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.