annually, this huge number become due to backlog of previous years. Particularly for the low income groups. The maximum loan amount has been increased from Rs.5 million to Rs.10 million, the debt equity ratio go down for lower income group and maximum period reached from fifteen to twenty years.After the discussion with the manager mortgages and credit initiation units heads of different banks including Islamic banks, it came into the knowledge that almost these institutions are hesitating the extension of finance to the following categories. It is surprising to come into the knowledge the one side the Islamic institutions raise the slogan for the welfare of the general public on the other hand they are not providing the facilities to below mentioned categories and treated as negative occupations.
1.Lawyers
2.Journalists (Publishers & Editors can be looked on case to case basis).
3.Agriculturists unless where agriculture income is the main source of income
4.Law enforcement personnel even if they have a business concern
5.Commission based business e.g. stockbrokers, real estate agents, commodity rokers.
6.Business involved in rental business.
7.Business involved in giving away goods on loans or instalments.
8.Businesses with pronounced cyclical trends displayed in their cash flows e.g. ice factories; cold storage & warm clothing related businesses.
9.Speculative business i.e. property buying & selling, stock purchase and selling.
10.Government contractors / suppliers dealing with or owing money to GOP.
11.Construction/Real Estate related business where there is no permanent/proper office. 12.Transporters
13.Entertainment Business
14.People related to entertainment business.
15.Jewellers (smaller ones only)
As mentioned point number three in the above category, the institutions are not granting the loans to the agriculturalist. The bank’s policy contravene the policy of the govt. because Pakistan is a agricultural country and in such country the institutions are not giving the loan facilities to the people having the main source of income from agricultural. As mentioned in the above list number 18 the institutions are not sanctioning the finance to the members of stock exchange except the Karachi stock exchange member. It is the contradiction with the policy of the bank because the members of stock exchange located in Lahore have the same worth just like Karachi stock exchange member
Comparison of instalments amount
The most expensive asset that any of us will generally purchase is our homes. The overall cost of this can vary radically depending on the mortgage product. Ensuring that you have selected the most competitive mortgage can result in substantially lower cost of borrowing. To add to the mainstream mortgage choices available there are a number of Shariah compliant products now on the market which are becoming more easily accessible and more competitive. (Mian, Hamza 2006)As mentioned in appendices K & L the comparison of instalment amount on the same amount of finance for the same period. For the comparison it isber. assumed that if a person gets finance amounting to Rs. 1,600,000/- from an Islamic financial institution for twenty years and other person gets same finance amount, for the same period from other conventional financial institution. (Please see the appendices K & L). The person took finance from an Islamic institution have to pay amounting to Rs. 3,528,000/-, on the other hand the person got finance from ordinary or conventional institution have to pay amounting to Rs. 4,248,952/-. This tendency reflects that the financing option from conventional bank is more expensive than the Islamic mode of mortgage finance. <http://www.lariba.com/knowledge-center/faqs.htm#question1
Problems of Islamic Banking
As defined by the governor of State Bank of Pakistan the followings are the challenges faced by the Islamic banking structure in Pakistan.Lack of effective enforcement of contracts.Inefficiency in the system of early recoveryIneffective code of conduct for professionalsLack of public awareness about Islamic financial system and its availability.Minimum income level.Area restrictions.Negative occupation.Minimum equity requirementCorruption In an In an article in ‘The Economist’ on the subject Islam and changes of interest rate the author explained that from a bank's point of view, mark-up loans are a relatively easy way to lend without receiving interest. In other ways, however, Islamic banks are less obviously suited to modern economies. Judging whether a company will make profits in the future is harder than
making a decision about its current ability to repay a loan.
INTRODUCTION OS ISLAMIC BANKING
1.Introduction
In the developing country like Pakistan it is one life’s most important achievement to own a home. Because it provides the security, stability and is a great blessing in itself. Now days it is unpredictable and costly environment, saving the required money can take a life time in itself. Rising property prices, taxes, inflation, currency devaluation, it is very hard task. On the other hand owing own home by paying an easy instalments that takes the step towards complete the ownership, is so much better than paying the rent which ultimately addition in the expenses rather than the ownership of the property. By accepting the borrowing options that being a Muslim one should accept the totally Riba – Free (interest free) financing option for inner satisfaction and peace of mind, because Allah prohibited the interest for believers. Islamic mortgage lending based on a diminishing Musharakah base, which means where bank provides the certain amount of finance to the customer and the borrower agree to a monthly payment to the bank of which a component is for the use of the home (rent), and another for customer’s equity share, as the result the monthly payment reduced regularly and customer’s share in the mortgage property grows. When the borrower made the full investment thathad been agreed, then he becomes the sole owner of the property and bank removed its charge from the property. But here the point is this why the people of country are entering the interest based structure instead of interest free banking system.<http://www.meezanbank.com/easyhome.asp >In a home mortgage market there are no limits to the options. This has made it possible for almost anyone to buy, construct or renovate the home. Most people however rush headlong into the mortgage process without checking out the options. This could be because we are too busy to study the market, or would like to use the same company as people they know. At the time of entering the mortgage contract there should be study before choosing the mortgage options. There are numerous items like attractive rates, lock in periods, insurance benefits and other add-ons to sweeten the deal. It is always beneficial for the borrower to compare the various options available inhe market. That’s why one will know that he/she is getting the best deal. Here the question becomes, what source of mortgage should be used and how one can glean these information.http://www.4loanranger.com/bank-loan/index.htmlThe Shariah prohibits interest or usury, gambling and gharar (undue risk taking), involvement in trading in such goods and services that are unlawful in themselves. As such, Islamic banking products are fundamentally and conceptually different from conventional banking products, although in order to facilitate customer ease and clarity of understanding, such products often emulate the packaging and presentation of conventional banking products. This does not mean that these products are the same as those offered by conventional banks. Islamic Banks serve the same purpose to customers and the functions of Islamic banks are and will remain essentially that of financial intermediaries.<http://www.nbp.com.pk/EcomomicBulletin/Economic%20Bulletin%20Jan-Feb%202005.pdf>
In the developing country like Pakistan it is one life’s most important achievement to own a home. Because it provides the security, stability and is a great blessing in itself. Now days it is unpredictable and costly environment, saving the required money can take a life time in itself. Rising property prices, taxes, inflation, currency devaluation, it is very hard task. On the other hand owing own home by paying an easy instalments that takes the step towards complete the ownership, is so much better than paying the rent which ultimately addition in the expenses rather than the ownership of the property. By accepting the borrowing options that being a Muslim one should accept the totally Riba – Free (interest free) financing option for inner satisfaction and peace of mind, because Allah prohibited the interest for believers. Islamic mortgage lending based on a diminishing Musharakah base, which means where bank provides the certain amount of finance to the customer and the borrower agree to a monthly payment to the bank of which a component is for the use of the home (rent), and another for customer’s equity share, as the result the monthly payment reduced regularly and customer’s share in the mortgage property grows. When the borrower made the full investment thathad been agreed, then he becomes the sole owner of the property and bank removed its charge from the property. But here the point is this why the people of country are entering the interest based structure instead of interest free banking system.<http://www.meezanbank.com/easyhome.asp >In a home mortgage market there are no limits to the options. This has made it possible for almost anyone to buy, construct or renovate the home. Most people however rush headlong into the mortgage process without checking out the options. This could be because we are too busy to study the market, or would like to use the same company as people they know. At the time of entering the mortgage contract there should be study before choosing the mortgage options. There are numerous items like attractive rates, lock in periods, insurance benefits and other add-ons to sweeten the deal. It is always beneficial for the borrower to compare the various options available inhe market. That’s why one will know that he/she is getting the best deal. Here the question becomes, what source of mortgage should be used and how one can glean these information.http://www.4loanranger.com/bank-loan/index.htmlThe Shariah prohibits interest or usury, gambling and gharar (undue risk taking), involvement in trading in such goods and services that are unlawful in themselves. As such, Islamic banking products are fundamentally and conceptually different from conventional banking products, although in order to facilitate customer ease and clarity of understanding, such products often emulate the packaging and presentation of conventional banking products. This does not mean that these products are the same as those offered by conventional banks. Islamic Banks serve the same purpose to customers and the functions of Islamic banks are and will remain essentially that of financial intermediaries.<http://www.nbp.com.pk/EcomomicBulletin/Economic%20Bulletin%20Jan-Feb%202005.pdf>
The Islamization of the Economy and the Development of Islamic Banking in Pakistan
The Islamization of the Economy and the Development of Islamic Banking in Pakistan
*
Mehboob UL-HASSAN
†
1. Introduction
The primary purpose of this work is to analyze the efforts that have been made and measures
that have been taken to Islamize the economy, specifically the banking and financial institutions in
Pakistan. This analytical study is thematically composed in four major sections. Section 1 explains
the objectives and purposes of the study. In Section 2, we make a step by step examination of the
nature, effectiveness and implications of strategic policies and measures taken to Islamize banking
and financial institutions prior to the historic judgment of the Lahore High Court that the Islamic
Shariah was the supreme law of the land. After evaluating these measures we point out some of
the factors that have hindered the Islamization process in Pakistan. In Section 3, we examine the
strategies and efforts made to re-launch the establishment process of Islamic banking after the
judgment of the Supreme Court. The contemporary picture of Islamic banking in Pakistan and
the factors that support the successful development of Islamic banking are also described in this
section. Finally, Section 4 concludes the study; we express some future expectations about Islamic
banking and recommend some directions for the development of Islamic banking, relatively new
economic phenomena.
2. A Historical Perspective of Islamization Measures Taken Prior to the Judgment of the
Supreme Court
Islam was the basis for demanding a separate and independent country within the British
ruled Indian sub-continent. The freedom movement of Pakistan was based on the two-nation
philosophy, which stated that the Hindus and Muslims of India were two different nations each
having her own religion, customs and lifestyle. Pakistan was created so that its people could live
according to Islamic teachings and principles.
Today the world is beginning to recognize the significance of the Islamic finance industry,
but in Pakistan the importance of adopting an Islamic economic system was stressed soon after its
independence sixty years ago. Muhammad Ali Jinnah (Founder of Pakistan) emphasized the virtues
of Islamic principles. In his historic address at the inauguration of the State Bank of Pakistan on
July 1
st
, 1948, he said:
I shall watch with keenness the work of your organization in evolving banking practices
compatible with Islamic ideas of social and economic life. We must work towards our destiny
in our own way and present to the world an economic system based on the true Islamic
concept of the equality of manhood and social justice.
Soon after the independence several strategic measures, both at constitutional and institutional
levels were taken for the inducement and implication of Islamic principles in the state affairs. In
イスラーム世界研究 第１巻 2 号（2007 年）92-109 頁
Kyoto Bulletin of Islamic Area Studies, 1-2 (2007), pp. 92-109
* The writer is thankful to Prof. Y. Kosugi, Kyoto University for helpful instructions and supervision for this study.
† Research Associate: Graduate School of Economics, Nagoya City University Japan.
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
following sub-sections we will examine these measures in a gradual order.
2.1 Measures Taken in the Constitutional Arena to Introduce Islamic Provisions
Islamic activists have struggled for a long time for the inducement of Islamic commands
in the state affairs and for the elimination of interest from the economy. But their efforts have
been stymied mainly by Pakistan’s political system. The first Constituent Assembly, which was
created under the Indian Independence Act of 1947, adopted the Objective Resolution on March
12
th
, 1949. The Objective Resolution envisaged clearly that “Pakistan will be a state wherein the
Muslims of Pakistan shall be enabled to order their lives in accordance with the teachings and
requirements of Islam as set out in Holy Qur’an and Sunnah”. Article 28 of the 1956 Constitution,
made it obligatory for the government to eliminate interest from the country “as early as possible”
and the 1962 Constitution called for the abolition of interest. Along with these provisions, Article
2 of the 1973 Constitution stated that Islam is the state religion of Pakistan and Articles 2A, 31,
37, 38(F), 227 of the constitution made it obligatory for the government to take steps to enable the
Muslims of Pakistan to order their lives in accordance with the injunctions of Islam. Therefore, it
was expected that living in Pakistan would be according to the teachings and commands of Islam.
Other constitutional institutions for the inducement and implementation of Islamic teachings in the
economic and other sectors of the country are the Council of Islamic Ideology (CII) and the Federal
Shariah Court (FSC) of Pakistan. The Council of Islamic Ideology was established in 1962 for the
purpose of advising the government about bringing its laws and provisions into conformity with the
injunctions of Islam. The council has the following functions:
1. To recommend laws conforming to Qur’an and Sunnah to the federal and provincial
assemblies.
2. To advise the parliament, the government, the president or a governor on any question
referred to the council as to whether a proposed law is or is not repugnant to the
injunctions of Islam.
3. To make recommendations for bringing the current laws into conformation with Islamic
injunctions.
4. To compile guidance for parliament and provincial assemblies.
CII made numerous recommendations during the 1960’s that interest should be eliminated in
Pakistan as it is forbidden by Shariah. In 1971 CII presented a report to the government that
recommended the abolition of interest [CII 1983: 10]. In 1976, the Council of Islamic Ideology
amended its questionnaire of 1966, regarding the dilemma of interest, and mailed it to well-known
Islamic scholars, Islamic laureates, economists and researchers of the State Bank of Pakistan
and to economic organizations in other Muslim countries. After a long time consumed research,
the council prepared a set of recommendations and sent to the government of that time. These
recommendations do not appear to have been subjected to any formal public debate in parliament by
the regime of Zulfikar Ali Bhutto. In 1977, CII was entrusted by the next president of Pakistan, Zia-
ul-Haq, with the task of preparing a blue print for making the economy interest-free. The president
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イスラーム世界研究（2007）2 号
directed the Council on September 29
th
, 1977 to consider how best to “eradicate the curse” of
interest, and so the issue of interest or riba gained central issue in country’s policy arena [Charles
H. Kennedy 2004: 102]. The Council of Islamic Ideology (CII) appointed a panel of economists
and bankers in November 1977 to assist the council in the delicate task of finding ways and means
to eliminate interest from the financial institutions and re-model (Islamize) Pakistan’s economy
[CII 1983 (2000): xiv]. CII submitted a number of reports and made several recommendations to
transform the socio-political and economic system into a system confirming to the tenets of the
Shariah. Some noteworthy developments around this period are as followings [Hussain 2006]:
1. In 1979, two government-owned mutual funds in Pakistan, the NIT and ICP, started
to eliminate interest from their operations by eschewing investment of their funds in
interest bearing securities. ICP’s investor scheme was replaced by a new one based on
profit and loss sharing from October 1st, 1980.
2. The state-run House Building Finance Corporation (HBFC) also eliminated interest
from its operations from July 1st, 1979.
3. In June 1980, legal framework was amended to permit the issuance of a new, interest-
free instrument of corporate financing called a Participation Term Certificate (PTC).
4. The introduction of zakat, which refers to an annual tax on surplus wealth obligatory in
Islamic law, in June 1980. After its implementation by the Supreme Court of Pakistan it
was called the zakat Ordinance.
5. A new law, namely, the Mudarabah (a specific business tie of islamic finance similar
to profit sharing,) Companies and mudarabah Ordinance of 1980 along with the
mudarabah Companies and mudarabah Rules of 1981 was promulgated to introduce
mudarabah as a two-tier fund structure, for undertaking Shariah compliant business
transactions.
6. The introduction of the Usher (a form of charitable investment where a percentage of
each donator’s income is accumulated to help needy peoples) Ordinance in March 1983.
7. In 1984, the Banking and Financial Services Ordinance amended seven laws and the
Banking Tribunals Ordinance of 1984 provided a new system of recovery for non-
interest based modes of financing.
8. From January 1st, 1981, separate interest-free counters started operations in all the
nationalized commercial banks to mobilize deposits on a profit and loss sharing basis.
Concurrently, banks were prohibited from specified interest based transactions, which
resulted in the development of Islamic modes of financing.
9. The SBP issued BCD Circular No. 13 of 1984 called for the elimination of riba from
the banking system and on January 1st, 1985 all financing to Federal and Provincial
Governments, public sector corporations and public or private joint stock companies
were directed to do business only through interest-free modes.
10. From July 1st, 1985 all commercial banking in Pak Rupees was declared interest free
and all deposits were operated on a profit and loss sharing (PLS) basis.
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
11. Specialized financial institutions were allowed a transitional period from July 1979
until July 1985, and commercial banks were given from January 1981 until July 1985,
to eliminate interest from their operations. All nationalized commercial banks opened
a special counter in 7000 domestic branches for accepting deposits on the basis of Profit
and Loss Sharing (PLS) in 1981 [Zaidi 1988: 23; Zubair 1987: 15].
2.2 Measures Taken at the State Bank of Pakistan
During the first decade of the establishment of the State Bank of Pakistan, no substantive
research work could be done for the promotion or development of an Islamic economy [State bank
of Pakistan as there was no economist in the country well acquainted with both the basic principles
of Islamic fiqh and contemporary economics [State Bank of Pakistan 2000: 609]. In 1963, the State
Bank prepared a comprehensive note for the benefit of the Council of Islamic Ideology (CII) on
various issues related to the problem of riba. The council gave its views in 1969, stating that modern
“interest” falls under the definition of riba and therefore must be abolished from all banking
and financial institutions. In 1978, the Islamic Economics Division of the State Bank of Pakistan
completed an in-depth study of various ingredients of the Islamic financial system including
mudarabah, shirkah (shirkah, shirakah or musharakah: a specific device of Islamic finance similar
to Joint venture), salam (a specific financial mode of Islamic finance where the seller undertakes
to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid
at spot. The price is in cash but the supply of purchased goods is deferred), murabahah, zakat &
usher and other related issues. This Division served as the hub of the national effort to mark out an
overarching financial system compliant with Shariah principles. It served as the secretariat of the
meetings of the Council of Islamic Ideology (CII), the Panel of Economists and Bankers, and six
special work groups that were entrusted with the job of hammering out the details for transforming
the financial system.
2.2.1 Formation of Special Working Groups at the State Bank
In a meeting on the April 8th, 1979, six work groups were formed to study in-depth the issues
for the abolition of riba and to transform the financial institutions. These work groups were to
cover the following fields of finance:
(1) Government transactions.
(2) State Bank of Pakistan: Domestic transactions and bank monetary policy.
(3) Bank deposits, Inter-Bank relations and bank management.
(4) Loans for fixed investment in industry, agriculture, construction, etc.
(5) Financing of working capital requirements.
(6) Co-operative credit system.
In February 1980, the Panel of Economists and Bankers, established under the supervision of the
State Bank of Pakistan, gave its detailed final report which was submitted to the government,
through the CII, in June 1980. This report prescribed a time frame, according to which the process
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of eliminating interest in Pakistan was to be completed by July, 1982.
2.2.2 Development of Permissible Modes of Finance
For conducting Islamic banking operations in practice, the State Bank of Pakistan issued its
Circular No. 13; dated June 20th, 1984 and approved the following twelve modes of finance to be
used by all banks carrying out banking activities in Pakistan. These financial techniques or modes
can be classified into three categories:
A. Trade related/type modes of financing
1. mark-up/cost plus sale
2. mark-down
3. buy-back
4. leasing
5. hire-purchase
6. development charges
B. Investment related/type modes of financing
1. musharakah
2. equity participation
3. participation term certificate (PTCs)
4. rent sharing
C. Loan related modes i.e. financing by lending
1. loans carrying service charges
2. qard-ul-hasan (beneficiary loan)
2.3 Implementation of the Above Measures and Practices by Banks: an Analytical Overview
The Council of Islamic Ideology (CII) has pointed out that the ideal alternatives to interest
in an Islamic economic system are musharakah and mudarabah (participation in profit and loss)
modes of finance along with qard-ul-hasan. However, keeping in mind the difficulties in the
practical application of the system of profit and loss sharing in certain spheres it endorsed the
recommendations of the Panel of Economists and Bankers that certain other modes like leasing,
hire purchase and bai muajjal (a sales contract, where the bank buys a commodity at a lower
price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in
installments at higher price than cost) on the basis of actual operating results might also be used
in interest-free banking operations, while cautioning against the danger that these modes could be
misused as a means for opening a back door for interest. Evaluating the practice of conventional
banks in terms of compatibility with the Islamic Shariah, the following facts were confirmed
[Rahman 197: 8]:
1. Interest-free counters were operating on the previous interest bearing basis.
2. Deposits received were used on the basis of ‘mark-up’ and ‘mark-up over mark-up’ that
were similar to interest.
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
3. Saving Schemes (e.g. Special Deposits, National Certificates, Monthly Income
Certificates, Participatory Term Certificate, etc.) based on interest were more attractive
than interest-free modes of investment.
4. A number of features of the musharakah agreement were in conflict with the Shariah.
5. Interest had been labeled as ‘Profit’, and the depositors under the Profit and Loss Sharing
(PLS) were neither informed in which venture their money had been invested, nor was
a separate balance sheet of their accounts prepared. The methods of calculating profits
on PLS accounts were also not indicated. On the analogy of interest bearing accounts, a
greater margin of ‘profit’ was offered on deposits of longer duration.
The underlying principle behind the opening of separate interest-free counters in banks besides
or along with interest bearing counters was itself objectionable as it tended to give the impression
that riba was something to be avoided by only the pious Muslims, whereas the illegality of riba is
applicable to all Muslims irrespective of their degree of piousness.
It also transpired from this study of banks that they provided more than 80% of the financing
under the ‘buy-back’ agreement with mark-up in price [Inayet 1993: 43]. The mechanism for
conducting a mark-up transaction is similar to that followed under the interest based system. It is
unfortunate to note that despite the fact that mark-up as a device was only to be used in unavoidable
cases, it had been made the pivot of the new arrangements. It is also important to note, that the
government is still mobilizing resources from the public through the National Saving Scheme on a
fixed return basis by merely changing the name of return from ‘Interest’ to ‘Profit’.
One can easily infer, from the ‘interest-free’ banking experience of Pakistan, that other than
a change in terminology (the term ‘interest’ was merely replaced with the term ‘profit’) the actual
practice had remained similar to the previous interest-based banking methods in government-
owned conventional banks in Pakistan [Inayat 1993: 43]. It is clear that the steps taken by the
government to eliminate interest from the country’s economy have proved to be spotty and uneven.
Justice Tanzil-ul-Rehman, Chairman of Council of Islamic Ideology has commented that the whole
approach has been characterised by “dualism and half heartedness”.
The Islamization of banking and financial institutions suffered a serious setback in August
1985, when banks were allowed to invest their Profit & Loss Sharing (PLS) deposits in interest-
bearing government securities. The ultimate earnings from these investments (PLS deposits)
obviously contained a substantial element of interest. Since 1984-85, the government has not
introduced any policies regarding the elimination of interest from governmental transactions
[Ahmed 1994: 73].
The second serious weakness in this process was the absence of a proper constitutional
mechanism (SBP started to take serious steps towards the development of Islamic banking from the
year 2001) for the continuous monitoring of Shariah compliance, the security of the bank/customer
relationship and legislative supervision of Islamic banking operations. Individual scholars have
pointed out several deviations in the musharakah and Diminishing musharakah modes of finance,
where the actual banking practices showed deviations from Shariah compliance. Even in the sound
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idea of issuing Participatory Term Certificates (PTCs), no legislative framework was provided
for standardizing the features of this financial instrument to ensure Shariah. The CII report had
provided a broad outline of the features of such financial instruments but the actual form in which
PTCs had actually been issued did not fully conform to the suggested outline.
Among the 12 permitted modes of financing, ‘mark-up’ was the most popular. It took two
forms; (a) a client asks the bank to purchase a particular item for him, the bank purchases the item
and then sells it to the client at higher price payable in the future; (b) the buyer pays back the agreed
price in installments until the transaction is completed. The second form of above transaction,
where the buyer pays an agreed price, involves a buy-back (interest-based) agreement. Regarding
this form of transaction, there was no corresponding change either in the legal or regulatory
framework of the bank; no consequent procedures or bank operations were changed. The only
change was a superficial one, a mere change in nomenclature, the term ‘interest’ was replaced
either by the terms ‘service charges’, ‘mark-up’ or ‘profit’ [Hassan 2002].
The scholars of Shariah and the Federal Shariah Court itself have criticized the above
practice. It is remarkable that even though mudarabah and musharakah are the ideal substitutes
for interest, no particular attempt had been made to incorporate these modes into financial
transactions.
2.4 Judgments of the Supreme Court on Banking Practices
The procedure adopted by banks after July 1985 was based largely on mark-up techniques
with or without a buy-back arrangement. Consequently it was eventually declared un-Islamic by the
Federal Shariah Court (FSC) in a judgment in November 1991. The government appealed against
the Federal Shariah Court’s judgment to the Shariah Appellate Bench (SAB) of the Supreme Court
of Pakistan. The Supreme Court too, in its historic judgment on December 23rd, 1999, rejected the
government’s appeals and asked the government to remove all laws involving interest before June
30th, 2001 [SAB Supreme Court of Pakistan 2000: 468]. The Court declared many of the prescribed
modes of investment and finance designed by SBP, and the practices of the commercial banks using
these modes as un-Islamic. The judgment of the court concluded that:
1. All prevailing forms of interest, either in banking transactions or in private transactions
fall within the definition of riba.
2. Any interest stipulated in government borrowings acquired from domestic or foreign
sources are riba and clearly prohibited by the Holy Qur’an.
3. The present financial system, based on interest, is against the injunctions of Islam as
laid down by the Holy Qur’an and Sunnah, and in order to bring it into conformity with
the Shariah, it has to be subjected to radical changes.
The court asked the government to set up a Commission for Transformation of Financial System
(CTFS) and for two task forces to be set up to plan and implement the process of this transformation.
Thus, the CTFS was constituted in January 2000 by the SBP under the chairmanship of I.A. Hanfi,
a former governor of the SBP. A task force was set up in the Ministry of Finance to suggest ways
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
in which interest could be eliminated from government financial transactions. Another task force
was set up in the Ministry of Law to suggest amendments to the legal framework to implement the
court’s judgment. However the government, working through a public sector bank, went to court to
ask for an extension of the date until 2006. The court gave only a year’s extension to its earlier June
30th, 2001, deadline.
The government constituted a high level commission and a number of task forces and
committees to study the prospects of transforming the interest based financial system of the time
into a Shariah compliant system and to format the transformation plan.
However they all arrived at the obvious conclusion that the transformation of the financial
system as a whole was not possible in the short term due to a variety of factors. In fact, the
complexity of the branch networks of national, foreign and state-owned and private commercial
banks, an absence of committed and sustained efforts, and a lack of genuine support from
various segments of society resulted in the failure of Islamization process. Indeed, developing
a successful, workable and complete model of Islamic banking was a complex and difficult task
for the government, especially in the case a developing country like Pakistan. Therefore, it was
decided in the year 2001 to compromise by promoting Islamic banking on a parallel basis with the
conventional banking system.
The worse was yet to come. All the efforts that had been made to introduce Shariah compliant
Islamic banking received a serious blow when on June 21st, 2002, while reviewing a petition by
United Bank Limited (UBL), the Supreme Court’s SAB set aside all the previous judgments in
this regard, including its own historic decision of December 23rd, 1999, and the November 1991
decision of the Federal Shariah Court (FSC). Horrified by this turn of events, the Shariah Appelates
Bench (SAB) of the Supreme Court asked the FSC to re-hear the original case. Since then, the
case has been collecting dust in a long line of cases still waiting to be reviewed. Consequently, the
efforts to transform the banking and financial institutions of Pakistan took a new turn, which in
time lead the State Bank and other authorities to mark out a new strategy for altering the existing
practices of the country’s financial institutions.
It should be remembered throughout all this that the commandments and views of Holy
Qur’an on the prohibition of riba are clear and unequivocal. Moreover, the constitution of Pakistan
1973, in its Article 227 states that all existing laws shall be brought into conformity with the
injunctions of Islam as laid down in the Holy Qur’an and Sunnah. Article 37 of the same (1973)
constitution dealing with the Principle of Policy states that it is the duty of the State to eliminate
riba as early as possible. There is complete unanimity among all schools of religious thought that
the term riba covers interest in all its manifestations.
2.5 Factors Involved in the Retardation of the Islamization Process in Pakistan
After carefully examining the Islamization process of the banking and financial institutions
of Pakistan several factors can be summed up in the following order:
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(a) The Government Administration
The significance of the government’s part in establishing and overseeing the success of
the new banking and financial system cannot be underestimated. Although the attempt at the
Islamization of the economy was initially started under the umbrella of the constitution, the
constitutional authorities were never persuaded to take the implications of these efforts seriously.
On the one hand the government initially suppressed but subsequently responded to the emergence
of Islamic law in Pakistan by declaring in the Supreme Court on February 10th, 1979, that the
enforcement of an interest-free Islamic economic system would be completed within a three-
year time frame. On the other hand this very same government on June 25th, 1980, limited the
jurisdiction of Federal Shariah Court for a period of three years from entertaining any petition
to consider fiscal issues including bank interest. This limiting of the jurisdiction of the Federal
Shariah Court was subsequently extended for one year and then for another year. Yet again on
March 2nd, 1985, the president of Pakistan promulgated the President’s Order No. 14 of 1985
whereby this period was extended for a further 10 years.
It is significant that neither the government nor the central bank of the country (SBP) provided
staunch leadership to motivate the conventional banks and other financial institutions to take bold
and devoted initiative to get rid from the traditional interest-based banking practices.
(b) Absence of Authentic Political Support
The provision of an Islamic way of life for its citizens and the establishment of an Islamic
economic and societal environment is the constitutional and legal responsibility of the government
of Pakistan. With the exception of establishing the Council of Islamic Ideology, the government did
not contrive firm provisions and effective strategic policies for facilitating the Islamization process
of the economy. On one hand the government asserted its intention to eliminate interest from the
economy, but on the other hand, it imposed a ten-year ban (from 1980 to 1990) on the Federal
Shariah Court preventing it from issuing any verdict against interest based banking transactions
[FSC Judgment on Riba 1991]. The subsequent government headed by Nawaz Sharif manifested
a similar attitude except for its establishment of the Commission for Islamization of the Economy
(CIE) in June 1991 to promote Islamic Banking. Furthermore, the ruling government of Nawaz
Sharif challenged the 1991 FSC judgment on riba in the Supreme Court. The government contended
that bank interest is not riba and that it was utterly impossible to run the economy without interest
in present day circumstances [Mansoor and Bhatti 2006: 146].
(c) Lack of Professional Management in the Central Bank of Pakistan
Obviously the task of developing alternative techniques to interest-based banking, without any
dislocation or chaos, is a very sophisticated operation requiring long-term planning and a sustained
effort to see it through to completion. Having observed that the government was not showing any
genuine interest in the project, the SBP did not feel a pressing need to devise any prudent policy for
adopting an interest-free financial system. It did not establish any internal Islamic Shariah Board
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
(until the year 2001) for seeking guidance on Islamization policies. Neither did it take any serious
measures for providing proper training to bankers on how to adopt interest-free banking.
(d) The Exploitative Socio-Economic Atmosphere of the Country
The socio-economic set of the country is beneficial for those who are powerful in term of
political and wealth. A handful number of malpractice politician and bureaucratic families have
monopolistic control of the state affairs. All major economic reforms to eliminate monopoly of
these few people over the country’s resources were not accompanied due to same malpractice
politicians and bureaucrats. The Islamization of the banking and financial institutions measures
were also not accompanied due to such malpractice attitude of the politicians. The Supreme
Court during her hearing on riba recorded that since the malpractice of politician is prevails the
interest-free banking cannot seek roots in Pakistan. The conclusion came into obvious form that
Islamization of banking and financial sector could not succeeded in Pakistan because a fair and
honest political and socio-economic setup, an essential prerequisite for the success of Islamic
banking was not available.
3. Post Judgment Measures Taken for the Re-launching of Islamic Banking
Since the measures undertaken for the transformation of state owned banks from the existing
conventional system to a Shariah compliant system could not be brought to a satisfactory outcome,
it was decided to establish an independent statutory body for this purpose. The Commission for the
Transformation of the Financial System (CTFS) was constituted in January 2000 in the State Bank
of Pakistan [State Bank of Pakistan 2002: 192]. A task force was set up in the Ministry of Finance
to work out ways to eliminate interest from the government’s financial transactions. Another
task force was set up in the Ministry of Law to draw up amendments to the legal framework to
implement the court’s judgment. The CTFS constituted a Committee for the Development of
Financial Instruments and Standardized Documents in the State Bank to prepare model agreements
and financial instruments for the new system. The First Interim Report of the CTFS submitted in
October 2000, identified a number of prior actions which needed to be taken in order to prepare
the ground for the transformation of the country’s financial system. The Second Interim Report
submitted in May 2001, identified major Shariah compliant modes of financing, mapped out their
essentials, drafted a seminal law captioned ‘The Islamization of Financial Transactions Ordinance,
2001’, drew up model agreements for major modes of financing, and wrote guidelines for the
conversion of the products and services of banks and financial institutions. The Final Report, made
by combining the two above mentioned reports, was sent to the government in August 2001. The
Commission also dealt with major products of banks and financial institutions, both assets and
liabilities, such as letters of credit or guarantee, bills of exchange, term finance certificates (TFCs),
State Bank’s refinance schemes, credit cards, interbank transactions, underwriting, foreign currency
forward cover and various kinds of bank accounts. This report contained a recommendation for
forestalling willful default and safeguarding the banks, their depositors and their clients against
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such losses. According to the Commission, prior/preparatory works for the introduction of a
Shariah compliant financial system in brief included creating a legal infrastructure conducive to
the working of the Islamic financial system, launching a massive education and training program
for bankers and their clients and an effective campaign through media to create an awareness
among the general public about the implications of an Islamic financial system.
3.1 Measures Taken by the Ministry of Finance
The Finance Minister in his budget speech for the FY2001-2002 declared the following:
“The government is committed to eliminating Riba and promoting Islamic banking in the
country”. For this purpose a number of steps are under way which are:
1. A legal framework is being designed to encourage the practice of Islamic banking by
banks and financial institutions as subsidiary operations of their main operations.
2. Consultations and exchanges are being undertaken with the governments of other
Islamic countries and renowned institutions of Islamic learning in Middle-Eastern
countries such as Al-Azhar University of Egypt, to learn more about their experiences
and practices.
3. Amendments in the HBFC Act are being made in line with the directive of the Supreme
Court. With these changes, HBFC will be a fully Shariah compliant institution, which
will play an effective role not only in the promotion of Islamic financing methods but
also in the development of the important housing sector.
4. Shariah compliant modes of financing like musharakah and mudarabah will be
encouraged so that familiarity with and use of such products is enhanced and their
adoption on a wider scale is made possible.
Furthermore, it is the government’s intention to promote Islamic banking in the country while
keeping in view its linkages with the global economy and existing commitments to local and
foreign investors.
A committee has been constituted in the Institute of Chartered Accountants, Pakistan
(ICAP), wherein the SBP is also represented, for the development of accounting and auditing
standards for Islamic modes of financing [State Bank of Pakistan 2002: 192]. This committee is
reviewing the standards prepared by the Bahrain based Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) with a view to adapting them to our circumstances and if
considered necessary, to proposing new accounting standards. The State Bank has also reviewed its
forms of financial statements for banks in the light of AAOIFI standards. A new Islamic Banking
Division has been established in the Banking Policy Department of SBP for the regulation and
promotion of Islamic banking. Existing prudential regulations for banks have been reviewed by
SBP for their application to Islamic banks.
3.2 Measures Taken at the State Bank of Pakistan
It was decided that the shift to an interest free economy would be made in a gradual and
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
phased manner so as not to cause any disruptions. The State Bank of Pakistan took the essential
steps and adopted the following strategy to promote Islamic banking in Pakistan.
SBP expressed its commitment to introducing Islamic banking in the country on a parallel
basis [SBP Annual report of 2001-2002: 194]. The following measures were taken in this regard:
1. For the establishment of Islamic banks in the private sector SBP issued detailed criteria
for the setting up of a Scheduled Islamic Commercial Bank to conduct business based
on the principles of the Shariah.
2. In order to promote Islamic Banking, the existing scheduled commercial banks were
allowed to open subsidiaries for Islamic banking operations.
3. With the objective of promoting Islamic banking SBP prepared a detailed guideline for
the opening of Stand-alone Islamic Banking branches by existing commercial banks.
Furthermore, SBP has taken a number of initiatives since this judgment:
4. A detailed set of criteria for the establishment of Islamic commercial banks in the
private sector was issued in December 2001.
5. A new, fully dedicated Islamic bank, Meezan Bank Limited, has been issued a license
and the bank has started its business.
6. In order to allow existing banks to set up subsidiaries for Islamic banking, draft
amendments in Section 23 of the Banking Companies Ordinance 1962 have been
submitted to the government for approval.
7. A new Islamic Banking Division has been established in the Banking Policy Department
for the regulation and promotion of Islamic banking.
8. Existing Prudential Regulations have been reviewed by SBP for their application to
Islamic banks, and revised regulations are being prepared.
9. The Export Finance Scheme of SBP is being revised to conform to a musharakah format.
10. Courses on Islamic economics, banking and finance have been included in the curricula
of the Institute of Bankers in Pakistan.
11. The International Islamic University, Islamabad, has conducted a teacher training
course on the Islamic Financial System in April 2002. SBP’s staff along with the staff of
other banks attended the course.
12. SBP has reviewed its forms of bank financial statements in the light of newly developed
accounting standards.
A Shariah Board comprising two Shariah scholars and three experts in the fields and professions of
banking, accounting and financial law has been established in the State Bank of Pakistan to advise
on modes, procedures, laws and regulations for Shariah compliant Islamic banking.
3.3 The Present Picture of Islamic Banking in Pakistan
There are 6 full-fledged Islamic and 13 conventional banks conducting Islamic banking in
Pakistan at present. The names of the six Islamic banks are: Meezan Islamic Bank, Al-Baraka
Islamic Bank, Dubai Islamic Bank, Bank Islami Pakistan Limited, Emirates Global Islamic Bank
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Limited and First Dawood Islamic Bank. According to the quarterly report of the State Bank of
Pakistan, the total assets of these Islamic banks now stands at PRS 136 billion, the assets growth
rate of Islamic banks is estimated at 10.5% over the period. The assets share of Islamic banking
in the overall banking system is estimated to be 3.2% at present. The total of number of Islamic
banking branches at Islamic banks and conventional banks is 173. These 173 Islamic banking
branches count for less than 1.5% of more than 8500 banking branches of the country. The number
of branches and the number of banks offering Islamic banking are tabulated as followings.
Table 1: Islamic Banks and Islamic Banking Branches in Pakistan
According to the state bank of Pakistan’s quarterly report of July 2007, total assets of these banking
branches now stands for more than 136 billion Pak-Rupees. The assets growth rate of these banks
is estimated more than 10% over the period. The assets share of Islamic banking in overall banking
industry is more than 3.2%. These figures indicate that each Islamic banking branch posses more
than double worth of assets as compared to conventional banking branch.
Name of Bank
Category
No. of Branches
Al-Baraka Islamic Bank
Islamic bank
11
Bank Islami Pakistan Limited
,,
13
Dubai Islamic Bank Pakistan
,,
15
Emirates Global Islamic Bank
,,
6
First Dawood Islamic Bank
,,
1
Meezan Islamic Bank
,,
69
Subtotal: 6
A
115
Askari Commercial Bank
conventional bank
6
ABN AMRO Bank Limited
,,
1
Bank Al-Habib
,,
3
Bank Al-Falah
,,
23
Bank of Khyber
,,
5
Habib Bank Metropolitan
,,
4
Habib Bank Limited
,,
1
MCB Bank Limited
,,
6
National Bank of Pakistan
,,
1
Prime Commercial Bank Limited
,,
2
Soneri Bank Limited
,,
2
Standard Chartered Bank
,,
3
United Bank Limited
,,
1
Subtotal: 13
B
58
Total: 19
A+B
173
Source: State Bank of Pakistan Quarterly Report July.2007
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Table 2: Progress of Islamic Banks and their Market Share in Pakistan
Description
March-07
Dec-06
Dec-05
Dec-04
Dec-03
Total Assets
136
118
72
44
13
% of Banking Industry
3.2
2.9
2.1
1.4
0.5
Deposits
93
83
50
30
8
% of Banking Industry
3.0
2.8
1.9
1.2
0.4
Finance & Investment
78
72
48
30
10
% of Banking Industry
2.5
2.4
1.8
1.3
0.5
Source: State Bank of Pakistan Quarterly Report July. 2007
3.4 Factors Supporting the Development of Islamic Banking in Pakistan
(a) Decentralization of Administrative Power
The responsibility for the adaptation of the market economy, the decentralization or
privatization of loss making state-owned financial enterprises and the task of establishing Islamic
banks was transferred to the State Bank of Pakistan. The State Bank of Pakistan took the initiative
to launch Islamic banking in gradual phases. The emphasis was to promote and establish new
full-fledged Islamic Banks rather than continue the transformation of existing conventional
banks towards Islamization. Since the year 2000, the State Bank of Pakistan has followed various
strategies to promote Islamic Banking such as; (a) the setting up of the criteria for establishing
independent Islamic branches or subsidiary branches of Islamic banking; (b) The formation of the
Islamic Banking Division at the State Bank of Pakistan and; (c) The establishment of a Shariah
Scholar Board at the State Bank of Pakistan. All these above measures have imparted a positive
impact on the effective working of Islamic Banking.
(b) Commendable Developments in the Economy after the Year 2000
Despite a series of domestic and external shocks of an unprecedented nature, the economy
of Pakistan has made commendable progress since the year 2000. It is a well-established fact that
the decade of the 1990s was a lost decade for Pakistan. While many developing countries made
substantial economic progress Pakistan lurched from one economic crisis to another mainly of
its own making [Ashfaq 2004]. Commercial banks and other financial institutions became the
instruments of political patronage and profit for certain sub-sections of society. The average
economic growth was between 3-4% per annum. During the years 2000-2005 the average economic
growth increased to 7-8% per annum. The depth and efficiency of financial intermediation in
Pakistan has improved. The bank assets to GDP ratio rose from 49.1% in 1997 to 55.6% in 2005 and
the deposit to GDP ratio – an indicator of the level of financial savings- rose from 38.7% in 1997 to
43.1% in 2005. More significantly, equity market capitalization grew from a mere 10.3% of GDP in
2000 to 37.1% of GDP in 2006.
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(c) Participation and Sharing of Islamic or Religious Parties in Political Power
When Pakistan became an independent nation, the Ulema (Religious leaders or Muslim
Scholars) did not wait long to demand their share of power in running the new state. Jamat-i-Islami
made the achievement of an Islamic Constitution its central goal.
In February 1948, Maulana Maududi, while addressing the Lahore Law College, demanded
that the Constitutional Assembly should unequivocally declare:
1. That the sovereignty of the State of Pakistan is vested in Allah and the government of
Pakistan shall be only an agent to execute the Sovereign’s Will.
2. That the Islamic Shariah shall form the inviolable basic code for all legislation in
Pakistan.
3. That all existing or future legislation which may contravene, whether in letter or in
spirit, the Islamic Shariah shall be null and void and be considered ultra vires (beyond
the legal capacity) of the constitution.
4. That the powers of the government of Pakistan shall be derived from, circumscribed by
and exercised within the limits of the Islamic Shariah alone.
On January 13th, 1948, Jamiat-al-Ulema-i-Islam, led by Maulana Shabbir Ahmad Usmani, passed
a resolution in Karachi demanding that the government appoint a leading alim (Islamic scholar)
to the office of Shaikh al-Islam, with appropriate ministerial and executive powers over the qadis
(Islamic judges) throughout the country. On February 9th, 1948, Maulana Shabbir Ahmad Usmani,
addressing the Ulema-i-Islam conference in Dacca, demanded that the Constituent Assembly
“Should set up a committee consisting of eminent Ulema (Islamic scholars.) and thinkers... to
prepare a draft for an Islamic state ... and present it to the Assembly”.
The declaration of Pakistan as an Islamic Republic in 1953 was also the result of the struggle
of these Islamic parties. All of the above and other Islamic parties also take-part in politics actively,
and their share of power is increasing gradually. The struggles of these parties to establish an
Islamic state is beginning to bear fruit now. The Islamization Program of Zia-ul-Haq, Islamization
amendments in Pakistan’s constitution, and the Islamization of the economy is the result of the
efforts of these Islamic or religious parties.
(d) The Prudential Performance of Islamic Banks and the Risk Taking Attitude of Investors
When compared to conventional banks the performance of Islamic banks is more
commendable because Islamic banks distribute higher profits. 80.9% of respondents said that
Islamic banks distribute higher profits when compared to conventional banks in Pakistan [Hassan
2007: 210-17]. In same study we found that investors were prepared to take a risk in the case of
Islamic banks, with 88.48% of respondents saying that they would continue their financial dealing
with Islamic banks, even though the risk with these banks was higher than the conventional
banks.
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4. Conclusion and Expectations
Soon after the independence of Pakistan several efforts and strategic measures were taken to
induce and implication the Islamic principles in state affairs, such as:
1. Efforts to introduce Islamic principles into the constitution.
2. At theoretical level, several debates were held focusing on the elimination of riba from
the economy in these debated some unanimity was achieved.
3. At institutional level, a number of constituent bodies such as the Federal Shariah Court,
the Commission for the Islamization of Economy and the Council of Islamic Ideology
were formed to formulate the suggestions and recommendations for the elimination of
interest from the economy.
Some important lessons have emerged from Pakistan’s experience through the Islamization
efforts of the 1980’s. First, the policy of transforming the financial and banking sectors in at once or
in one-step did not brought the desired results. Most of the measures were later reversed or, at least,
further enhancement of the Islamization of the economy was halted. Second, decentralization or
privatization of state owned banks and financial institutions was initiated and measures to establish
a market economy were adopted. This policy helped the government to get rid of loss generating
financial institutions and allowed it to concentrate on the process of Islamizing the economy. Third,
an evolutionary (step-by-step) process, rather than a revolutionary (at once or sudden) approach was
introduced in order to nurture the acceptability and development of an Islamic financial industry.
The State Bank of Pakistan wisely adopted a gradual approach to establishing Islamic banking in
Pakistan. Under this policy, Islamic banking is being promoted in parallel with the conventional
finance industry, in an integrated, gradual and steady way. In addition, SBP allows conventional
banks to set up Islamic banking subsidiaries or dedicated Islamic banking branches to offer a range
of financial services. SBP has put into place a comprehensive and robust multi-tiered Shariah
compliance mechanism to increase customers and investors confidence in the Islamic banking
industry. The Shariah compliance mechanism has three main pillars: (i) a Shariah Board at SBP
which approves policies and guidelines as well as fitting and proper criteria for its advisors; (ii)
Shariah advisors in each bank to provide guidance to the bank staff and comfort to its customers on
Islamic financial services; and (iii) a Shariah Audit System.
Although the process of re-launching Islamic banking in Pakistan started just four years
ago the assets share of Islamic banks in the overall banking sector of Pakistan is remarkable.
Now Islamic banks in Pakistan have more than 3.2% of the total deposits of the country’s entire
banking and financial sector. Islamic banks have more than 25000 borrowers now. These figures
are noteworthy to show the prudential performance of Islamic banks because the risks involved
are relatively different. Investors of Islamic banks face greater risks than investors of conventional
banks. The progress of Islamic banks indicates that their popularity is growing and these banks are
becoming attractive to investors. Furthermore, these banks have developed several new modes and
instruments of finance and investments and now offer 75% of the financial instruments available
at conventional banks. The present emphasis of the Shariah Advisory Board and the Islamic banks’
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business development managers is on Shariah compliance. Keeping in mind the future of Islamic
banks, it is hoped that this emphasis will shift to introducing a variety of financial instruments
and modes of investment, and that continued financial development will increase the share of
Islamic banks in banking and financial market. Presently, almost all Islamic banks are operating
exclusively in the mega cities and big business centers of the country, but they are still noticeably
absent from urban and rural areas where many potential customers with an urgent need for Islamic
banking are waiting. It is suggested that opening operations in secondary and rural areas will foster
the future development of Islamic banking.
Bibliography
Ahmad, A. 1993. Contemporary Practice of Islamic Financing Techniques. Jeddah: IRTI (Research
and Training Institute).
Ashfaq, H. Khan. 2004 (August 28). “Pakistan exports what needs to be done,” Pakistan Observer.
Ayub, M. 2002. Islamic Banking and Finance: Theory and Practice. Karachi: SBP (State Bank of
Pakistan).
CII Council of Islamic Ideology. 1980 (2002). Elimination of Interest from the Economy. Islamabad:
Council of Islamic Ideology.
Federal Shariah Court of Pakistan. 1992. Judgment on Riba. Lahore: PLD publishers.
Iqbal, Z. and A. Mirakhor. 1987. Islamic Banking. Occasional Working Paper No. 49. Washington:
IMF Research Department.
Hassan, M. 2007. Evolution and Development of Islamic Banking and People’s Perceptions towards
this System, Ph.D. Thesis submitted to Nagoya City University.
Hassan, Tariq. 2002 (May 04). “Transforming the Economy,” The Dawn.
Hussain, Ishrat. 2006. “Evolution of Islamic Banking,” Journal of Islamic Banking and Finance
23(3), pp. 73-79.
Inayat, N. 1993. “Theory and Practice of Islamic Banking in Pakistan,” Ph.D. Dissertation
submitted to University of Punjab Lahore.
Kaleem, Ahmed. 2007 (Sep 17). “Developing the Islamic Money Market,” Dawn.
Kazmi, A. Ali. 2001. “A Comparative Study of Islamic Banking in Iran and Pakistan,” Master
Dissertation submitted to University of Tehran.
Kennedy, H. Charles. 2004. “Pakistan Superior Courts and the Prohibition of Riba,” in Robert M.
Hathaway and Wilson Lee, ed., Islamization and Pakistani Economy. Washington: Woodrow
Wilson International Center for Scholars Asia Program, pp. 101-117.
Khan, M. Mansoor, and M. I. Bhatti. 2006. “Why the Interest-free Banking and Finance Movement
failed in Pakistan,” Humanomics 22(3), pp. 145-161.
Khan, W. Masood. 2002. Transition to a Riba Free Economy. Islamabad: IIIT (International
Institute of Islamic Thoughts) Press.
Memon, Noor. A. 2005. “Islamic Banking: Present, Past and Future Challenges,” Journal of Islamic
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banking & Finance 22(4), pp. 65-73.
Rukhsana, K. and Lodhi, S. A. 2006. “Strategic Direction for Developing an Islamic Banking
System,” Review of Islamic Economics 10(1), pp. 5-21.
SAB (Shariah Appellate Bench) Supreme Court of Pakistan. 2000. Supreme Court’s Judgment on
Interest. Lahore: PLD Publishers.
Siddiqi, M. N. 1986. Banking without Interest. Leicester: Islamic Foundation UK.
Siddiqui, S. H. 1994. Islamic Banking. Karachi: Royal Book Company.
――― 1997. “Establishment of a Model Islamic Bank is need of the hour – ‘Interest-free Banking
System’ as Adopted in Pakistan is un-Islamic, Exploitative,” Journal of Islamic banking &
Finance 14(2), pp. 7-12.
―――
2006. “Islamic Banking: True Modes of Financing,” Journal of Islamic Banking & Finance
23(4), pp. 102-117.
Tanzil-ur-Rahman. 1997. “Interest-free Banking in Pakistan An Appraisal, ”Journal of Islamic
Banking & Finance 14(4), pp. 6-22.
State Bank of Pakistan. 2002, 2003, 2004, 2005, 2006, 2007. Annual Report.
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2002. Policies for the Development of Islamic Banking.
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Usmani M. Taqi. 2000. The Historical Judgment on Interest Delivered in the Supreme Court of
Pakistan. Karachi: Idaratul- Ma’arif.
Zaidi, N. A. 1987. Eliminating Interest from Banks in Pakistan. Karachi: Royal Book Company.
*
Mehboob UL-HASSAN
†
1. Introduction
The primary purpose of this work is to analyze the efforts that have been made and measures
that have been taken to Islamize the economy, specifically the banking and financial institutions in
Pakistan. This analytical study is thematically composed in four major sections. Section 1 explains
the objectives and purposes of the study. In Section 2, we make a step by step examination of the
nature, effectiveness and implications of strategic policies and measures taken to Islamize banking
and financial institutions prior to the historic judgment of the Lahore High Court that the Islamic
Shariah was the supreme law of the land. After evaluating these measures we point out some of
the factors that have hindered the Islamization process in Pakistan. In Section 3, we examine the
strategies and efforts made to re-launch the establishment process of Islamic banking after the
judgment of the Supreme Court. The contemporary picture of Islamic banking in Pakistan and
the factors that support the successful development of Islamic banking are also described in this
section. Finally, Section 4 concludes the study; we express some future expectations about Islamic
banking and recommend some directions for the development of Islamic banking, relatively new
economic phenomena.
2. A Historical Perspective of Islamization Measures Taken Prior to the Judgment of the
Supreme Court
Islam was the basis for demanding a separate and independent country within the British
ruled Indian sub-continent. The freedom movement of Pakistan was based on the two-nation
philosophy, which stated that the Hindus and Muslims of India were two different nations each
having her own religion, customs and lifestyle. Pakistan was created so that its people could live
according to Islamic teachings and principles.
Today the world is beginning to recognize the significance of the Islamic finance industry,
but in Pakistan the importance of adopting an Islamic economic system was stressed soon after its
independence sixty years ago. Muhammad Ali Jinnah (Founder of Pakistan) emphasized the virtues
of Islamic principles. In his historic address at the inauguration of the State Bank of Pakistan on
July 1
st
, 1948, he said:
I shall watch with keenness the work of your organization in evolving banking practices
compatible with Islamic ideas of social and economic life. We must work towards our destiny
in our own way and present to the world an economic system based on the true Islamic
concept of the equality of manhood and social justice.
Soon after the independence several strategic measures, both at constitutional and institutional
levels were taken for the inducement and implication of Islamic principles in the state affairs. In
イスラーム世界研究 第１巻 2 号（2007 年）92-109 頁
Kyoto Bulletin of Islamic Area Studies, 1-2 (2007), pp. 92-109
* The writer is thankful to Prof. Y. Kosugi, Kyoto University for helpful instructions and supervision for this study.
† Research Associate: Graduate School of Economics, Nagoya City University Japan.
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
following sub-sections we will examine these measures in a gradual order.
2.1 Measures Taken in the Constitutional Arena to Introduce Islamic Provisions
Islamic activists have struggled for a long time for the inducement of Islamic commands
in the state affairs and for the elimination of interest from the economy. But their efforts have
been stymied mainly by Pakistan’s political system. The first Constituent Assembly, which was
created under the Indian Independence Act of 1947, adopted the Objective Resolution on March
12
th
, 1949. The Objective Resolution envisaged clearly that “Pakistan will be a state wherein the
Muslims of Pakistan shall be enabled to order their lives in accordance with the teachings and
requirements of Islam as set out in Holy Qur’an and Sunnah”. Article 28 of the 1956 Constitution,
made it obligatory for the government to eliminate interest from the country “as early as possible”
and the 1962 Constitution called for the abolition of interest. Along with these provisions, Article
2 of the 1973 Constitution stated that Islam is the state religion of Pakistan and Articles 2A, 31,
37, 38(F), 227 of the constitution made it obligatory for the government to take steps to enable the
Muslims of Pakistan to order their lives in accordance with the injunctions of Islam. Therefore, it
was expected that living in Pakistan would be according to the teachings and commands of Islam.
Other constitutional institutions for the inducement and implementation of Islamic teachings in the
economic and other sectors of the country are the Council of Islamic Ideology (CII) and the Federal
Shariah Court (FSC) of Pakistan. The Council of Islamic Ideology was established in 1962 for the
purpose of advising the government about bringing its laws and provisions into conformity with the
injunctions of Islam. The council has the following functions:
1. To recommend laws conforming to Qur’an and Sunnah to the federal and provincial
assemblies.
2. To advise the parliament, the government, the president or a governor on any question
referred to the council as to whether a proposed law is or is not repugnant to the
injunctions of Islam.
3. To make recommendations for bringing the current laws into conformation with Islamic
injunctions.
4. To compile guidance for parliament and provincial assemblies.
CII made numerous recommendations during the 1960’s that interest should be eliminated in
Pakistan as it is forbidden by Shariah. In 1971 CII presented a report to the government that
recommended the abolition of interest [CII 1983: 10]. In 1976, the Council of Islamic Ideology
amended its questionnaire of 1966, regarding the dilemma of interest, and mailed it to well-known
Islamic scholars, Islamic laureates, economists and researchers of the State Bank of Pakistan
and to economic organizations in other Muslim countries. After a long time consumed research,
the council prepared a set of recommendations and sent to the government of that time. These
recommendations do not appear to have been subjected to any formal public debate in parliament by
the regime of Zulfikar Ali Bhutto. In 1977, CII was entrusted by the next president of Pakistan, Zia-
ul-Haq, with the task of preparing a blue print for making the economy interest-free. The president
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directed the Council on September 29
th
, 1977 to consider how best to “eradicate the curse” of
interest, and so the issue of interest or riba gained central issue in country’s policy arena [Charles
H. Kennedy 2004: 102]. The Council of Islamic Ideology (CII) appointed a panel of economists
and bankers in November 1977 to assist the council in the delicate task of finding ways and means
to eliminate interest from the financial institutions and re-model (Islamize) Pakistan’s economy
[CII 1983 (2000): xiv]. CII submitted a number of reports and made several recommendations to
transform the socio-political and economic system into a system confirming to the tenets of the
Shariah. Some noteworthy developments around this period are as followings [Hussain 2006]:
1. In 1979, two government-owned mutual funds in Pakistan, the NIT and ICP, started
to eliminate interest from their operations by eschewing investment of their funds in
interest bearing securities. ICP’s investor scheme was replaced by a new one based on
profit and loss sharing from October 1st, 1980.
2. The state-run House Building Finance Corporation (HBFC) also eliminated interest
from its operations from July 1st, 1979.
3. In June 1980, legal framework was amended to permit the issuance of a new, interest-
free instrument of corporate financing called a Participation Term Certificate (PTC).
4. The introduction of zakat, which refers to an annual tax on surplus wealth obligatory in
Islamic law, in June 1980. After its implementation by the Supreme Court of Pakistan it
was called the zakat Ordinance.
5. A new law, namely, the Mudarabah (a specific business tie of islamic finance similar
to profit sharing,) Companies and mudarabah Ordinance of 1980 along with the
mudarabah Companies and mudarabah Rules of 1981 was promulgated to introduce
mudarabah as a two-tier fund structure, for undertaking Shariah compliant business
transactions.
6. The introduction of the Usher (a form of charitable investment where a percentage of
each donator’s income is accumulated to help needy peoples) Ordinance in March 1983.
7. In 1984, the Banking and Financial Services Ordinance amended seven laws and the
Banking Tribunals Ordinance of 1984 provided a new system of recovery for non-
interest based modes of financing.
8. From January 1st, 1981, separate interest-free counters started operations in all the
nationalized commercial banks to mobilize deposits on a profit and loss sharing basis.
Concurrently, banks were prohibited from specified interest based transactions, which
resulted in the development of Islamic modes of financing.
9. The SBP issued BCD Circular No. 13 of 1984 called for the elimination of riba from
the banking system and on January 1st, 1985 all financing to Federal and Provincial
Governments, public sector corporations and public or private joint stock companies
were directed to do business only through interest-free modes.
10. From July 1st, 1985 all commercial banking in Pak Rupees was declared interest free
and all deposits were operated on a profit and loss sharing (PLS) basis.
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
11. Specialized financial institutions were allowed a transitional period from July 1979
until July 1985, and commercial banks were given from January 1981 until July 1985,
to eliminate interest from their operations. All nationalized commercial banks opened
a special counter in 7000 domestic branches for accepting deposits on the basis of Profit
and Loss Sharing (PLS) in 1981 [Zaidi 1988: 23; Zubair 1987: 15].
2.2 Measures Taken at the State Bank of Pakistan
During the first decade of the establishment of the State Bank of Pakistan, no substantive
research work could be done for the promotion or development of an Islamic economy [State bank
of Pakistan as there was no economist in the country well acquainted with both the basic principles
of Islamic fiqh and contemporary economics [State Bank of Pakistan 2000: 609]. In 1963, the State
Bank prepared a comprehensive note for the benefit of the Council of Islamic Ideology (CII) on
various issues related to the problem of riba. The council gave its views in 1969, stating that modern
“interest” falls under the definition of riba and therefore must be abolished from all banking
and financial institutions. In 1978, the Islamic Economics Division of the State Bank of Pakistan
completed an in-depth study of various ingredients of the Islamic financial system including
mudarabah, shirkah (shirkah, shirakah or musharakah: a specific device of Islamic finance similar
to Joint venture), salam (a specific financial mode of Islamic finance where the seller undertakes
to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid
at spot. The price is in cash but the supply of purchased goods is deferred), murabahah, zakat &
usher and other related issues. This Division served as the hub of the national effort to mark out an
overarching financial system compliant with Shariah principles. It served as the secretariat of the
meetings of the Council of Islamic Ideology (CII), the Panel of Economists and Bankers, and six
special work groups that were entrusted with the job of hammering out the details for transforming
the financial system.
2.2.1 Formation of Special Working Groups at the State Bank
In a meeting on the April 8th, 1979, six work groups were formed to study in-depth the issues
for the abolition of riba and to transform the financial institutions. These work groups were to
cover the following fields of finance:
(1) Government transactions.
(2) State Bank of Pakistan: Domestic transactions and bank monetary policy.
(3) Bank deposits, Inter-Bank relations and bank management.
(4) Loans for fixed investment in industry, agriculture, construction, etc.
(5) Financing of working capital requirements.
(6) Co-operative credit system.
In February 1980, the Panel of Economists and Bankers, established under the supervision of the
State Bank of Pakistan, gave its detailed final report which was submitted to the government,
through the CII, in June 1980. This report prescribed a time frame, according to which the process
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of eliminating interest in Pakistan was to be completed by July, 1982.
2.2.2 Development of Permissible Modes of Finance
For conducting Islamic banking operations in practice, the State Bank of Pakistan issued its
Circular No. 13; dated June 20th, 1984 and approved the following twelve modes of finance to be
used by all banks carrying out banking activities in Pakistan. These financial techniques or modes
can be classified into three categories:
A. Trade related/type modes of financing
1. mark-up/cost plus sale
2. mark-down
3. buy-back
4. leasing
5. hire-purchase
6. development charges
B. Investment related/type modes of financing
1. musharakah
2. equity participation
3. participation term certificate (PTCs)
4. rent sharing
C. Loan related modes i.e. financing by lending
1. loans carrying service charges
2. qard-ul-hasan (beneficiary loan)
2.3 Implementation of the Above Measures and Practices by Banks: an Analytical Overview
The Council of Islamic Ideology (CII) has pointed out that the ideal alternatives to interest
in an Islamic economic system are musharakah and mudarabah (participation in profit and loss)
modes of finance along with qard-ul-hasan. However, keeping in mind the difficulties in the
practical application of the system of profit and loss sharing in certain spheres it endorsed the
recommendations of the Panel of Economists and Bankers that certain other modes like leasing,
hire purchase and bai muajjal (a sales contract, where the bank buys a commodity at a lower
price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in
installments at higher price than cost) on the basis of actual operating results might also be used
in interest-free banking operations, while cautioning against the danger that these modes could be
misused as a means for opening a back door for interest. Evaluating the practice of conventional
banks in terms of compatibility with the Islamic Shariah, the following facts were confirmed
[Rahman 197: 8]:
1. Interest-free counters were operating on the previous interest bearing basis.
2. Deposits received were used on the basis of ‘mark-up’ and ‘mark-up over mark-up’ that
were similar to interest.
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
3. Saving Schemes (e.g. Special Deposits, National Certificates, Monthly Income
Certificates, Participatory Term Certificate, etc.) based on interest were more attractive
than interest-free modes of investment.
4. A number of features of the musharakah agreement were in conflict with the Shariah.
5. Interest had been labeled as ‘Profit’, and the depositors under the Profit and Loss Sharing
(PLS) were neither informed in which venture their money had been invested, nor was
a separate balance sheet of their accounts prepared. The methods of calculating profits
on PLS accounts were also not indicated. On the analogy of interest bearing accounts, a
greater margin of ‘profit’ was offered on deposits of longer duration.
The underlying principle behind the opening of separate interest-free counters in banks besides
or along with interest bearing counters was itself objectionable as it tended to give the impression
that riba was something to be avoided by only the pious Muslims, whereas the illegality of riba is
applicable to all Muslims irrespective of their degree of piousness.
It also transpired from this study of banks that they provided more than 80% of the financing
under the ‘buy-back’ agreement with mark-up in price [Inayet 1993: 43]. The mechanism for
conducting a mark-up transaction is similar to that followed under the interest based system. It is
unfortunate to note that despite the fact that mark-up as a device was only to be used in unavoidable
cases, it had been made the pivot of the new arrangements. It is also important to note, that the
government is still mobilizing resources from the public through the National Saving Scheme on a
fixed return basis by merely changing the name of return from ‘Interest’ to ‘Profit’.
One can easily infer, from the ‘interest-free’ banking experience of Pakistan, that other than
a change in terminology (the term ‘interest’ was merely replaced with the term ‘profit’) the actual
practice had remained similar to the previous interest-based banking methods in government-
owned conventional banks in Pakistan [Inayat 1993: 43]. It is clear that the steps taken by the
government to eliminate interest from the country’s economy have proved to be spotty and uneven.
Justice Tanzil-ul-Rehman, Chairman of Council of Islamic Ideology has commented that the whole
approach has been characterised by “dualism and half heartedness”.
The Islamization of banking and financial institutions suffered a serious setback in August
1985, when banks were allowed to invest their Profit & Loss Sharing (PLS) deposits in interest-
bearing government securities. The ultimate earnings from these investments (PLS deposits)
obviously contained a substantial element of interest. Since 1984-85, the government has not
introduced any policies regarding the elimination of interest from governmental transactions
[Ahmed 1994: 73].
The second serious weakness in this process was the absence of a proper constitutional
mechanism (SBP started to take serious steps towards the development of Islamic banking from the
year 2001) for the continuous monitoring of Shariah compliance, the security of the bank/customer
relationship and legislative supervision of Islamic banking operations. Individual scholars have
pointed out several deviations in the musharakah and Diminishing musharakah modes of finance,
where the actual banking practices showed deviations from Shariah compliance. Even in the sound
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idea of issuing Participatory Term Certificates (PTCs), no legislative framework was provided
for standardizing the features of this financial instrument to ensure Shariah. The CII report had
provided a broad outline of the features of such financial instruments but the actual form in which
PTCs had actually been issued did not fully conform to the suggested outline.
Among the 12 permitted modes of financing, ‘mark-up’ was the most popular. It took two
forms; (a) a client asks the bank to purchase a particular item for him, the bank purchases the item
and then sells it to the client at higher price payable in the future; (b) the buyer pays back the agreed
price in installments until the transaction is completed. The second form of above transaction,
where the buyer pays an agreed price, involves a buy-back (interest-based) agreement. Regarding
this form of transaction, there was no corresponding change either in the legal or regulatory
framework of the bank; no consequent procedures or bank operations were changed. The only
change was a superficial one, a mere change in nomenclature, the term ‘interest’ was replaced
either by the terms ‘service charges’, ‘mark-up’ or ‘profit’ [Hassan 2002].
The scholars of Shariah and the Federal Shariah Court itself have criticized the above
practice. It is remarkable that even though mudarabah and musharakah are the ideal substitutes
for interest, no particular attempt had been made to incorporate these modes into financial
transactions.
2.4 Judgments of the Supreme Court on Banking Practices
The procedure adopted by banks after July 1985 was based largely on mark-up techniques
with or without a buy-back arrangement. Consequently it was eventually declared un-Islamic by the
Federal Shariah Court (FSC) in a judgment in November 1991. The government appealed against
the Federal Shariah Court’s judgment to the Shariah Appellate Bench (SAB) of the Supreme Court
of Pakistan. The Supreme Court too, in its historic judgment on December 23rd, 1999, rejected the
government’s appeals and asked the government to remove all laws involving interest before June
30th, 2001 [SAB Supreme Court of Pakistan 2000: 468]. The Court declared many of the prescribed
modes of investment and finance designed by SBP, and the practices of the commercial banks using
these modes as un-Islamic. The judgment of the court concluded that:
1. All prevailing forms of interest, either in banking transactions or in private transactions
fall within the definition of riba.
2. Any interest stipulated in government borrowings acquired from domestic or foreign
sources are riba and clearly prohibited by the Holy Qur’an.
3. The present financial system, based on interest, is against the injunctions of Islam as
laid down by the Holy Qur’an and Sunnah, and in order to bring it into conformity with
the Shariah, it has to be subjected to radical changes.
The court asked the government to set up a Commission for Transformation of Financial System
(CTFS) and for two task forces to be set up to plan and implement the process of this transformation.
Thus, the CTFS was constituted in January 2000 by the SBP under the chairmanship of I.A. Hanfi,
a former governor of the SBP. A task force was set up in the Ministry of Finance to suggest ways
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
in which interest could be eliminated from government financial transactions. Another task force
was set up in the Ministry of Law to suggest amendments to the legal framework to implement the
court’s judgment. However the government, working through a public sector bank, went to court to
ask for an extension of the date until 2006. The court gave only a year’s extension to its earlier June
30th, 2001, deadline.
The government constituted a high level commission and a number of task forces and
committees to study the prospects of transforming the interest based financial system of the time
into a Shariah compliant system and to format the transformation plan.
However they all arrived at the obvious conclusion that the transformation of the financial
system as a whole was not possible in the short term due to a variety of factors. In fact, the
complexity of the branch networks of national, foreign and state-owned and private commercial
banks, an absence of committed and sustained efforts, and a lack of genuine support from
various segments of society resulted in the failure of Islamization process. Indeed, developing
a successful, workable and complete model of Islamic banking was a complex and difficult task
for the government, especially in the case a developing country like Pakistan. Therefore, it was
decided in the year 2001 to compromise by promoting Islamic banking on a parallel basis with the
conventional banking system.
The worse was yet to come. All the efforts that had been made to introduce Shariah compliant
Islamic banking received a serious blow when on June 21st, 2002, while reviewing a petition by
United Bank Limited (UBL), the Supreme Court’s SAB set aside all the previous judgments in
this regard, including its own historic decision of December 23rd, 1999, and the November 1991
decision of the Federal Shariah Court (FSC). Horrified by this turn of events, the Shariah Appelates
Bench (SAB) of the Supreme Court asked the FSC to re-hear the original case. Since then, the
case has been collecting dust in a long line of cases still waiting to be reviewed. Consequently, the
efforts to transform the banking and financial institutions of Pakistan took a new turn, which in
time lead the State Bank and other authorities to mark out a new strategy for altering the existing
practices of the country’s financial institutions.
It should be remembered throughout all this that the commandments and views of Holy
Qur’an on the prohibition of riba are clear and unequivocal. Moreover, the constitution of Pakistan
1973, in its Article 227 states that all existing laws shall be brought into conformity with the
injunctions of Islam as laid down in the Holy Qur’an and Sunnah. Article 37 of the same (1973)
constitution dealing with the Principle of Policy states that it is the duty of the State to eliminate
riba as early as possible. There is complete unanimity among all schools of religious thought that
the term riba covers interest in all its manifestations.
2.5 Factors Involved in the Retardation of the Islamization Process in Pakistan
After carefully examining the Islamization process of the banking and financial institutions
of Pakistan several factors can be summed up in the following order:
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(a) The Government Administration
The significance of the government’s part in establishing and overseeing the success of
the new banking and financial system cannot be underestimated. Although the attempt at the
Islamization of the economy was initially started under the umbrella of the constitution, the
constitutional authorities were never persuaded to take the implications of these efforts seriously.
On the one hand the government initially suppressed but subsequently responded to the emergence
of Islamic law in Pakistan by declaring in the Supreme Court on February 10th, 1979, that the
enforcement of an interest-free Islamic economic system would be completed within a three-
year time frame. On the other hand this very same government on June 25th, 1980, limited the
jurisdiction of Federal Shariah Court for a period of three years from entertaining any petition
to consider fiscal issues including bank interest. This limiting of the jurisdiction of the Federal
Shariah Court was subsequently extended for one year and then for another year. Yet again on
March 2nd, 1985, the president of Pakistan promulgated the President’s Order No. 14 of 1985
whereby this period was extended for a further 10 years.
It is significant that neither the government nor the central bank of the country (SBP) provided
staunch leadership to motivate the conventional banks and other financial institutions to take bold
and devoted initiative to get rid from the traditional interest-based banking practices.
(b) Absence of Authentic Political Support
The provision of an Islamic way of life for its citizens and the establishment of an Islamic
economic and societal environment is the constitutional and legal responsibility of the government
of Pakistan. With the exception of establishing the Council of Islamic Ideology, the government did
not contrive firm provisions and effective strategic policies for facilitating the Islamization process
of the economy. On one hand the government asserted its intention to eliminate interest from the
economy, but on the other hand, it imposed a ten-year ban (from 1980 to 1990) on the Federal
Shariah Court preventing it from issuing any verdict against interest based banking transactions
[FSC Judgment on Riba 1991]. The subsequent government headed by Nawaz Sharif manifested
a similar attitude except for its establishment of the Commission for Islamization of the Economy
(CIE) in June 1991 to promote Islamic Banking. Furthermore, the ruling government of Nawaz
Sharif challenged the 1991 FSC judgment on riba in the Supreme Court. The government contended
that bank interest is not riba and that it was utterly impossible to run the economy without interest
in present day circumstances [Mansoor and Bhatti 2006: 146].
(c) Lack of Professional Management in the Central Bank of Pakistan
Obviously the task of developing alternative techniques to interest-based banking, without any
dislocation or chaos, is a very sophisticated operation requiring long-term planning and a sustained
effort to see it through to completion. Having observed that the government was not showing any
genuine interest in the project, the SBP did not feel a pressing need to devise any prudent policy for
adopting an interest-free financial system. It did not establish any internal Islamic Shariah Board
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
(until the year 2001) for seeking guidance on Islamization policies. Neither did it take any serious
measures for providing proper training to bankers on how to adopt interest-free banking.
(d) The Exploitative Socio-Economic Atmosphere of the Country
The socio-economic set of the country is beneficial for those who are powerful in term of
political and wealth. A handful number of malpractice politician and bureaucratic families have
monopolistic control of the state affairs. All major economic reforms to eliminate monopoly of
these few people over the country’s resources were not accompanied due to same malpractice
politicians and bureaucrats. The Islamization of the banking and financial institutions measures
were also not accompanied due to such malpractice attitude of the politicians. The Supreme
Court during her hearing on riba recorded that since the malpractice of politician is prevails the
interest-free banking cannot seek roots in Pakistan. The conclusion came into obvious form that
Islamization of banking and financial sector could not succeeded in Pakistan because a fair and
honest political and socio-economic setup, an essential prerequisite for the success of Islamic
banking was not available.
3. Post Judgment Measures Taken for the Re-launching of Islamic Banking
Since the measures undertaken for the transformation of state owned banks from the existing
conventional system to a Shariah compliant system could not be brought to a satisfactory outcome,
it was decided to establish an independent statutory body for this purpose. The Commission for the
Transformation of the Financial System (CTFS) was constituted in January 2000 in the State Bank
of Pakistan [State Bank of Pakistan 2002: 192]. A task force was set up in the Ministry of Finance
to work out ways to eliminate interest from the government’s financial transactions. Another
task force was set up in the Ministry of Law to draw up amendments to the legal framework to
implement the court’s judgment. The CTFS constituted a Committee for the Development of
Financial Instruments and Standardized Documents in the State Bank to prepare model agreements
and financial instruments for the new system. The First Interim Report of the CTFS submitted in
October 2000, identified a number of prior actions which needed to be taken in order to prepare
the ground for the transformation of the country’s financial system. The Second Interim Report
submitted in May 2001, identified major Shariah compliant modes of financing, mapped out their
essentials, drafted a seminal law captioned ‘The Islamization of Financial Transactions Ordinance,
2001’, drew up model agreements for major modes of financing, and wrote guidelines for the
conversion of the products and services of banks and financial institutions. The Final Report, made
by combining the two above mentioned reports, was sent to the government in August 2001. The
Commission also dealt with major products of banks and financial institutions, both assets and
liabilities, such as letters of credit or guarantee, bills of exchange, term finance certificates (TFCs),
State Bank’s refinance schemes, credit cards, interbank transactions, underwriting, foreign currency
forward cover and various kinds of bank accounts. This report contained a recommendation for
forestalling willful default and safeguarding the banks, their depositors and their clients against
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such losses. According to the Commission, prior/preparatory works for the introduction of a
Shariah compliant financial system in brief included creating a legal infrastructure conducive to
the working of the Islamic financial system, launching a massive education and training program
for bankers and their clients and an effective campaign through media to create an awareness
among the general public about the implications of an Islamic financial system.
3.1 Measures Taken by the Ministry of Finance
The Finance Minister in his budget speech for the FY2001-2002 declared the following:
“The government is committed to eliminating Riba and promoting Islamic banking in the
country”. For this purpose a number of steps are under way which are:
1. A legal framework is being designed to encourage the practice of Islamic banking by
banks and financial institutions as subsidiary operations of their main operations.
2. Consultations and exchanges are being undertaken with the governments of other
Islamic countries and renowned institutions of Islamic learning in Middle-Eastern
countries such as Al-Azhar University of Egypt, to learn more about their experiences
and practices.
3. Amendments in the HBFC Act are being made in line with the directive of the Supreme
Court. With these changes, HBFC will be a fully Shariah compliant institution, which
will play an effective role not only in the promotion of Islamic financing methods but
also in the development of the important housing sector.
4. Shariah compliant modes of financing like musharakah and mudarabah will be
encouraged so that familiarity with and use of such products is enhanced and their
adoption on a wider scale is made possible.
Furthermore, it is the government’s intention to promote Islamic banking in the country while
keeping in view its linkages with the global economy and existing commitments to local and
foreign investors.
A committee has been constituted in the Institute of Chartered Accountants, Pakistan
(ICAP), wherein the SBP is also represented, for the development of accounting and auditing
standards for Islamic modes of financing [State Bank of Pakistan 2002: 192]. This committee is
reviewing the standards prepared by the Bahrain based Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) with a view to adapting them to our circumstances and if
considered necessary, to proposing new accounting standards. The State Bank has also reviewed its
forms of financial statements for banks in the light of AAOIFI standards. A new Islamic Banking
Division has been established in the Banking Policy Department of SBP for the regulation and
promotion of Islamic banking. Existing prudential regulations for banks have been reviewed by
SBP for their application to Islamic banks.
3.2 Measures Taken at the State Bank of Pakistan
It was decided that the shift to an interest free economy would be made in a gradual and
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
phased manner so as not to cause any disruptions. The State Bank of Pakistan took the essential
steps and adopted the following strategy to promote Islamic banking in Pakistan.
SBP expressed its commitment to introducing Islamic banking in the country on a parallel
basis [SBP Annual report of 2001-2002: 194]. The following measures were taken in this regard:
1. For the establishment of Islamic banks in the private sector SBP issued detailed criteria
for the setting up of a Scheduled Islamic Commercial Bank to conduct business based
on the principles of the Shariah.
2. In order to promote Islamic Banking, the existing scheduled commercial banks were
allowed to open subsidiaries for Islamic banking operations.
3. With the objective of promoting Islamic banking SBP prepared a detailed guideline for
the opening of Stand-alone Islamic Banking branches by existing commercial banks.
Furthermore, SBP has taken a number of initiatives since this judgment:
4. A detailed set of criteria for the establishment of Islamic commercial banks in the
private sector was issued in December 2001.
5. A new, fully dedicated Islamic bank, Meezan Bank Limited, has been issued a license
and the bank has started its business.
6. In order to allow existing banks to set up subsidiaries for Islamic banking, draft
amendments in Section 23 of the Banking Companies Ordinance 1962 have been
submitted to the government for approval.
7. A new Islamic Banking Division has been established in the Banking Policy Department
for the regulation and promotion of Islamic banking.
8. Existing Prudential Regulations have been reviewed by SBP for their application to
Islamic banks, and revised regulations are being prepared.
9. The Export Finance Scheme of SBP is being revised to conform to a musharakah format.
10. Courses on Islamic economics, banking and finance have been included in the curricula
of the Institute of Bankers in Pakistan.
11. The International Islamic University, Islamabad, has conducted a teacher training
course on the Islamic Financial System in April 2002. SBP’s staff along with the staff of
other banks attended the course.
12. SBP has reviewed its forms of bank financial statements in the light of newly developed
accounting standards.
A Shariah Board comprising two Shariah scholars and three experts in the fields and professions of
banking, accounting and financial law has been established in the State Bank of Pakistan to advise
on modes, procedures, laws and regulations for Shariah compliant Islamic banking.
3.3 The Present Picture of Islamic Banking in Pakistan
There are 6 full-fledged Islamic and 13 conventional banks conducting Islamic banking in
Pakistan at present. The names of the six Islamic banks are: Meezan Islamic Bank, Al-Baraka
Islamic Bank, Dubai Islamic Bank, Bank Islami Pakistan Limited, Emirates Global Islamic Bank
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Limited and First Dawood Islamic Bank. According to the quarterly report of the State Bank of
Pakistan, the total assets of these Islamic banks now stands at PRS 136 billion, the assets growth
rate of Islamic banks is estimated at 10.5% over the period. The assets share of Islamic banking
in the overall banking system is estimated to be 3.2% at present. The total of number of Islamic
banking branches at Islamic banks and conventional banks is 173. These 173 Islamic banking
branches count for less than 1.5% of more than 8500 banking branches of the country. The number
of branches and the number of banks offering Islamic banking are tabulated as followings.
Table 1: Islamic Banks and Islamic Banking Branches in Pakistan
According to the state bank of Pakistan’s quarterly report of July 2007, total assets of these banking
branches now stands for more than 136 billion Pak-Rupees. The assets growth rate of these banks
is estimated more than 10% over the period. The assets share of Islamic banking in overall banking
industry is more than 3.2%. These figures indicate that each Islamic banking branch posses more
than double worth of assets as compared to conventional banking branch.
Name of Bank
Category
No. of Branches
Al-Baraka Islamic Bank
Islamic bank
11
Bank Islami Pakistan Limited
,,
13
Dubai Islamic Bank Pakistan
,,
15
Emirates Global Islamic Bank
,,
6
First Dawood Islamic Bank
,,
1
Meezan Islamic Bank
,,
69
Subtotal: 6
A
115
Askari Commercial Bank
conventional bank
6
ABN AMRO Bank Limited
,,
1
Bank Al-Habib
,,
3
Bank Al-Falah
,,
23
Bank of Khyber
,,
5
Habib Bank Metropolitan
,,
4
Habib Bank Limited
,,
1
MCB Bank Limited
,,
6
National Bank of Pakistan
,,
1
Prime Commercial Bank Limited
,,
2
Soneri Bank Limited
,,
2
Standard Chartered Bank
,,
3
United Bank Limited
,,
1
Subtotal: 13
B
58
Total: 19
A+B
173
Source: State Bank of Pakistan Quarterly Report July.2007
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
Table 2: Progress of Islamic Banks and their Market Share in Pakistan
Description
March-07
Dec-06
Dec-05
Dec-04
Dec-03
Total Assets
136
118
72
44
13
% of Banking Industry
3.2
2.9
2.1
1.4
0.5
Deposits
93
83
50
30
8
% of Banking Industry
3.0
2.8
1.9
1.2
0.4
Finance & Investment
78
72
48
30
10
% of Banking Industry
2.5
2.4
1.8
1.3
0.5
Source: State Bank of Pakistan Quarterly Report July. 2007
3.4 Factors Supporting the Development of Islamic Banking in Pakistan
(a) Decentralization of Administrative Power
The responsibility for the adaptation of the market economy, the decentralization or
privatization of loss making state-owned financial enterprises and the task of establishing Islamic
banks was transferred to the State Bank of Pakistan. The State Bank of Pakistan took the initiative
to launch Islamic banking in gradual phases. The emphasis was to promote and establish new
full-fledged Islamic Banks rather than continue the transformation of existing conventional
banks towards Islamization. Since the year 2000, the State Bank of Pakistan has followed various
strategies to promote Islamic Banking such as; (a) the setting up of the criteria for establishing
independent Islamic branches or subsidiary branches of Islamic banking; (b) The formation of the
Islamic Banking Division at the State Bank of Pakistan and; (c) The establishment of a Shariah
Scholar Board at the State Bank of Pakistan. All these above measures have imparted a positive
impact on the effective working of Islamic Banking.
(b) Commendable Developments in the Economy after the Year 2000
Despite a series of domestic and external shocks of an unprecedented nature, the economy
of Pakistan has made commendable progress since the year 2000. It is a well-established fact that
the decade of the 1990s was a lost decade for Pakistan. While many developing countries made
substantial economic progress Pakistan lurched from one economic crisis to another mainly of
its own making [Ashfaq 2004]. Commercial banks and other financial institutions became the
instruments of political patronage and profit for certain sub-sections of society. The average
economic growth was between 3-4% per annum. During the years 2000-2005 the average economic
growth increased to 7-8% per annum. The depth and efficiency of financial intermediation in
Pakistan has improved. The bank assets to GDP ratio rose from 49.1% in 1997 to 55.6% in 2005 and
the deposit to GDP ratio – an indicator of the level of financial savings- rose from 38.7% in 1997 to
43.1% in 2005. More significantly, equity market capitalization grew from a mere 10.3% of GDP in
2000 to 37.1% of GDP in 2006.
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(c) Participation and Sharing of Islamic or Religious Parties in Political Power
When Pakistan became an independent nation, the Ulema (Religious leaders or Muslim
Scholars) did not wait long to demand their share of power in running the new state. Jamat-i-Islami
made the achievement of an Islamic Constitution its central goal.
In February 1948, Maulana Maududi, while addressing the Lahore Law College, demanded
that the Constitutional Assembly should unequivocally declare:
1. That the sovereignty of the State of Pakistan is vested in Allah and the government of
Pakistan shall be only an agent to execute the Sovereign’s Will.
2. That the Islamic Shariah shall form the inviolable basic code for all legislation in
Pakistan.
3. That all existing or future legislation which may contravene, whether in letter or in
spirit, the Islamic Shariah shall be null and void and be considered ultra vires (beyond
the legal capacity) of the constitution.
4. That the powers of the government of Pakistan shall be derived from, circumscribed by
and exercised within the limits of the Islamic Shariah alone.
On January 13th, 1948, Jamiat-al-Ulema-i-Islam, led by Maulana Shabbir Ahmad Usmani, passed
a resolution in Karachi demanding that the government appoint a leading alim (Islamic scholar)
to the office of Shaikh al-Islam, with appropriate ministerial and executive powers over the qadis
(Islamic judges) throughout the country. On February 9th, 1948, Maulana Shabbir Ahmad Usmani,
addressing the Ulema-i-Islam conference in Dacca, demanded that the Constituent Assembly
“Should set up a committee consisting of eminent Ulema (Islamic scholars.) and thinkers... to
prepare a draft for an Islamic state ... and present it to the Assembly”.
The declaration of Pakistan as an Islamic Republic in 1953 was also the result of the struggle
of these Islamic parties. All of the above and other Islamic parties also take-part in politics actively,
and their share of power is increasing gradually. The struggles of these parties to establish an
Islamic state is beginning to bear fruit now. The Islamization Program of Zia-ul-Haq, Islamization
amendments in Pakistan’s constitution, and the Islamization of the economy is the result of the
efforts of these Islamic or religious parties.
(d) The Prudential Performance of Islamic Banks and the Risk Taking Attitude of Investors
When compared to conventional banks the performance of Islamic banks is more
commendable because Islamic banks distribute higher profits. 80.9% of respondents said that
Islamic banks distribute higher profits when compared to conventional banks in Pakistan [Hassan
2007: 210-17]. In same study we found that investors were prepared to take a risk in the case of
Islamic banks, with 88.48% of respondents saying that they would continue their financial dealing
with Islamic banks, even though the risk with these banks was higher than the conventional
banks.
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The Islamization of the Economy and the Development of Islamic Banking in Pakistan
4. Conclusion and Expectations
Soon after the independence of Pakistan several efforts and strategic measures were taken to
induce and implication the Islamic principles in state affairs, such as:
1. Efforts to introduce Islamic principles into the constitution.
2. At theoretical level, several debates were held focusing on the elimination of riba from
the economy in these debated some unanimity was achieved.
3. At institutional level, a number of constituent bodies such as the Federal Shariah Court,
the Commission for the Islamization of Economy and the Council of Islamic Ideology
were formed to formulate the suggestions and recommendations for the elimination of
interest from the economy.
Some important lessons have emerged from Pakistan’s experience through the Islamization
efforts of the 1980’s. First, the policy of transforming the financial and banking sectors in at once or
in one-step did not brought the desired results. Most of the measures were later reversed or, at least,
further enhancement of the Islamization of the economy was halted. Second, decentralization or
privatization of state owned banks and financial institutions was initiated and measures to establish
a market economy were adopted. This policy helped the government to get rid of loss generating
financial institutions and allowed it to concentrate on the process of Islamizing the economy. Third,
an evolutionary (step-by-step) process, rather than a revolutionary (at once or sudden) approach was
introduced in order to nurture the acceptability and development of an Islamic financial industry.
The State Bank of Pakistan wisely adopted a gradual approach to establishing Islamic banking in
Pakistan. Under this policy, Islamic banking is being promoted in parallel with the conventional
finance industry, in an integrated, gradual and steady way. In addition, SBP allows conventional
banks to set up Islamic banking subsidiaries or dedicated Islamic banking branches to offer a range
of financial services. SBP has put into place a comprehensive and robust multi-tiered Shariah
compliance mechanism to increase customers and investors confidence in the Islamic banking
industry. The Shariah compliance mechanism has three main pillars: (i) a Shariah Board at SBP
which approves policies and guidelines as well as fitting and proper criteria for its advisors; (ii)
Shariah advisors in each bank to provide guidance to the bank staff and comfort to its customers on
Islamic financial services; and (iii) a Shariah Audit System.
Although the process of re-launching Islamic banking in Pakistan started just four years
ago the assets share of Islamic banks in the overall banking sector of Pakistan is remarkable.
Now Islamic banks in Pakistan have more than 3.2% of the total deposits of the country’s entire
banking and financial sector. Islamic banks have more than 25000 borrowers now. These figures
are noteworthy to show the prudential performance of Islamic banks because the risks involved
are relatively different. Investors of Islamic banks face greater risks than investors of conventional
banks. The progress of Islamic banks indicates that their popularity is growing and these banks are
becoming attractive to investors. Furthermore, these banks have developed several new modes and
instruments of finance and investments and now offer 75% of the financial instruments available
at conventional banks. The present emphasis of the Shariah Advisory Board and the Islamic banks’
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business development managers is on Shariah compliance. Keeping in mind the future of Islamic
banks, it is hoped that this emphasis will shift to introducing a variety of financial instruments
and modes of investment, and that continued financial development will increase the share of
Islamic banks in banking and financial market. Presently, almost all Islamic banks are operating
exclusively in the mega cities and big business centers of the country, but they are still noticeably
absent from urban and rural areas where many potential customers with an urgent need for Islamic
banking are waiting. It is suggested that opening operations in secondary and rural areas will foster
the future development of Islamic banking.
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