low profit rates & unreliability of consumers on islamic products in pakistan
TRANSCRIPT
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
1/57
INSTITUTE OF BUSINESS AND TECHNOLOGY
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
Prepared By
Aamir Ali KhanBM-25128
Anzar IshaquiBM-25167
Shoaib HasanBM-25118
Course Code : MKT-606
MBA (Banking and Finance)
FACULTY OFMANAGEMENT AND SOCIAL SCIENCES
SPRING 2011
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
2/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
Institute of Business and Technology
INSTITUTE OF BUSINESS AND
TECHNOLOGY
ABSTRACT SUBMITTED BY: Aamir Ali Khan Anzar Ishaqui
Shoaib Hasan
DISCIPLINE: MBA (Banking and Finance)
TITLE OF PROJECT REPORT: Low Profit Rates & Unreliability of
Consumers on Islamic Products in
Pakistan
MONTH OF SUBMISSION: April, 2011
NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon
ABSTRACTThe root of Islamic banking activity, such as acceptance of deposit and the
rejection of interest, go back to the days when the Prophet Muhammad was stillalive. At the time, people deposited money with the Prophet himself, and Abu
Sedique the first khalif of islam But the Islamic banking system as we now know
it only began to evolve towards the end of the 1960s when several Muslim
countries started to put the idea into practice, early models began emerging in
the 1970s,but found difficulty in implementing full compliance with Islamic
principles. During the same period, Islamic accounting, an essential tool for the
success of Islamic banks, was being developed and in 1973 the first meeting of the Islamic Organization Conference (IOC) in Jeddah discussed the desirability
of abolishing fixed interest rates and creating financial systems based on Islamic
beliefs.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
3/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
Institute of Business and Technology
If we talk about Pakistan Islamic banking emerged as a response to both
religious and economic needs. Efforts for economy wide elimination of Riba
started during 1970s and most of the significant and practical steps were taken in
1980s. The mid-80s attempt was a significant step in the evolution of Islamic
banking system in the country. In a technical sense it was the most advanced
model compared to any other model being practiced anywhere in the world at
that time. However that system fell apart as it did not adequately address issues
such as putting in place an effective Shariah compliance mechanism, giving
emphasis to capacity building, and opting for a flexible and evolutionary
approach. In any case this effort provided a valuable experience that has been
taken into account while formulation of SBPs current strategy to re-launch
Islamic Banking in Pakistan. Amendments in financial system to allow theissuance of new interest-free instrument of corporate financing, promulgation of
ordinance to permit the establishment of Mudaraba companies and floatation of
Mudaraba Certificates, constitution of Commission for Transformation of
Financial System (CTFS), and the establishments of Islamic Banking Department
by the State Bank of Pakistan are some of the key steps taken place by the
governments.
The initiative to re-introduce Islamic Banking in Pakistan was launchedback in 2001 when the government decided to promote Islamic banking in a
gradual manner and as a parallel and compatible system that is in line with best
international practices. But from now consumers trying and willing to accept this
system with low profit rates and ensure about the reliability of Islamic products
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
4/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
Institute of Business and Technology
ACKNOWLEDGEMENT
First of all we would like to thank our ALLAH Almighty Who gave us thecourage, health, and energy to accomplish our Project in due time and without
Whose help this study which required untiring efforts would have not been
possible to complete within the time limits.
Motivation, encouragement, guidance, corrections, advices, and overall
support are the key elements required from the supervisor to write and complete
a Project of a good standard and a quality within deadlines. It is a matter of
utmost pleasure for us to extend our gratitude and give due credit to our supervisor DR. NOOR whose support has always been there in need of time and
who provided us with all these key elements to complete our dissertation within
the time frame.
Acknowledgement would be incomplete without extending our gratitude to
one of my shariah staff, Rahim Mujadidi who is in Dubai Islamic Bank Pakistan
Limited, help in data collection made this study possible. Moreover, he has been
supporting us enthusiastically throughout our work to make our Project ready indue time. our thanks is also due to our examiner Dr. NOOR whose valuable
comments and suggestions made colossal contribution in improving our
dissertation. Last but not least, we extend our thanks to our entire family for
moral support and pray for our health and successful completion of our
dissertation within time limits.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
5/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
Institute of Business and Technology
CONTENTS ABSTRACT
ACKNOWLEDGEMENT
1. INTRODUCTION .............................................................................................. 1 1.1. Introduction ............................................................................................... 1
1.2. Purpose of Study ...................................................................................... 4
1.3. Research Objectives ................................................................................ 4
1.4 Hypothesis ................................................................................................. 5
1.5. Data Collection ......................................................................................... 5
1.6. Sampling................................................................................................... 6 1.7. Data Analysis ............................................................................................ 7
1.8. Limitation of the Study .............................................................................. 8
2. LITERATURE REVIEW .................................................................................... 92.1 Literature Review
3. ISLAMIC BANKING IN PAKISTAN ................................................................. 13 3.1. Growth .................................................................................................... 21
3.2. Islamic Banking Products ....................................................................... 22
3.3. Investments ............................................................................................ 23
3.4. Market Share .......................................................................................... 26
3.5 Problems/Prospective..294. DEPOSIT AND RATE OF RETURN ...................................................................
4.1. Security on Deposits and Investments.................................................... 30
4.2. Rate of Return on Deposits and Investments ......................................... 32
4.3. International Dealings ............................................................................. 34
4.4. Taxations ................................................................................................ 36 5. PROBLEMS .................................................................................................... 37
5.1 Lack of Awareness ............................................................................... 38
5.2 Religious Convictions .......................................................................... 41
5.3 Social, Ethical and Cultural Values ...................................................... 44
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
6/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
Institute of Business and Technology
6. CONCLUSION AND RECOMMENDATION ........................................................6.1 Conclusion ............................................................................................... 49
6.2 Recommendations ................................................................................... 49
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
7/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
1Institute of Business and Technology
1. INTRODUCTION
1.1. Introduction
Expansion (1976 to the early 1980s): Islamic banking spread from the Gulf
eastward to Malaysia, and westward to the UK.More then 20 Islamic banks were
established, including international and intercontinental instituions.Islamic
banking association or consultancy bodies also broadened their operations. and
they were offered various Islamic products. Almost all of the pioneers of Islamic
finance in present age, ideally the real alternatives to lending on interest under
an Islamic economic system are profit /loss sharing (PLS) or qard-e-hasan i.e.
loaning without any charge over and above the principal amount. However, in
view of the difficulties faced in practical application of PLS system , a number of other alternatives have been endorsed by the CII as also by other Shariah
scholars 1.,Islamicproducts promotes over the world with the help of more than 300
Islamic financial institutions which is operating in around 75 countries. Over the
years, the Islamic financial landscape has transformed into a vibrant and
competitive mode of global financial intermediation. According to an estimate,
total shariah compliant assets worldwide have grown to about US$ 700 billion
with annual growth exceeding 10.0 percent during the past decade1
- and areprojected to grow to US$ 1.6 trillion by 2012. 2 Islamic banking and Sukuk
represent the most well established forms of Islamic finance, whereas Takaful
and shariah-compliant mutual funds are also evolving rapidly. In terms of
contribution to the global shariah-compliant asset base, Islamic commercial
banks take the lead with a 74 percent share of assets. 3
Islamic financial institutions (IFIs), while not directly impacted by the
repercussions of the global financial crisis, 4 did experience the knock-on risks
transmitted through indirect channels. Notably, to comply with the asset-backing
principle5 of Islamic transactions, one of the preferred asset classes of Islamic
banks is real estate. According to an estimate by Standard & Poors, 6 around
20.0 percent of all financing by IFIs is backed by real estate, and a large number
of commercial banks are vulnerable to the correction in the real estate market
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
8/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
2Institute of Business and Technology
seen during the last two years. Secondly, given the dearth of shariah-compliant
liquidity management instruments, IFIs have generally resorted to placing funds
in the equity market, which has exposed them to the risk of severe correction in
stock markets around the world, as seen during the course of the financial crisis.
1. http://weatdibp/Learning.aspx?2 Islamic Finance Outlook 2009, Standard & Poors, February 2009.3 Islamic Finance - Higher Rewards but Higher Risks, Oliver Wyman, April 2009.4 Islamic Finance 2009, International Financial Services London (IFSL) Research, February 2009.5 Shariah Law prohibits interest-based structured financial products, the mismanagement of which led to the crisis.6 IFIs have to abide by the asset-backing principle which requires that each financial transaction must refer to a
tangible, identifiable underlying asset.7 Islamic Finance Outlook 2009, Standard & Poors, February 2009.
Third, the drying up of global liquidity has had an adverse impact on sukuk
issuance, which has gone down to US$ 14.9 billion in 2008, as against US$ 34.3
billion in the previous year. The emergence of these risks as a consequence of
the financial crisis has brought forth the realization that IFIs, while resilient to
adverse developments, are not risk immune. The ensuing debate on the
supremacy of the tenets of Islamic finance versus conventional finance needs to
take these risk factors into account, given that both conventional and Islamic
financial institutions function in one and the same global economy. Islamic
Finance is one component of global finance and equally exposed to the
developments in international financial markets. The view that IFIs are inherentlysafe because of the prohibition on the use of structured finance vehicles is
countered by the argument that Islamic finance is still not a mature industry, that
there would have been attempts to introduce shariah- compliant securitization
instruments.
Notwithstanding the ongoing debates and arguments, the fact that IFIs
remained relatively unscathed during the initial phase of the crisis does speak of
its virtues in comparison with conventional finance.In Pakistan, since its re-launch 7 in 2002, Islamic banking has grown
progressively. The asset base of the Islamic Banking Institutions (IBIs) 8 on
average has grown at around 59 percent per annum since 2005. The growth in
the deposit base and the ongoing expansion in outreach, based on the number of
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
9/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
3Institute of Business and Technology
branches, is also impressive. As a proportion of the overall banking industry, the
combined share of Islamic banks, Islamic branches of conventional banks and
Islamic windows 9 is 5.2 percent in deposits, and 5.1% in assets, as of end-June
CY09. State Bank of Pakistans strategic plan for the Islamic banking industry
launched in 2008, 10 aims to increase the size of the industry to 12% by 2012.
8 Historical details in Chapter 4, SBP Financial Sector Assessment 2004, and Chapter 8, SBP Financial StabilityReview 2007-08.
9 IBIs include stand-alone Islamic banks, Islamic banking branches of conventional banks and Islamic windowoperations in conventional branches of conventional banks.
10 IBD Circular No. 6 dated November 10, 2007.11 Strategic Plan for Islamic Banking Industry of Pakistan, September 2008, Islamic Banking Department, State Bank of
Pakistan.
In essence, the focus of the strategic plan is: (i) to extend the outreach of Islamicbanking services by covering a broad-based geographical area and encouraging
product development, (ii) strengthen the shariah-compliance mechanism andregulatory support, while (iii) building the capacity of Islamic banking institutions.Notably, the Islamic banking industry in Pakistan is also stymied with challengesfaced by other jurisdictions such as the need for standardization in shariahrulings on products and services, developing appropriate instruments for liquiditymanagement purposes etc, and the strategic plan aims to overcome thesechallenges, by focusing on the SMEs, microfinance and agriculture sectors.MAJOR ISLAMICMODES AT A GLANCE
Modes & their Close Conventional Equivalents
Islamic Finance Conventional Finance Intermediated Intermediated Not
Intermediated
1. Murabaha None None 2. S alam None Future contracts
3. Istisn aa None None
4. Ij arah Leasing Leasing 5. Mus harakah Shareholding Venture capital
6. Mudarabah None Venture capital
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
10/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
4Institute of Business and Technology
1.2. Purpose of Study
Pakistan initiated a process of the Islamization of its financial system in
1979. Though the financial system of the country had undergone significant
changes since then, the process of Islamization is yet to take its full course. Although Pakistan is an Islamic country according to its constitution, it is not an
Islamic state, as it does not follow the principal objectives of economic order in
Islam.
It is an irony that very little has been borrowed from the Islamic concept of
economics in the Islamic state of Pakistan, Perhaps the people as well as rulers
of Pakistan have not cared to study in depth the Islamic economic concept, given
by the Holy Prophet (P.B.U.H.) and the pious caliphs. What we have only
succeeded in is making cosmetic changes here and there, and that too, in very
few sectors of economy.
So what are the factors impeding the growth of Islamic Banking System in
Pakistan? The purpose of this study is to discuss the various factors impacting
negatively (or positively) in the implementation of Islamic Banking System in
Pakistan.
1.3. Research Objectives
As such, the purpose of this study is to review the various aspects of
Islamic Banking and to identify the various factors affecting in the implementation
of Islamic Banking in Pakistan and also assess their viability and applicability with
respect to individual and corporate consumers. More specifically the objectives
will be:
y To review the History of Islamic Baking in the Pakistan. This will enable
the readers in understanding the evolution of Islamic Banking and will
consequently enable them in evaluating its need in present times.
y To identify the various factor which has major effect on implementation of
Islamic banking system in Pakistan.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
11/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
5Institute of Business and Technology
1.4. Hypothesis
In the light of above, the following hypothesis is developed:
Lack of awareness, low profit rate of return on deposits and investments,
and differences in opinion regarding Islamic Banking Products are creatingobstacles in the investment of Islamic products and promotion and
implementation of Islamic Banking System in Pakistan.
1.5. Data Collection
Lots of secondary data is available about Islamic Banking and their
products and the review of secondary data will aid us in determining the true
factors impacting on Islamic Banking. State bank data will be analyzed and past
editions of various newspapers, magazines,interanet and intrernet will be
reviewed to get valuable information.
Dawn, The News, Jang, and Business recorder are the most credible
newspapers of Pakistan so there current and past editions will be fully explored.
Research reports, which have already been developed on Islamic Banking
and their products, have immense significance and they will form an integral part
of secondary data.Books published on Islamic Banking are another valuable source and for
this purpose, top libraries of Karachi will be visited including Applied Economics
Research Center (AERC), University of Karachi.
Internet is, no doubt, the biggest source of information on any topic. There
is a lot of material about Islamic Banking available on Internet and shall be
referred definitely.
The material published by State Bank of Pakistan, and annual reports of
various banks form another important source of secondary data.
In order to test the research hypothesis, corporate customers and bankers
are identified as main primary source of data. Corporate customers form an
important part of banking industry and their views will be used in the testing of
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
12/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
6Institute of Business and Technology
hypothesis. Bankers have more knowledge about Islamic Banking than any one
else and their expertise will enable us to find the shortcomings of Islamic Banking
Products..
Personal Interviews will be conducted from reputed religious scholars,economists, and government officials to get first hand knowledge about Islamic
Banking. It is planned that an interview of Adnan Kakakheal who is vising faculty
member of Dabai Islamic Bank, the fastest growing Islamic bank in Pakistan, will
be conducted to get critical information about Islamic Banking Products
1.6. Sampling
Following table illustrates the sources that were identified for sampling.
Table 2.1: Sampling Techniques for Primary Sources
Source Population SamplingTechniqueDesired
Sample Size
Non Islamic Banks 30 Stratified RandomSampling 3
Bankers 50000 Judgment Sampling 5000
CorporateCustomers 100000 Judgment Sampling 10000
1.6.1. Non Islamic Banks(offering various products)
Non Islamic Banks operating in Pakistan include foreign as well as
local banks. Since these two groups are totally different, so it is decided to
use stratified random sampling technique. After applying the procedure of
stratified sampling, interviews will be conducted from the top officials of
selected banks on some suitable time.
1.6.2. Bankers and Corporate Customers
Judgment sampling technique will be used for bankers and corporatecustomers. Since population-size of these sources is based on estimation, so
the most suitable technique of collection information from respondents is
judgment sampling.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
13/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
7Institute of Business and Technology
1.6.3. Observation
Another instrument that will be used in our study is the observation.
People will be observed thoroughly while conducting interviews and getting
questionnaires filled.
1.7. Data Analysis
After the data collection phase that will be done through questionnaires,
interviews and observations, results will be analyzed thoroughly. Since the
purpose of the study is to identify the most critical issues impacting on Islamic
banking so in order to test the hypothesis, interval scale will be used.
Interval scale is assignment of numbers to rank items such thatnumerically equal distances on the scale represent equal distances in the
property of factor being measured. Following table shows the interval scale to be
used in this study.
Table 2.2: Interval Scale
The statistical tools to be used with interval scale are
a. Mean
b. Percentage
Mean for various purposes will be calculated using the formula mentioned below,Mean = X = f iXi
N The aforementioned tools will be used in summarizing and examining the
nature of the results. The results will be tabulated for the purpose of analysis,
and Figures and graphs will be drawn from the tabulated data.
Degree of Property CodeVery High -2
High -1 Average 0Low 1
Very Low 2
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
14/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
8Institute of Business and Technology
1.8. Limitation of the Study
This research report is purely an academic work, due to time constraints
and hectic academic activities; The research is conducted within the following
limitations:y To keep the study manageable research is conducted on limited grounds.
y The study is conducted on small level and only the important aspects are
considered.
y There was a shortage of time thats why limited data is collected. Still the
researcher has tried to collect sufficient data to make an effective analysis.
y
Some respondents, who have limited knowledge of Islamic banking or noknowledge about the financial modes of conventional and Islamic banking,
also answered the questions; hence the replies of some questions may be
based on their own imagination or thoughts.
y Although majority of our respondents of Islamic banking questionnaire
were account holders of Dubai Islamic Bank, however some of our
respondents had accounts in other Islamic banks too or accounts in
Islamic branches of conventional banks, so the results of this study are not
fully applicable to Dubai Islamic Bank of Pakistan.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
15/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
9Institute of Business and Technology
2. LITERATURE REVIEWIslamic Banking: A research on Islamic Banking conducted at university of Malaysia in 1988, which is conducted by Mohamed Arif shows that huge part of population(Muslim) was aware the concept &existence of Islamic banking. Its factthis is new phenomena that has kaen many observers by surprise as per research thirty Islamic banks was working globally at that time an attempt ismade in this paper
(a) To survey the growing literature as Islamic banking in particular.(b) To trace the growth and develop dent of Islamic banking.(c) To highlights its silent fretures.
The first several organizations work to achieve international standardization andharmony to make the banking activities more transparent and attractive. Theachievement of harmonization as well as the performance of the banks is crucialfor the future of Islamic banking.
Modern experiment with Islamic banking was undertaken in Egypt under cover,without projecting an Islamic image. The pioneer effort lead by Ahmed-al-najjar,took the form of savings bank based on profit sharing in the Egyptian townof Mit ghamer in 1983-further the Nasir social bank, established in Egypt in1971was declared an interest free commercial bank, although its charter madeno reference to Islam given the huge potential for developed in the Islamic worldand the increasing of funds being invest invested according to the shariah itsseem perfectly reason able to suppose that the recent growth in Islamic bankingwill continue an accelerated pace. Another legitimate mode of financingrecognized in Islam is an based an equity participation (musharka)in which thepartners use their capital jointly to generate a surplus-profits or losses will beshared between according to the same agreed formula depending on the equityratio the literature also discases the question of central banking in Islamicbanking
M.Iqbal Patel in the article Islamic Banking needs restructinggave the conceptof Restructingof Islamic banking system. He explained towards the values andprinciple to solve the economic problems of mankind from a moral and sociallyresponsible prospective.The Islamic financial system requires that the transaction must be backed by realasset and not shady repackaged sub-prime mortgage that have impacted theglobal financial system. The risk is shared between the bank and the depositor.There is an incentive for both the banks and the depositors/borrowers to ensurethat the deal is sound. The asset-backed financing differs from conventionalbanking which deals with money and monetary papers and not so much tradingin goods and making inventories. The Islamic banking system to encourage savings and capital formation, ensureequitable distribution of income and wealth and justice between the parties canonly be achieved if financing by it is allowed on the PLS and fixed rate
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
16/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
10Institute of Business and Technology
techniques based on mutually agreed ratios is discarded in totality. Therefore,there is a need to restructure the mode of financing. In this article focus about the abolition of interest which is are the pillars of theIslamic economis system according to Quran ALLAH has permitted trading andprohibited riba
Tools of Islamic bankingMusarakaandMudarabaare based on the concept of profit and loss sharing in this system real asset must be involve and concern therisk factor which is shared between the banks and the depositor. The profitearned through dealing in money or the paper representing them is interestwhich is prohibited in Islam.The Islamic banking system to encourage saving and the capital formationensure equitable distribution of income and wealth and justice between theparties can only be achieved.
A research on the impact of interest rate changes an Islamic bank financingconducted in Malaysia on 3 April 2009 by Radiah Abdul Kader & Yap Kok
Leong. The study about the impact of interest rate changes an demand of Islamicfinancing in a dual banking system. as per research Any change of interest ratewould lead customer who are guided by the profit motive to substitute Islamicfinancing for convectional bank loans and voice versa and in the other scenarioany increase in the base lending rate would induce customers to obtain financingfrom Islamic bank. The study conclude that because customers are profitmotivated Islamic banks in the dual system are exposed to interest rate riskdespite operating on interest free principles
As per this research in Malaysia first time introducing Islamic Banking in1983,which is based on long term objective of Islamic banking system, would runside by side the existing conventional banking system.Rosly provide the theoretical explanation of the impact of interest rate changeson Islamic bank performance in the dual system. He emphasizes that Islamicbanks are exposed to interest rate risks and the root cause of this phenomenonis the overdependence of Islamic banks on BBA financing where the profitrate(financing rate is fixed, means that when interest rates are rising, the baselending rate(BLR)and rates of return on deposits of the conventional bank wouldchange accordingly to changes in the market interest rate.How-ever,the Islamicbank cannot increase the rate of returns on its deposits on its deposits becausethe profit margin of BBA is fixed.
HJ Zaharuddin HJ Abd Rehman wrote an article Islamic Banking Financing ratenot competitivewhich was published in NSTon 21/09/2005 .According to thisarticle consumers having issues against Islamic bank financing pattern-theyclaimed thatthe high profit rate changed by Islamic bank for their financingproducts as compare to the interest rate which is changed by conventional bank.(a)Islamic banks are also offering service for earning profit and is not a welfareinstitution where service are rendered for free.(b)Islamic bank is obligated to fulfill its duty towards investors.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
17/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
11Institute of Business and Technology
(c)They also needs to pay the staff salary which means the profit must be earn topay.The following factors answer the issue of why the Islamic bank financing rate isaveragely higher than the conventional.
a) The principles value of Halal.
b) The professional Shariah screening and auditing.c) The high potential players in the market.d) On the other hand, the home loans offered by Conventional banks are
seemingly very attractive as the rate charged in the first year is relativelylow. However, the rate for the remaining years will fluctuate as it isdependence on the Base Lending Rate (BLR) in the market. For exampleif the current BLR is 6 %, therefore the rate is equal to 6.25 % as the rateis equal to BLR + 0.25 %. What if BLR rises to 11 % or higher as hashappened in the past Malaysian economic crisis?
e) In the contrary, this will not occur in Islamic Banks because the sellingprice has already been fixed and agreed in the contractual agreement by
both parties. The Islamic Banks profit rate does not have any relation tothe BLR rate, thus it will not increase. In fact, it may even be reduced if theIslamic Banks were to provide rebate (ibra).
This article belongs with speech of Dr.Shamshad Akhter-Governor of State Bankof Pakistan- addressing 14 th world Islamic banking conference. In this speechshe was talk about competiton, growth and sustainability. All over the worldreceiving great work in form of innovation of new Islamic product which ispossible because of involment of consumer, they can convey the banker whichsort of product they need- she said in debate regarding the progress of Islamicfinance with the help of genuine effort Islamic finance giving to which market andalso discuss about the key drivers which can help the enhance the efficiency andcompetitiveness of Islamic finance and enhance its sustainability talk about thechallenges of new market to Islamic finance because of the issue of haramproductwhich is forbidden investment as concern of shariah approval due to allIslamic aspects same permits discuss about the mechanism of Islamic finance,principle of Islamic finance flexible, constructive and innovative.In this speech she talked about the drivers of enhancing efficiency andcompetiveness, as (1) Financial engineering and innovation.(2)Global financial centers and their regulators.(3)Standard governance and prudential regulation and supervisory guidance.(4) Development and adoption of simple and standard and cost effective legalframework for contract associated.(5)Flexible and practical application and enforcement of shariah principles and itsinjections and its acceptability by public.
Salman Ahmed Shaikh in the article critical analysis of the current Islamicbanking system published on 11/08/2007.In this article writter discussed about the critism an Islamic bank system thecurrent Islamic modes of financing are no different then conventional system
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
18/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
12Institute of Business and Technology
nothing can be changed an consumable products including money but rent canbe changed an tangibles like property or any assets. The technique is to then sellthe asset a profit or given the assets on rental basis to earn profit the articlehas delighted the defect of investments.The article outlines the economic teaching of Islam with regard t o income,
earning and spending. It compares interest rate with rent and with profit andshows that interest is equivalent neither rent nor profit. Its also analyzes thelogical arguments put faword in favor of interest by different economists andrefutes any economy and refutes and logical justification of interest.
This research is conduct by Abdul Hameed M.Bashir(who is the part of department of economics-Grambling state University).This research paper intendto analyze the banking system and the overall financial environment effect theperformance of Islamic banks,especially to examine the relationship betweenprofitability and the banking characteristic, after controlling for economic and
financial structure indicators.This research provides summary statistics pertaining to Islamic banks size andprofitability and also with the help of regression analysis to determine theunderlying determinants of Islamic bank performance and also discuss theinternal characteristics include bank size,leverageloans,short term financing, andownership and while studying the relationship between banks internalcharacteristic and performance the the impact of external factors such asmacroeconomic, regulatory and financial market environment are controlled.In other words we can say The study examines the determinants of Islamicbanks performance across eight Middle Eastern Countries between 1993 to19998.A variety of internal and external banking characteristics were used topredict profitability and efficiency.In general, our analysis of determinants of Islamic bank performance profitabilityconfirms pervious findings, controlling for macroeconomics environment, financialmarket structure, and taxation, the result indicates indicate the high leverage andlarge laons to assets ratios lead to higher profitability.
.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
19/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
13Institute of Business and Technology
3. ISLAMIC BANKING IN PAKISTAN
3.1. Growth
Islam was the basis of creation of an independent state within the
undivided Indo-Pak Sub- Continent. All Constitutions of Pakistan have
incorporated, within the principles of policy, the elimination of Riba as an
important objective of the State policy. Quaid-e-Azam, the father of the nation, in
his speech at the occasion of the inauguration of State Bank of Pakistan, had
expressed the desire for evolving an Islamic system of banking. In Pakistan
Islamic banking emerged as a response to both religious and economic needs.
Efforts for economy wide elimination of Riba started during 1970s and
most of the significant and practical steps were taken in early 1980s. It was a
very bold and comprehensive exercise. Pakistan was among the three countries
in the world that had been trying to implement interest free banking at
comprehensive / national level.
Numerous measures were taken to introduce interest free banking in
Pakistan. Banking and other relevant laws viz. SBP Act, Companies Ordinance,
recovery laws, negotiable instruments act, etc. were amended to facilitate
interest free banking system and the industry was given a specific timeline to
convert to the Islamic banking system.
State Bank Pakistan also gave the industry the products which it was
allowed to use without any change or exception. Islamic banking was rolled out
country-wide. New regulations were prepared prescribing the modes of financing,
profit distribution mechanism for deposits, financing facilities by SBP, etc. which
constituted ground work for Islamization of financial system. The mid-80s attempt
was a significant step in the evolution of Islamic banking system in the country. In
a technical sense it was the most advanced model compared to any other model
being practiced anywhere in the world at that time. The efforts and practical steps
undertaken in the 1980s to Islamize the economy at national level are
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
20/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
14Institute of Business and Technology
considered as pioneering work in the Muslim world as this became important
reference material for other countries which undertook the path towards
introduction and establishment of an Islamic banking system. In early 90s the
whole exercise was challenged in the Federal Shariat Court and the procedure
adopted by banks in Pakistan since July 1, 1985 was declared un-Islamic by the
Federal Shariat Court (FSC) in November 1991. The system was based largely
on mark-up technique with or without buy-back arrangement. The FSC
declared that various provisions of the laws held repugnant to the injunctions of
Islam in its Judgment dated November 14, 1991 would cease to have effect as
from July 1, 1992.
In a meeting held on September 4, 2001 under the Chairmanship of the
President of Pakistan, attended by officials of the Ministries of Finance and Law,
Governor State Bank of Pakistan, Chairman and some members of the Council
of Islamic Ideology and the Chairmen, and the two Task Forces it was decided
that the shift to interest free economy would be made in a gradual and phased
manner and without causing any disruptions. It was also agreed that State Bank
of Pakistan would offer three institutional options:
Setting up subsidiaries by the commercial banks for the purpose of conducting
Shariah compliant transactions;y Specifying branches by the commercial banks exclusively dealing in
Islamic products with all safeguards to ensure integrity and purity of
Islamic banking operations,
y Setting up a new full-fledged commercial bank to carry out exclusively
banking business based on proposed Islamic products.
y As a result of these efforts, in 2001, an Islamic Banking Division was
established in the Banking Policy Department at SBP. This time around,concerted efforts were made by SBP to undertake Islamic Banking in its
true spirit and also keeping in view the lessons learnt from the experience
of Bahrain, Malaysia and Saudi Arabia etc. in this area. Accordingly, steps
have been taken to set up a parallel banking system, so that an enabling
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
21/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
15Institute of Business and Technology
environment is ensured for the sector, avoiding any serious repercussions
of entire transformation of financial sector.
Sh aria h Compliance Developments
The present re-launch of Islamic Banking in Pakistan by the StateBank of Pakistan has been based not only on the lessons learnt from the
history of Islamic Banking efforts in Pakistan but also on the experiences of
other countries in the world that are currently known for their leadership role
in this banking sector. The basic difference, in SBPs current policies
regarding Islamic banking and the previous efforts, is the approach adopted
by SBP wherein the introduction of Islamic Banking is being viewed more as a
change management issue rather than as a religious or a legal issue.
This basic difference in approach defines the policies on Islamic
Banking and is primarily responsible for the success achieved so far. It was
decided to promote Islamic banking in a gradual manner and as a parallel and
compatible system that is in line with best international practices. Following
the pronouncement of the government to shift to interest free economy in a
phased manner without causing any disruptions the effort was envisaged to
be based on a market driven and flexible approach.
Furthermore this approach is also helping build a broad based
financial system in the country to enable all segments of the population to
access financial services.
Shariah compliance is the most important aspect of Islamic finance.
The credibility of Islamic Banking Institutions (IBIs) not only depends on the
financial health of the institution but also on its adherence to the Shariah.
Under the current strategy for promotion and development of IslamicBanking as a parallel, viable and compatible system, State Bank of Pakistan
has put in place a comprehensive Shariah Compliance Structure.
The Shariah Compliance Framework established by State Bank of
Pakistan consists of:
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
22/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
16Institute of Business and Technology
1. Shariah Board at SBP
2. Shariah Advisor
3. Essentials & Model Agreements of Islamic Modes of Financing
Instructions and Guidelines for Shariah Compliance in Islamic Banking
Institutions
4. Shariah Advisors Forum
5. Shariah Compliance Inspection
6. Standardization of Shariah Practices- Adoption of AAOIFI(Acco unting a nd Aud iting O r g a niz a ti on f or Islam i c Fin a nc i al Instit uti ons) Shariah Standards
Each Islamic Banking Institution (IBI) is required to work under the
guidance of a Shariah advisor. To keep this process more objective, broad
based and responsive to the market conditions SBP Shariah Board has
approved Fit & Proper Criteria for Shariah advisors of IBIs. According to this
Criteria, minimum required Shariah and contemporary educational
qualification as well as experience and exposure for becoming a Shariah
Advisor has been defined. Moreover, to minimize conflict of interest, it has
been specified that a person cannot work as Shariah Advisor for more than
one IBI in Pakistan.
Further, it has been specified that a Shariah Advisor shall not hold
any executive/non-executive position in any other financial institution, except
working as Shariah Advisor of Islamic mutual funds of the same IBI. In
addition to that, Shariah Advisors of IBIs have been barred from having any
substantial interest in or becoming employee of some types of organizations
like exchange Companies, corporate brokerage houses or stock exchange.
These provisions in Fit and Proper Criteria for Shariah Advisors has
ensured objectivity in evaluation criteria, minimization in conflict of interest
and induction of new lot of Shariah advisors in the market.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
23/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
17Institute of Business and Technology
Current Industry Review
This time there has been a shift in the approach from the legal &
regulatory perspective to that of dealing with the whole affair of introducing
Islamic banking in Pakistan as a change management issue. As compared toour past experience our new approach provides flexibility to the IBIs as regard
to products, instruments and Shariah compliance methodology. This new
initiative has witnessed a very encouraging response. As at end of the year
2003 only one bank operated as a full-fledged Islamic bank and three
conventional banks were operating Islamic banking branches. Currently there
are 6 full fledged licensed Islamic banks (IBs) and 12 conventional banks
have licenses to operate dedicated Islamic banking branches (IBBs). All of
the five big banks in Pakistan are providing Islamic banking services. The
total assets of the Islamic banking industry are over Rs. 477 billion as of DEC,
2010 which accounts for a market share of 6.4% of total banking industry
assets. The market share of deposits stands at 6.5%. Total branch network of
the industry comprises of more than 700 branches with presence in over 50
cities & towns covering all the four provinces of the country.
The industry over the years has managed to offer a wide array of
products encompassing almost the\ entire range of Islamic modes of financing that are able to cater to the needs of majority of the sectors of the
economy. Also it has been noticed that the industry has a good financial
performance. Foreign investment in Pakistani Islamic banking industry is
giving the industry a unique look through which success transfer is taking
place as experiences are being shared leading to the development of the
local industry.
SBP has over the years attempted to develop a supportive Regulatory andSupervisory Framework having special emphasis on Shariah Compliance that is
in line with the best international practices. The aim is to align our industry with
the international best practices so as to enhance the credibility and international
stakeholders confidence in Islamic banking efforts of SBP. This will in turn not
only boost the image of our country but will also be instrumental in attracting
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
24/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
18Institute of Business and Technology
foreign investment. Pakistan has adopted a three tiered, somewhat unique,
Shariah Compliance Mechanism and process to ensure a deeper and extensive
Shariah compliance supervision on an on-going basis.
The data for period ended Dec-2010, shows that asset financingactivities of Islamic banks have revived besides substantially higher assets
and deposits growth. The profitability indicators have also shown marked
improvement as compared to the preceding quarter. The financing and
investment portfolio of Islamic banks reached Rs 477.0 billion in Dec 2010
comparatively better as compare to previous, depicting an increase of 6.4
percent during the last quarter. In terms of market share, total assets,
financing & investment and deposits reached 5.1 percent and 4.2 percent and
5.2 percent, respectively, at end Dec-2010. The branch network of 6 full-
fledged Islamic banks and 12 conventional banks (with dedicated Islamic
banking branches-IBBs) increased to 528 branches in DEC 2010.
The State Bank of Pakistan issuing "Islamic Banking Bulletin" for the
second quarter ended on June 30, 2010 said that current growth rate of
Islamic banking industry has envisioned to achieve a share of 12 percent by
2012 as per Islamic banking strategy plan.
The growing depositors confidence is well reflected in last quarter,
which shows an increase of 15.5 percent in the deposits. The deposit base of
Islamic banks stood at Rs. 238 billion at end-Dec 2011 compared to Rs 206
billion in the previous quarter-end.
Total liabilities of Islamic banks have increased by 13.3 percent to Rs
274 billion from Rs 242 billion during the quarter. While the net assets and
equity increased by around 7 percent each. There is an increase of 6 percent
in the reserves to one billion rupees and then appropriated profits increased
by 79 percent to Rs 900 million in last quarter.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
25/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
19Institute of Business and Technology
The most of the indicators of the Islamic banking in Pakistan showed
reversion towards the usual high growth trend. It may be recalled that the
Islamic banks also witnessed some slowdown as a result of the financial
stress of recent times.
The financing portfolio has increased by 3 percent quarter on quarter
basis. This is encouraging, as during the last quarter the financing had
actually declined by Rs 10 billion. The resurgence in financing is
accompanied by 9.3 percent increase in investment. The increased financing
may be reflecting the improving economic outlook of the country.While the
investment has largely increased due to 3rd issuance of Ijarah Sukuk.
Nonetheless, there is a welcome increase of Rs 2.4 billion in Musharika
financing, though Modaraba financing declined by almost 50 percent.
Nonetheless, the net mark-up income increased from Rs 7.8 billion to Rs 15.4
billion-a healthy 94.0 percent growth. Non-mark up income increased by a
hefty 213.2 percent from Rs 0.5 billion in SEP 2010 to Rs 1.6 billion in June
Islamic Finance has made commendable progress in the last few years. The
growth rate remained consistently higher than the conventional finance
industry, culminating in continuously rising share of Islamic finance in the
local and global financial markets. The SBP is leading the way in Pakistanand has envisioned to achieve a share of 12 percent by 2012 in its Islamic
banking strategy plan. A relatively restricted branch network coupled with the
preferred policy of some conventional banks having IBBs (Islamic Banking
Branches) to borrowing funds from their head offices has partly contributed to
this skewed distribution.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
26/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
20Institute of Business and Technology
Figure 3.1 Deposits of Islamic Banking Industry
The rapid growth experienced during the year 2004 was primarily due to
the entry of Albaraka Islamic bank and an aggressive strategy adopted by Bank
Alfalah. Similarly the entry of four new full fledged Islamic banks i.e. Dubai
Islamic, Emirates Global, Dawood Islamic & BankIslami during 2006 and 2007
contributed towards the healthy growth in overall deposits position during these
years.
Figure 3.2 Bank Wise Share of Deposits*
S our ce: SBP Q uar t e rly R epo r t Dec+2010
The bank wise share of deposits as on Jun-09 is presented in the Figure.Over all the share of Meezan Banks deposits is dominant while among IBDs
(Islamic Banking Divisions of Conventional Banks having IBBs) of conventional
banks Bank Alfalah is leading the group.
However the new entrants like Dubai Islamic and BankIslami have also
managed to capture good share in relatively shorter period of time. Going
forward the remaining two full fledged players i.e. Dawood Islamic and Emirates
Global are also expected to catch up with other competitors.
Deposits structure consists of Fixed Deposits, Saving Deposits, Current
Accounts non remunerative and other deposits. Savings, Fixed and Current
account (non remunerative) of customers deposits are 32%, 36% and 20%
respectively of Overall Deposits and Other accounts.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
27/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
21Institute of Business and Technology
* S our ce: SBP Q uar t e rly R epo r t J un-09
Growt h (Branc h Network)
The share of full fledged Islamic banks in overall branch network of the
industry has increased over period of time. Furthermore, it shows that during the
year 2008 highest growth rates in overall branch expansion were experienced
wherein two new full fledged Islamic banks (Meezan Islamic Bank & BankIslami)
and four conventional banks having IBBs commenced operations. As the full
fledged banks consolidate themselves it is expected that the rate of growth innetwork expansion will increase at a much higher pace.
Currently Islamic Banking is available through 6 full-fledge Islamic banks
and 12 conventional banks having Islamic banking branches. The experience as
reported by some of these banks is that around 10% to 15% customers walking
into their branches are new to banking. These are the people that have remained
away from the conventional banking system because of their beliefs. Additionally
those who have been using conventional banking but minimizing the depth of their relationship again based on their beliefs tend to deepen their relationship
with an Islamic bank thus again contributing to the size of the banking sector
from within its existing coverage and base. From the above figure we can identify
the growth of Islamic Banking by Branch network, as this is the statistics from
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
28/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
22Institute of Business and Technology
2002 where there was only 6 Branches of Islamic Banks as up to June - 2009
there are 528 branches.
3.2. Islamic Banking Products
These are Islamic products which is discussed following
1 Customers Deposits2 Fixed deposits3 Savings deposits4 Current accounts -Remunerative5 Financial Institutions Deposits6 Remunerative deposits7 Non Remunerative deposits8 Murabaha9. Ijarah10 Musharaka11 Mudaraba12. Diminishing Musharaka13. Salam14 Istisna15 Qarz-e-Hasna
3.3. Investments
dec-2010 the Investments has been 4.5% (194Bn) with respective to
Industry growth Initially due to non availability of Shariah compliant instruments
the Islamic banking institutions suffered from a relative disadvantageous position.
Specifically, until the issuance of WAPDA Sukuk in November 2005, there was
no approved security for meeting the Statutory Liquidity Requirement.
Subsequently KSEW Sukuk has also been categorized as SLR eligibleinstrument. Meanwhile SBP has provided the industry with a level playing field
through a separate SLR regime and limit on investment in shares. Currently for
meeting the SLR requirements Islamic Banking Institutions have been allowed to
maintain SLR at 9% of their TDL on an overall basis, with investment in SLR
eligible Sukuk not exceeding 7% of their TDL (however, individual holding in
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
29/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
23Institute of Business and Technology
Sukuk of one issuer shall be limited to 5 percent of total TDL) and remaining in
the shape of cash in hand, balance with NBP in current account, and balance
with State Bank of Pakistan in Special Deposit Account.
The direct investment by the Islamic banks are not the same ratio as theconventional banks are doing, the main reason of that is the conventional banks
are operating from more than decades where as the Islamic banking just had
start recently by getting the full fledge licenses from the State Bank of Pakistan
during 2002, from that starting point Islamic banks are now growing at the very
high pace, as we have already known from the above discussion that Islamic
Banking has high growth rate than the conventional banking.
Figure 3.5 Islamic Banking Industry Investment
*
S our ce: SBP Q uar t e rly R epo r t J un-09
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
30/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
24Institute of Business and Technology
Up June-2009 Meezan Bank continued to enjoy the highest share in
overall investments made by the industry and Bank Alfalah in line with the size of
its balance sheet leads the category of conventional banks having IBBs.
June 2009 compared with Rs.185 billion in March 2009. In terms of marketshare, total assets, financing & investment and deposits reached to 5.1% and
4.2% and 5.2%, respectively at end June 2009. The branch network of 6 full
fledged Islamic banks and 12 conventional banks (with dedicated Islamic banking
branchesIBBs) increased to 528 branches in June 2009.
The financing portfolio has increased by 3 percent QoQ. This is
encouraging as during the last quarter (Jan-Mar 2009) the financing had actually
declined by Rs 10 billion. The resurgence in financing is accompanied by a QoQ
9.3 percent
Figure 3.6 Assets of Islamic Banking Industry
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
31/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
25Institute of Business and Technology
*Source: SBP Quarterly Report Jun-09
Sou r o f unds une - 9
2
Borrowing Capital of
und ther Liabilities eposit
*Source: SBP Quarterly Report Jun-09
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
32/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
26Institute of Business and Technology
As from the above graph we van see that the main source of Funding in
Islamic Baking is Customer Deposits, which contributes 72% of its total funding
and remaining 7% is from Borrowing, and 14% and 7% Capital and other
liabilities. From this figure it can be easily identified that the people are
diversifying from conventional to the Islamic Banking.
*Source: SBP Quarterly Report Jun-09
This figure shows the fine combination of financing and investing of the
funds used by Islamic banks in june-2009, as we can easily identified that 67% of
spending is done in the financing and investing section and separately financing
contributes 52% and Investing 15% where as the placement portion is about
14%.
3.4. Market Share
As mentioned earlier SBP worked on a three pronged strategy for
promotion of Islamic Banking i.e.
1. Allow new full fledged Islamic banks in the private sector,
2. Allow the conventional banks to set up Islamic banking subsidiaries
3. Allow the existing conventional banks to open Stand-alone Islamic
banking branches.
The first and third options have been exercised so far and none of the
commercial banks have so far set up a subsidiary for Islamic banking.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
33/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
27Institute of Business and Technology
Figure 3.8 Market Share
*
S our ce: SBP Q uar t e rly R epo r t J un-09
The change in policy approach from the legal & regulatory perspective to
that of dealing with the whole affair of introducing Islamic banking in Pakistan as
a change management issue has received a very encouraging response. Under
the current policy first Islamic banking license was granted on 31st January,
2002. Since then the industry has been continuously showing impressive growth.In 2003 only one bank operated as the full fledged Islamic bank and two
conventional banks were operating Islamic banking branches.
The total assets of the Islamic banking industry accounted for a market
share of about 0.5% and the total branch network comprised of 17 branches.
Today we have 6 full fledged Islamic banks and 12 conventional banks are
operating dedicated Islamic banking branches.
As on 30th June 2009, the total assets of the Islamic banking industry
were around Rs. 313 billion which accounts for a market share of about 5.1%.
The total branch network of the industry comprises of over 528 branches with
presence in over 50 cities & towns and covering all the four provinces of the
country.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
34/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
28Institute of Business and Technology
It is also important to compare progress of Islamic Banking in Pakistan
with the progress in other countries15. Malaysias first Islamic Bank commenced
operations in 1983 and the market share of the Malaysian Islamic banking
system today stands at approximately 13%. Bahrains Islamic banking system is
said to have gained a share of around 8% in over 30 years. Similarly in Indonesia
Islamic banking was introduced somewhere in mid 90s. According to Bank
Indonesia, Islamic banking assets reached in March, 2009 to 1.67 percent of total
assets as compared with 0.7 percent in 2003 and currently the deposits stand at
1.69% and financing at 2.60% of the total banking sector.
On the other hand, Pakistan has shown much better performance than
other global players. At certain point of time, 6 full-fledged Islamic banks and 14
conventional banks with Islamic banking branches were operating. Due to
merger of Habib Bank AG Zurich Pakistan Operations with Metropolitan Bank
Limited and Prime Commercial Bank Limited with ABN Amro Bank N.V. Pakistan
(now RBS Bank), the total number of conventional banks having Islamic banking
branches today stands at 12.
Islamic banks are currently able to offer at least 75% of the product range
available in contemporary conventional banking. On the consumer banking side,
clean lending products like Personal Loans and Credit Cards still pose achallenge. On the corporate side working capital loans are a challenge.
None of the banks have any Microfinance or Agriculture business although
a few have started offering financing to SME sector.
This offers a huge opportunity to extend the reach of the banking sector
and multiply the size of Islamic banking geometrically. It also clearly points out
the direction that has to be taken. In the existing coverage area, both
geographical and customer type, there is need to enrich the offerings through
product development and extension of distribution channel and network
Additionally there is need to extend the coverage to those sectors that are not
being covered by Islamic banking i.e. Microfinance and Agrifinance and also to
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
35/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
29Institute of Business and Technology
deepen the offerings in the sector with significant potential but limited presence
i.e. the SME, infrastructure and housing sectors.
It can be seen that although Islamic banks have an amount-wise 4.2%
market share in financing, however, their share in number of borrowers is just0.9%. It is because of following factors:
1. Products: 93% customers of banking industry are availing Consumer and
Agriculture finance facilities. In consumer finance, a large number of
customers are from the credit card or personal loan sectors. However,
Islamic banks have no such products and their financing to Agriculture
sector is also negligible.
2. Geographical outreach: Conventional banks have a network of more than7800 branches in all parts of the country, through which they can extend
financing. However, IBIs being new institutions have just over 582
branches (around 5.1% of total) as of end June, 2009.
3. Technical Assistance: State Bank has arranged technical assistance in the
areas of SME, Agriculture, Microfinance, etc. which is being availed by
conventional banks through which they are developing products for these
sectors.However, no such assistance has been provided to/availed by IBIs as yet.
Despite these issues, it is believed that Islamic banking can grow at a much
faster
3.5 PROBLEMS/PROSPECTIVE
THE Idea of Islamic Banking is still hot these days in Pakistan. Either
completely new Islamic institute are being emerged or recent traditional banks
are opening additional branches focusing in Shariah-based Financing
products/services. But still consumers doubt that how much are they Islamic?
Average consumer of the Islamic banks in Pakistan they still have doubt in
their mind from the scratch to the main services provided by Islamic Banks.
Consumers would be open to the thought of acquire Islamic banking products
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
36/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
30Institute of Business and Technology
and services given that the organization that is offering the service is renowned,
and better customer service features such as ATM access, phone banking and
so on, are offered. This provides a great prospect for Islamic financial
organizations in a market that already have many other competitive existing
commercial banks. If Islamic financial organizations can make on their
understanding and status in the monetary world, In Pakistan, a number of
consumers would not adopt halal banking products because they feel insecure
that what will happen if credit facilities were taken away. In the Islamic monetary
structure money is not lent out, as an alternative it is an asset-backed scheme
where monetary organizations invest in projects. Consequently, financial
organizations deal in equity, not debt. To counter this inadequacy, some banks
have started issuing debit cards. These cards are alike to the credit cardsexcluding the actuality that they use the consumers own funds as an alternative
of trust on any credit. Another concern is that of sharing profits and not losses. A
lot of consumers who have been using the Islamic banking services were not
educated about the loss sharing concept earlier. This would designate that some
economic organizations have been assuring profits. In fact, it breaches the
fundamental law of Islamic financing structure that is, relating compensations to
risk. Any kind of money earned on investment without risk is simply interest more
than profit, so, it reveals the fact that, in order to recognize how the Islamic
structure makes a distinction between profit and interest, they have to look at the
dissimilarities in financial beliefs. Because past experiences have already shown
that the rationale of monetary and financial standing is very important for a
consumer to select a particular bank. In capitalist theory, capital and
entrepreneurs are taken care of as two separate identities of production where
the first identity acquires interest and the second identity is permitted to get the
profit. It is implicit that interest is a fixed return to offer capital, and profit can
simply be produced after allocating the fixed return to land, labor and capital. On
the contrary, the Islamic monetary sys does not regard as capital and
entrepreneurs as separate identities of production.
4. DEPOSIT AND RATE OF RETURN
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
37/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
31Institute of Business and Technology
In this chapter, we have emphasized the areas of accounting for Islamic
financing, their dealings at different levels, returns to investors, and the difficulties
that are faced in the promotion of Islamic economic system due to these factors.
Since Islamic banking is in embryonic state in Pakistan, many important things
are still undefined. We have tried to lionize these parameters.
4.1. Security on Deposits and Investments
Many depositors and investors have reservations about security of their
money. They are not sure whether it is safe in Islamic products or not. Numerous
reasons are propounded in this regard, e.g., small size of Islamic banking
industry, unstable returns, uncertainty of its long-term prosperity, and many other
direct and indirect parameters.The most important reason for lack of security is found to be Riba. The
definition of Riba, provided by the Supreme Court, includes any increase over
and above the principal amount. It does not take into account inflation,
depreciating value and declining purchasing power of the rupee. The real worth
of the depositors' money is eroded by inflation requiring protection. The
traditional bankers are supposed to ensure returns to the depositors over and
above the rate of inflation. The incentive is offered to attract deposits. Sourcessaid that Dr Tariq Hasan had proposed that the indexation should be allowed to
protect the real value of principal amount. Experts point out that the rise in prices
is now an every day phenomenon. Price stability is a thing of the past.
Regarding the impact of security on deposits and investments on Islamic
banking, questions were asked from 50 corporates and 30 bankers. The results
are shown in the table given below.
Table 4.1: Computation of Mean for Security on Deposits and Investments Options X f 1 f 2 f 1X f 2X
A -2 8 2 -16 -4B -1 13 6 -13 -6C 0 13 12 0 0d 1 11 7 11 7e 2 5 3 10 6
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
38/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
32Institute of Business and Technology
f 1 = Frequency for Corporatesf 2 = Frequency for Bankers X1 = -0.16 X2 = 0.10
Following figure shows the summarized results, as shown in figure both
the groups have rated this factor differently.
Figure 4.1: Responses to Security on Deposits and Investments
Corporates Bankers
Results are very different for corporations and bankers. Corporations have
shown little interest about low returns. Main reason can be that when intension is
to transact in Halal and Islamic way, amount of return becomes a secondary
consideration (or looses significance altogether in many cases). They are
contended in compliance with Islamic norms and it is more important than any
other factor.
Bankers have low importance for issue of return. They are dealing in
different types of investments and securities in Islamic as well as non-Islamic
modes. Many of the non-Islamic instruments are more vulnerable and, hence,
insecure than current Islamic products, but they are available in the market. So,
security is not a big problem in the eyes of bankers. However, bankers are
working hard to improve the security of all types of instruments.
Total 50 30 -8 -3
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
39/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
33Institute of Business and Technology
4.2. Rate of Return on Deposits and Investments
Government, with the alliance of SBP and other leading financial
institutions, wants to promote investment in country. Many steps have been
taken in this regard. One of the important ones is to implement Islamic bankingsystem.
State Bank Governor Dr Ishrat Hussain said the interest-based prevailing
system and Riba-free banking mode would run parallel. Therefore, people who
want riba-free products will go to Islamic banks, while the people who want fixed
income on investments and deposits will opt for non-Islamic banks. However,
return on Islamic products will remain point of concern, as it is not stable.
However, return on deposits and investments are bothersome, and manypeople are reluctant towards Islamic products just because of it. Shoukat Tareen
says that return on deposits is low because of currently prevailing low interest
rates.
Regarding the impact of rate of return on deposits and investments on
Islamic banking, questions were asked from 50 corporates and 30 bankers. The
results are shown in the table given below.
Table 4.2: Computation of Mean for Rate of Return on Deposits andInvestments
f 1 = Frequency for Corporatesf 2 = Frequency for Bankers X1 = -0.20X2 = -0.27
Following figure shows the summarized results, as shown in figure both
the groups have rated this factor in a similar manner.
Figure 4.2: Responses to Rate of Return on Deposits and Investments
Options X f 1 f 2 f 1X f 2Xa -2 6 6 -12 -12b -1 16 6 -16 -6c 0 15 11 0 0d 1 6 4 6 4e 2 6 3 12 6
Total 4 30 -10 -8
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
40/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
34Institute of Business and Technology
Corporates Bankers
The results are, virtually, consistent for both, corporate as well as banking
sectors. Corporations did not heed low returns because it becomes a secondary
issue if the intension is Halal and Islamic way of financing. In general, low return
bothered very few companies, or bothered all companies in a very negligible
amount.
Bankers, on the other hand, seem very comfortable with the issue of
return, as it is a routine thing for them. Banks are dealing with returns on
investments and deposits in all modes of financing, including Islamic mode. So, it
might bother them in initial adoption because of differences in terminologies, but
they seem comfortable with dealing any type of return under any mode of
banking/financing.
4.3. International Dealings
Islamic bankers have been scrambling for years to cement rapidly growing$200 billion sector into mainstream global finance. Their hard work has paid off,
with the rise in the number of firms offering banking products and services
compliant with Islamic law and Sharia, from a handful in the 1970s to about 300
today and global banks such as Citibank and HSBC opening units to cater to
roughly 1.2 billion Muslims worldwide.
Islamic banking has a long way to go to compete with conventional
financial institutions. The Islamic Financial Services Board (IFSB) secretarygeneral, Rifaat Ahmed Abdul Karim says that IFSB is also starting to prepare a
standard on corporate governance that will focus on investment account holders
(IAH) of Islamic banks. In addition, it will start working on a standard on
transparency and market discipline soon.
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
41/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
35Institute of Business and Technology
Regarding the impact of international dealings on Islamic banking,
questions were asked from 50 corporates and 30 bankers. The results are shown
in the table given below.
Table 4.3: Computation of Mean for International Dealings
f 1 = Frequency for Corporatesf 2 = Frequency for Bankers X1 = -0.46X2 = -0.50
Following figure shows the summarized results, as shown in figure both
the groups have rated this factor quite highly.
Figure 4.3: Responses to International Dealings
Corporates Bankers
Results are almost identical for corporations and bankers and both are
considerably concerned with international dealings, especially in the era of
globalization and impending WTO regime.From corporations viewpoint, they have to deal with local as well as
foreign stakeholders e.g. shareholders, auditors, customers, etc. so, they need
smooth international procedures to communicate at all platforms effectively.
Options X f 1 f 2 f 1X f 2Xa -2 20 9 -40 -18b -1 7 9 -7 -9c 0 5 4 0 0d 1 12 4 12 4e 2 6 4 12 8
Total 50 30 -23 -15
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
42/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
36Institute of Business and Technology
Same reasons may be quoted for bankers as that of corporations. Banks
deal with different types of clients that include local and foreign clients e.g.
investors, creditors, companies, individuals, etc who make deposits and
investments in different portfolios. Banks have to ensure homogeneous policies
and procedures for all local and international dealings to avoid conflicts and
obscurity.
4.4. Taxations
Taxations are one of the most important issue under the paradigm of
standardization of accounting rules for Islamic banking system that will facilitate
the dealings at all platforms.
Shoukat Tareen (chairman, Pakistan Bankers Association; and Chief Executive, UBL) realizes this and suggests substantive changes in taxation and
loan recovery policies.
It is believed that government will face problems in developing secondary
market for Islamic debt instruments and financial products. There are legal and
taxation issues involved in launching this type of financing in the local market.
The review of legal and tax regulatory aspects should come hand in hand with
continuous research and development in the product development.
Regarding the impact of taxation policies on Islamic banking, questions
were asked from 50 corporates and 30 bankers. The results are shown in the
table given below.
Table 4.4: Computation of Mean for Taxation Policies
f 1 = Frequency for Corporatesf 2 = Frequency for Bankers X1 = -0.08X2 = 0.37
Options X f 1 f 2 f 1X f 2X A -2 7 1 -14 -2
B -1 10 4 -10 -4C 0 18 10 0 0D 1 8 12 8 12E 2 6 3 12 5
Total 4 30 -4 11
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
43/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
37Institute of Business and Technology
Following figure shows the summarized results, as shown in figure both
the groups have rated this factor differently.
Figure 4.4: Responses to Taxation Policies
Corporates Bankers
Big differences in opinions exist between corporate and banking sector.
From corporations perspective, mean of (-0.08) indicates that most of them have
little or no problem in paying tax in Islamic process. After all, they are paying
taxes on other transactions also. So it bothers very little to companies how they
pay it, what bothers more is that they have to pay it.
From banks viewpoint, mean of (+0.37) suggests that banks have had to
adjust with taxation in Islamic mode because they are responsible to levy it for government. They have to negotiate all the techniques with SBP, govt., and other
bodies. They have to materialize them in effective manner. So, banks face some
problems in Islamic way of taxation.
5. PROBLEMSWhat really are the reasons for the lack of progress at the practical level
about the application of Islamic Banking? Different people may have different
perceptions on the issue. Proponents of the Islamic banking generally attribute itto the lack of will and commitment of the successive governments and of the
government machinery at various levels. While this view carries weight one
cannot ignore other dimensions of the issue. Most important being the
impression at various levels that Islamic banking has not been in practice
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
44/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
38Institute of Business and Technology
anywhere in the world in its real spirit and therefore in the absence of the tested
alternative Islamic model there is little likelihood of a successful beginning,
instead any new experiment may backfire. Though this impression may not hold
ground, it does indicate towards a general lack of awareness about the Islamic
banking alternatives that are already in practice.
5.1 Lack of Awareness
Lack of Awareness something is always the first drop of rain. Dr Ishrat
Hussain, Governor State Bank of Pakistan, ranks lack of awareness as the
foremost factor hampering the growth of Islamic banking in Pakistan.
In Pakistan, public is unaware, or has distorted information of Islamic
banking. Therefore, the first step to be taken is to create awareness in people aswell as in bankers. Awareness is more, a sort of, problem of marketing campaign
than any thing else.
The foremost pre-requisite in this regard is mass awareness about the
concept of Islamic banking among the general public and the education of
bankers and the business community. Efforts are needed at changing the
general perception about return on financial savings/assets and creating genuine
demand for Islamic banking. Through a comprehensive campaign, people mustbe made to understand that Islamic banking does not mean free loaning to the
business and industry and that the savers can justifiably take return on the basis
of results of the business activity undertaken with the help of their funds.
Similarly, industrialist and the business community need to be persuaded to raise
more and more equity-based funds instead of loans.
The depositors and investors who have been avoiding the banking
channel so far due to involvement of Riba would approach Islamic Banks onlywhen they are assured that their funds would be invested in Shariah compliant
activities. Therefore, credibility of Islamic banks is the most important aspects
and the key to success and development of the emerging discipline. The clients
would need to be assured of Shariah compliance that funds are kept separate
-
8/6/2019 Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
45/57
Low Profit Rates & Unreliability of Consumers on Islamic Products in Pakistan
39Institute of Business and Technology
from their conventional deposits, and financing is provided purely on the basis of
Islamic modes. Islamic banks would also need to ensure that their funds are not
invested in Haram and indecent activities. Companies with excessive reliance on
debt financing will also be excluded, and hence gearing ratios will need to be
monitored. This also highlights the need for education and training of all the
stakeholders.
Training of banks personnel and creating awareness among the people
about the true nature of Islamic ban