Islamic Banking and finance Islam is not only a religion in the ordinary sense of the word, but a complete

system of life. While other religious codes provide guidance only for the relation between man and his Creator, Islam guides man in his relationship with God, and gives him the norms which govern his temporal existence, since Islam is concerned with the spiritual, political, social economic, moral and all other material aspects of the human being. Every social system has its own economic system. Islam being a comprehensive and distinct social system, possesses a corresponding economic system of its own. Islamic economics is fast developing into a different and distinct paradigm of economics. Therefore, a number of Islamic financial institutions have emerged in various Muslim as well as some non-Muslim countries Difference between Islamic and conventional banks There are a number of key differences between the products and services offered by a conventional bank in comparison to an Islamic financial institution. Firstly, Islam is the back bone of interest free banking, moral principles and objectives play a more important role in its operations. As such it is organized on the basis of cooperation with each other as stated in the Quranic injuction: "Help you one another in righteousness and piety but help you not one another in sin and trasgression" (Quran, 5:2). The Quran also calls for trade "Eat not up your property among yourselves in vanities but let there be amongst you, traffic by mutual goodwill"(Quran, 4:29). Honesty and trustworthiness is so essential in business, thus the Prophet (Pbuh) had declared that dishonest transactions are illegal (reported by Bukhari). Secondly, no gain is accepted without either effort or liability. Islam forbids receiving a monetary advantage without giving a counter value, but is not opposed to profit or financial gain as long as an effort is performed or (partial) liability is accepted for the financial result of a venture. Thirdly, general conditions of a debtor should be evaluated genuinely. If one is in financial distress, and is not able to pay back the principal, one should be given an extension on humanitarian ground without any penalty. (Quran,

2:280) Fourthly, certain business transactions are considered unlawful in Islam and cannot be carried out in an Islamic bank. For example trading in alcohol, intoxicating drugs, gambling or producing pornography are contrary to Islam. Fifthly, Islamic banks offer no interest-bearing products or services, and in its organisational structure and corporate governance, Islamic banks have Shariah board, to ensure that the bank practices are in conformity with the Shariah and do not oppress the disadvantaged client. INTERNATIONAL Scenario Islamic banking is a growth industry, and not just in the Islamic business sector. Banks from all parts of the world, including Western brands like HSBC, Citigroup and UBS, are moving fast to secure a place in the market. The reason? There is money to be made in Islamic Banking. But therein also lies the challenge. For whilst the profit motive and market forces invigorate Islamic banking as much as any other business, Shariah law forbids certain financial practices that lie at the foundation of traditional commerce, notably lending money on interest. Banks looking to operate in such an environment therefore need partners with a thorough understanding of the sector and proven experience in it. The Islamic Banking market is now estimated at more than $500bn and is due to will grow at between 10% and 15% annually up to 2010. ot just a Middle-Eastern model Although the Middle-East is still home to most of the worlds Islamic banks, a growing number of financial institutions operating in the marketplace are domiciled elsewhere. Local players such as Malaysias Bank Islam Malaysia and the United Kingdoms Islamic Bank of Britain are being joined by Citibank, HSBCs Amanah and UBS Noriba subsidiary.

Islamic Banking in Pakistan

In Pakistan islamic banking Started in 1977-78, which included the elimination of interest from the operation of specialized institution and commercial banks.Financial and corporate system was amended on June 26, 1980 to permit issuance of new interest-free instrument of corporate financing named Participation Term Certificate (PTC). In the same time Ordinance was promulgated to allow the establishment of Mudaraba companies and floatation of Mudaraba certificates for rising risk based capital. In July 1, 1985, all commercial banks in Pak Rupee was made interest free which was mark-up technique with or without buy-back agreement. This was however declared un-Islamic by the Federal Shariat Court (FSC) in Nov 1991 Commission for Transformation of Financial System (CTFS) was constituted in January 2000 in the State Bank of Pakistan. It introduced Shariah compliant modes of financing which included creating legal infrastructures conductive for working of Islamic financial system, launching a massive education and training program for bankers and their clients and an effective through media for the general public to create Awareness about the Islamic financial system. It also dealt with major products of banks and financial institution , both for assets and liabilities side. Overview of Islamic Finance in Pakistan September 06 In September 2001 it was decided by Government that the shift to interest free economy would be made in a gradual and phased manner and without causing any disruptions and was also agreed that state bank Pakistan would consider for: Setting up subsidiaries by the commercial banks for the purpose of conducting Shariah compliant transactions Specifying branches by the commercial banks exclusively dealing in Islamic products, and Setting up new full-fledged commercial banks to carry out exclusively banking business based on proposed Islamic products. _ In January, 2002 State Bank of Pakistan gave first Islamic Banking License to Meezan Bank Ltd. Present State of Pakistan Islamic Banking September 06 Current scenario in Pakistan

The progress of Islamic Banking in Pakistan has been commendable during the last two years There is huge appetite for Islamic financial services. The growth, is however, constrained by the lack of infrastructure support & dearth of professional Islamic Bankers Currently, there are 6 licensed full fledged (4 operational) Islamic Banks with 40 branches and 10 conventional banks with standalone Islamic Banking Branches with the total branch network of 35 branches operating in thirteen cities of all the four provinces in the country (as of 31 March 2009) while Applications for a few more banks are under consideration The central bank is pursuing a three-pronged strategy to promote Islamic Banking in Pakistan establishing full-fledged Islamic banks in the private sector; setting up of subsidiaries by the existing commercial banks; and allowing stand-alone branches for Islamic banking by the existing commercial banks

Key Figures of Islamic Instruments Sukuk Government of Pakistan Sovereign Sukuk USD600 million 5year, Libor +220bps, Water & Power Development Authority Sukuk USD 133.33 million Domestic Issue Modaraba

There are 36 Madarabas as on 2nd August 2006. Total assets of Modarabas - USD352.12 million & paid-up capital of USD123.43 million as on 30 June 2005 Net Profit Margins - 20.15%

DEPOSITS Till March 2006, Islamic Banking Deposit increased to USD 1.3billion which is 2.8 of the total deposit of the commercial banks Share of Islamic banking in the overall banking system increased to 2.1pc from TFCs Sitata Chemical Industries Ltd. - Musharakah based TFCs USD 6 million Al-Zamin Leasing Modaraba I tranch- Musharakah based TFCs USD 5 million Al-Zamin Leasing Modaraba II tranche - Musharakah based TFCs USD 5.42 million

Suggestions The Government of Pakistan intends to continue promoting Islamic Banking in the country while keeping in view its linkages with the global economy & existing commitments to local & foreign investors There is a great need to develop instruments for liquidity management by banks & monetary management by the SBP The pace of Islamization of the financial system will crucially depend on the development of Shariah compliant instruments to be used for government transactions There is need for innovative products i.e., development of financial instruments on the basis of Musharika, Mudaraba, Leasing, & Salam related to wide spectrum of maturities, projects & issuing entities