Islamic Banking Historical Growth & Future Outlook

1. Islamic BankingHistorical Growth & Future Outlook HASSAN KAMRAN

2. Salient Features of Islamic Finance • Prohibition of transactions on a Riba basis. • Wealth should be directed in the Halal Channels which will benefit all individuals. • Wealth must not be spent with a motive of exploitation or to the detriment of society or individuals. • Funds are not to be utilized lavishly, avoiding extravagance & thrift.

3. Salient Features of Islamic Finance • Money is not be treated as a commodity in itself as a unit of account and measure of value that can be used as a means to fulfill the needs of society. • A fixed charge on capital is unjust. Risk and Reward go together. No risk no return. • Wealth should be acquired through legitimate trade and the creation of real assets.

4. History of Islamic Banking • In the early history of Islam, the injunction against interest was strictly observed, but with the decadence of moral values, financial practices based on interest (Riba) began to permeate. • In the period of colonial domination, the interest system became solidly entrenched in Muslim countries. • With attainment of freedom from foreign powers and the resurgence of Islam, there is wide-spread yearning in Muslim countries to reorder their economic life in the light of Islam.

5. History of Islamic Banking • In this context, the elimination of Riba, which is strictly prohibited, became the biggest challenge faced by the Muslims. • In the midst of 20th century, the Muslim experts paid a good deal of attention in economics, banking and finance to find ways and means eliminating Riba. • Islamic Banking system was established during 1970s.Among the first institutions was the Naseer Social Bank which started operations in Cairo, Egypt, in 1972.

6. History of Islamic Banking • In 1975 Dubai Islamic Bank was established. • During the last three decades an immense research and efforts have been made to confine the system for Pakistani environment. • In the present decade the Islamic banking system has gained a good position in the world around.

7. Chronological introduction of Islamic banking products 1970’s 1980’s 1990’s 2000’s Current Retail Banking Murabaha Project Finance Wadiah Syndication PLS Musharaka/ Equity Mudaraba Ijarah Sukuk Str. Products Wealth Mgmt.

8. Islamic Banking • Increase in count – in over than 75 countries • Malaysia, Bahrain, Pakistan are among big players • Total business has crossed US$1.3T. • Islamic Financial and quality control agencies emerged Examples: • IFSB = Islamic Financial Services Board • AAOIFI = Accounting and Auditing Organization for Islamic Financial Institutions • IIFM = International Islamic Financial Market • LMC = Liquidity Management Centre • IIRA = International Islamic Rating Agency • GCIBFI = General Council of Islamic Banks and Financial Institutions

9. Islamic Banking IndustryinPAKISTAN An Overview

10. Evolution of Islamic banking • Pakistan struggled for Islamic system during 80s but the system failed: • REASONS for FAILURE OF EARLY EFFORTS • Absence of Shari’ah compliance mechanism in financial institutions. • Ineffective enforcement of contracts and inefficient system for early recovery. • Ineffective code of conduct for professionals. • Lack of continued research and development in the field of Islamic finance and economics. • Inadequate training to the staff of SBP and banks. • Lack of public awareness about Islamic economic system.

11. Evolutionof Islamic Banking Islamic Banking in Pakistan has a short history of nine years when in 2001 Meezan Bank started its operations

12. Year Wise Entry of Players 2003 1. Meezan Bank 2. Bank of Khyber 3. MCB Bank 4. Bank Alfalah 2004 1. Albaraka Islamic Bank 2. Habib Bank AG Zurich 3. Standard Chartered 4. Metropolitan Bank 5. Soneri Bank 2005 1. Habib Bank 2. Bank Al Habib

13. Year Wise Entry of Players 2006 1. Dubai Islamic Bank 2. Bank Islami Pakistan 3. ABN Amro N.V. (Now RBS Bank) 4. Askari Bank Ltd. 5. National Bank 6. United Bank Ltd. 2007 1. Emirates Global Islamic 2. Dawood Islamic Bank Then many mergers took place.

14. Evolution of Islamic banking • Islamic Banking industry is on fast growth; • 6 full commercial Islamic banks are functional • Size of total banking industry is 13.0% (30-06-2013). • The total branch network of the Islamic banking industry comprises of 700 branches with presence in over 50cities. • Islamic banking gets great attention academically • Attention to Human Resource development. • Healthy competition among players • Good control • Shari’ah Governance

15. Industry Progress

16. Industry Progress

17. Major PlayersFull Fledged Islamic Banks

19. Basic Difference between Islamic and Conventional Modes of Finance Conventional money Bank Client Bank Client money + money (interest)

20. Goods & Services money Basic Difference between Islamic and Conventional Modes of Finance Islamic Client Bank

21. What Distinguishes Islamic Banking • All transactions are asset-based • It is socially-responsible banking • Because it operates under Shariah restrictions • Does not permit financing of prohibited goods / Industries • It starves evil out of the society

22. Basic difference between an Islamic Bank and a Conventional Bank

23. Basic difference between an Islamic Bank and a Conventional Bank

24. Basic difference between an Islamic Bank and a Conventional Bank

25. Common Misconceptions

26. Common Misconceptions “Islamic banking looks the same as conventional banking” A Halal meat and Haram meat may look exactly the same But one is permissible while the other is not

27. Common Misconceptions “A fixed rate of return is not permitted under Islamic Shariah” • Fixed return does not make a transaction Halal or Haram • For example: • Profit on trading • Rent on property

28. Current Trends in Islamic banking • Sukuk issuance • Housing mortgage • Shariah-compliant investment banking activities • Murabaha domination • Mergers & Acquisitions • Project Finance

29. Products & ServicesFund based - I Corporate & SME: • Ijarah Finance – (Plant, Machinery, Equipment & Vehicles) • Musharaka Finance (Commercial) • Murabaha Finance (Local, Import, Export) • Salam Finance • Istisna Finance • Musawama • SBP Islamic Export Re-finace • Structured Finance • Sukuk The lending rates depends on PIB, TB & KIBOR rates with monetary policy.

30. Products & ServicesFund based - II Consumer Finance: • Diminishing Musharaka • Ijarah • Murabaha

31. Product & ServicesNon-fund based • Letter of Credit (Sight & Usance) • Guarantees (Bid bonds, Performance Bonds, Advance Payments)

32. Deposit side Products & Services • Current Account (Qard) • Savings Account (Musharaka, Mudaraba) • Term Deposit Account (Musharaka, Mudaraba) • Online Banking/Phone Banking/SMS Banking • Clearing/Collection • ATM

33. The HR Outlook

34. Mountains to be crossed - I • Enhance access of financial services to all population segments • Enhance coverage of financial services to all Shariah-compliant sectors • Induce, motivate and draw non-Shariah compliant sectors to Islamic banking

35. Mountains to be crossed - II • Development of standardized products • Achieve standardization in Shariah laws, Legal, Regulatory and Supervisory frameworks • Comprehensive system for inter-bank liquidity management • Development of Islamic capital markets

36. Mountains to be crossed - III • Product Development • Short-term placement of Treasury funds • Long term tradable instruments • Risk Management tools • IT Banking solutions • Shortage of qualified, experienced professionals

37. Mountains to be crossed - IV • Strengthening of supervision of Islamic banks: • Shariah-based mindset critical • Transparency & Disclosure • Risk Management

38. Islamic Banking is Reality The Islamic banking system is not a imaginary thing. There is need to develop insight, educate and train the bankers in the Islamic economic and banking system.

39. Islamic Banking is Reality Without having a deep understanding of the principles of Islamic banking, it is difficult to offer its products and services that confirm to the true spirit of Islamic Shariah.

40. Current banking situation Deposit rates are not increasing due to increase in NPLs. Five major banks enjoying 51% of banks’ deposits. The current deposit is 27% , saving is 40% & fixed is 33% of total deposit. The average deposit rate is 8% to 9% The spread is from 5% to 10%.

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