Pakistan Came In To Existence Finance Essay

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Pakistan came in to existence as the first Islamic republic created in the name of islam on 14 august 1947. The government of Pakistan is bound to follow the instructions of the ALLAH ALMIGHTY according to objective resolution , passed in 1949. Islam is declared the official religion of Pakistan according to tho first constitution of Pakistan in 1956 and all the rules and regulations should be according to the instructions of Holy Quran and Sunnah. The council of islamc ideology was established under the constitution of 1962, to eliminate the interest from the economy especially from banking sector. The constitiution of Pakistan 1973 require thi elimination of riba ( interest) from the economy as soon as possible. The council consulted a large number of banker and economist recommended some alternative eo replace interest base financial structure in the economy during in 1980s. In 1911, full bench of supreme court of Pakistan orderd the elimination of riba from the economy until june 30 ,1992.

Pakistan banking sector has witnessed drastic changes over a period of 61 years since its independence. Initially it suffered from acute shortage of resources and uncertainity due to prevailing political and socioeconomic conditions. Lack of trained human resources and professionals turnd into poor condition and quality of services. Financial librization and deregulation stimulated the competition of banks due to an expansion of the banking industry.a large of banks has initiated their operation in Pakistan and try to attract the maximum number of customers. The inception of 21st century heightend the competition among banks regarding services quality to have satisfied customers for better profitability.

State bank of Pakistan has undertaken a number of initiatives to ensure stability, transparency and flexible legislation. The regulatory framework encourage "financial sector growth, diversification and innovation; healthy competition and risk taking to ensure a suitable and aggressive income stream; opportunity for enhancing the franchise Value of banks; prudent behaviour and effective risk management and loan provision requirement of the loan portfolio; safeguarding social obligations and consumer interest" (economic survey of Pakistan 2011-2012)

Pakistan banking sector is continuously improving with divfersified pattern of ownership due to an active participation of foreign and local stakeholders. It expirence an expension in its network , size and structure due to beautiful blending of commercial banks, micro finance institutions and Islamic banks in the country. It resulted into an increased competition among banks to attract a greater number of customers by the provision of quality services for long-term benefits. The performance of nationalized banks deteriorated due to government protection to employees that resulted into the provision of inferior products and poor services. It also discouraged the private investors and foreign financial institutions. But liberalization of financial sector by privatization and deregulation during 1990s encouraged local investors and motivated foreign banks to start their operations in Pakistan. There are drastic changes in Pakistani banking sector due to strong competition among public, private and foreign banks.

SBP plays an active role to establish a sound Islamic banking system in Pakistan

according to principles of Sharia'h as mentioned in its mission statement that read "To promote and develop Islamic Banking industry in line with best international practices, ensuring Sharia'h Compliance and transparency". SBP issued detailed criteria in December 2001 for the establishment of full-fledged Islamic bank in the private sector. Al Meezan Investment Bank received the license from SBP in January 2002 and started its operations with the name of Meezan Islamic bank as the first Islamic bank from March 20, 2002 (SBP, 2002).

Islamic bank offers a wide range of products on the basis of profit and loss according to principles of Sharia'h. It develops the sense of collective welfare by sharing the risk among different stakeholder. While the interest is the central tenet of the conventional banking and it maximizes the return even at the cost of other stakeholders by transferring the burden of risk to other parties. It generate exploitative trend that is fatal for the economy and society. Islamic banks are primarily concerned to eliminate Riba from the

economy by promotion of risk sharing practices for economic prosperity. Islamic banks work within the limits prescribed by Sharia'h to stimulate business and trade activities.

The interest-based transactions of conventional banks promote materialistic and exploitative attitude that is fatal for society. It was proved that equity participation has a great potential for larger profits along with benefits of decentralized decision-making (Wieltzman, 1984; 1985). Equity contract is superior to debt contract due to a number of benefits. It improves the profitability of business units by eliminating the limitations as imposed by debt. Furthermore, equity based banking contracts stimulate the investment in the economy (Haque and Mirakhor, 1986). Riba, interest, or usury is strictly prohibited in Islam as dealing with Riba-based transactions means declaring war with Allah Almighty and His Messenger (Muhammad, peace be upon him). Interest is an additional amount paid/received on the principal amount according to an agreement due to a time period attached thereof. Even a single additional penny on the principal amount or any other benefit attached with this transaction is considered as Riba (Rehman, 1993).

Prohibition of riba in Islamic banking:

Interest based activities are strictly prohibited in Islam as it is ordered by the Allah Almighty in the Holy Quran. In Islam, religious, social and economic activities have strong ties with each other, so economic activities (i.e. earning and spending pattern of any individual) should be in line with the Islamic principles. Banks are actively engaged in different economic activities by developing a liaison among various stakeholders for financial and productive ventures. Banking activities must be interest-free and purely according to principles of Sharia'h for the welfare of the all segments of the society.

Riba is prohibited step by step by Allah Almighty by conveying its pros and cons in the Sura-e-Rome (30:39) and finally declared haraam in the Sura-e-Al-Bakara (2:275).

Following verses of the Holy Quran clearly reflects the instructions regarding riba.

" That which ye given in riba in order that it may increase on (other) people's property

hath no increase with Allah; but that which ye give in charity; seeking Allah's

countenance, hath increase manifold" (30:39).

Current situation of Islamic banking system in Pakistan :

I have tabulated growth of different Islamic banks. Three indicator included Total assets, deposits and net financing investments.

GROWTH OF IBIs (2003-2011 )

Some important indicators

Years

total assets

 

deposits

net financing investment

 

 

(December)

Total Rs.b

shares of IBIs %

total Rs.b

Shares of IBIs %

Total Rs.b

Shares of IBIs %

2003

13

1

8

1

10

1

2004

44

2

30

1

30

1

2005

71

2

50

2

48

2

2006

119

3

84

3

73

2

2007

206

4

147

4

138

4

2008

276

5

202

5

186

4

2009

366

6

283

6

226

5

2010

411

6.1

330

6.4

236

4.6

2011

560

7.3

452

7.6

420

7

 

 

 

 

 

 

 

The following conclusions emerge from the above table:

1) IBIs represent 7.3% of banking industry.

2) IBIs share of deposit was 7.6% and the share in net financing investment was 7.0% of banking industry.

3) Shares of all the three indicators have been registering a steady rise. This augurs well for the IBIs for the future .

The following table has been compiled to present concentration of Islamic banking in Pakistan as on june 30, 2011.

Name of district

Number of branches

%

lahore

133

17

Karachi

223

28

islamabad

43

5

bahawalpur

41

5

peshawar

32

4

Multan

27

4

Queeta

25

4

Fasailabad

35

3

Total

559

70

There are over 100 districts in Pakistan. Unfortunately, Islamic Banking Branch Network exists only in 73 districts. Therefore, there is need to widen the network of branches in every district, tehsil and union council of each Province of Pakistan, particularly in rural areas so that those who are desirous of opening their accounts and also undertaking their operations in Islamic Banking modes can really benefit out of it.

A detailed analysis has been carried out by us and the following Table presents IBIs branch network:

Islamic banks branches in Pakistan

S. #

Particular

No. Of IBIs

%

A.

Islamic banks

 

 

 

1.Meezan bank

232

 

 

2.Al Barka bank

87

 

 

3.Bank islamic pakistan

70

 

 

4.Dubai islamic bank

66

 

 

5.dawood islamic bank

42

 

B.

Islamic branches of conventional bank

 

 

 

1.Bank Alflah Ltd.

80

 

 

2.Faysal bank Ltd.

37

 

 

3.Askari bank Ltd.

29

 

 

4.Habibi bank Ltd.

22

 

 

5.Bank of khyber.

21

 

 

others

64

 

 

Sub totals

253

 

C.

Sub branches of IBIs

 

 

 

1.Bank islamic Ltd.

32

 

 

2.Dawood islamic bank

8

 

 

3.Other banks

9

 

 

Sub totals

49

 

 

Total

799

100%