1 - historical growth future outlook (2)

8/7/2019 1 - Historical Growth Future Outlook (2)

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Islamic BankingHistorical Growth & Future Outlook

HASSAN KAMRAN


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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, avoidingextravagance & thrift.


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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 systembecame solidly entrenched in Muslim countries.

With attainment of freedom from foreign powers and theresurgence of Islam, there is wide-spread yearning inMuslim countries to reorder their economic life in thelight of Islam.


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History of Islamic Banking In this context, the elimination of Riba, which is strictly

prohibited, became the biggest challenge faced by theMuslims.

In the midst of 20 th century, the Muslim experts paid agood deal of attention in economics, banking and financeto find ways and means eliminating Riba.

Islamic Banking system was established during1970s.Among the first institutions was the Naseer SocialBank which started operations in Cairo, Egypt, in 1972.


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History of Islamic Banking

In 197 5 Dubai Islamic Bank was established.

During the last three decades an immenseresearch and efforts have been made to confinethe system for Pakistani environment.

In the present decade the Islamic bankingsystem has gained a good position in the worldaround.


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Chronological introduction of

Islamic banking products1970s 1980s 1990s 2000s CurrentRetail BankingMurabaha Project FinanceWadiah SyndicationPLS Musharaka/ EquityMudaraba Ijarah

SukukStr. Products

Wealth Mgmt.


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Islamic BankingIncrease in count in over than 75 countriesMalaysia, Bahrain, Pakistan are among big playersTotal business has crossed US$1.3T.Islamic Financial and quality control agencies emerged

Examples:IFSB = Islamic Financial Services BoardAAOIFI = Accounting and Auditing Organization for IslamicFinancial InstitutionsIIFM = International Islamic Financial MarketLMC = Liquidity Management Centre

IIRA = International Islamic Rating AgencyGCIBFI = General Council of Islamic Banks and FinancialInstitutions


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Islamic Banking Industryin

PAKISTAN An Overview


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Evolution of Islamic bankingEvolution of Islamic banking

Pakistan struggled for Islamic system during 80s but thesystem failed:

REASONS for FAILURE OF EARLY EFFORTS Absence of Shariah compliance mechanism in financialinstitutions. 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.


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Year Wise Entry of Players Year Wise Entry of Players20031. Meezan Bank2. Bank of Khyber 3. MCB Bank

4. Bank Alfalah20041. Albaraka Islamic Bank2. Habib Bank AG Zurich3. Standard Chartered

4. Metropolitan Bank5. Soneri Bank20051. Habib Bank2. Bank Al Habib


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Year Wise Entry of Players Year Wise Entry of Players20061. Dubai Islamic Bank2. Bank Islami Pakistan3. ABN Amro N.V. (Now RBS Bank)4. Askari Bank Ltd.5. National Bank6. United Bank Ltd.2007

1. Emirates Global Islamic2. Dawood Islamic Bank


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Evolution of Islamic bankingEvolution of Islamic banking

Islamic Banking industry is on fast growth;6 full commercial Islamic banks are functionalSize of total banking industry is 8.0% (30-06-2010).The total branch network of the Islamic bankingindustry comprises of 506 branches with presence inover 50cities.Islamic banking gets great attention academicallyAttention to Human Resource development.Healthy competition among playersGood controlShariah Governance


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Progress to DateDescription 2003 2007

Total Assets Rs. 13 Bn Rs. 206 Bn

% of Banking Industry 0.5% 4.0%

Total Deposit Rs. 8 Bn Rs. 147 Bn% of Banking Industry 0.4 % 3.8 %

Financing and Investment Rs. 10 Bn Rs. 138 Bn% of Banking Industry 0.5 % 3.5 %

Full Fledged Islamic Banks 1 6Conventional Banks withIslamic Banking Branches 3 12

Total Number of IBBs 17 289


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Industry Progress


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Industry Progress


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Major PlayersFull Fledged Islamic Banks

S.No. Islamic Banks No of Branches1 Meezan Bank Limited 145

2 Albarka Islamic Bank Limited 20

3 Banks Islami Pakistan Limited 854 Dubai Islamic Bank Pakistan Limited 205 Emirates Global Islamic Bank Ltd 246 Dawood Islamic Bank Limited 14

T otal (A) 308


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B) Islamic Banking Branchesof Conventional Banks

No. of Branches

1 National Bank of Pakistan 52 MCB Bank Ltd 8

3 The Bank of Khyber 17

4 Bank Alfalah Ltd 32

5 Habib Metropolitan Bank Ltd 4

6 Standard Chartered Banks Ltd 87 Banks Al Habib Ltd 4

8 Habib Banks Ltd 1

9 Soneri Bank Ltd 4

10 Askari Bank Ltd 14

11 United Bank Ltd 5

12 Royal Bank of Scotland 3

T otal (B) 105 Total (308 + 105) 413


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Basic Difference between Islamic andConventional Modes of Finance

Conventional

Client

money + money

(interest)

Bank

money

ClientBank


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Basic Difference between Islamicand Conventional Modes of Finance

Islamic

ClientBank Goods &Services

money


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What Distinguishes IslamicBanking

All transactions are asset-based It is socially-responsible banking

Because it operates under Shariahrestrictions Does not permit financing of prohibited goods

/ Industries

It starves evil out of the society


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Basic difference between an IslamicBank and a Conventional Bank

Islamic Bank Conventional Bank1-Islamic Banking prices goods& services

2-The relation between Islamicbank & Customer is one of participation in risks andrewards.

3 -Profit is shared with thedepositor, higher the banksprofit, higher the depositorsincome.

1-Conventional banking pricesmoney

2-The relationship over here b/wbank and customer is that of debtors and creditors.

3 -Depositors get a fixed rateregardless of the banksprofitability, thus insulating themfrom the banks trueperformance.


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Islamic Bank Conventional Bank4 -An Islamic bank keeps capitalfunds and investors fundssegregated, in order not mix upthe profit earned on its ownfunds (capital & current up)balances.

5 -Islamic banks do not providefinance by offering cash loans,but through Musharaka etc.

4 - The conventional banks pooltogether all the funds.

5 - The conventional banks offer provide finance totally byoffering cash loans.


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Islamic Bank Conventional Bank6 -Islamic banking is primarilyequity-based.

7-The Islamic system is value-oriented.

8-Actively participates in trade and

production.

6 - The conventional system is as awhole interest-based.

7-This system is value-neutral.

8- Does not involve itself in trade

& business.


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Common Misconceptions


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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



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A fixed rate of return is not permitted under Islamic Shariah

F ixed return does not make a transaction Halal or Haram

F or example:

Profit on trading Rent on property



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Current Trends in Islamic banking

Sukuk issuance Housing mortgage Shariah-compliant investmentbanking activities Murabaha domination Mergers & Acquisitions Project Finance


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Products & ServicesFund based - I

Corporate & SME:Ijarah Finance (Plant, Machinery, Equipment &Vehicles)Musharaka Finance ( Commercial)

Murabaha Finance (Local, Import, Export)Salam FinanceIstisna FinanceMusawamaSBP Islamic Export Re-finace

Structured FinanceSukuk

The lending rates depends on PIB, TB & KIBOR rateswith monetary policy.


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Products & ServicesFund based - II

Consumer Finance:

Diminishing Musharaka

Ijarah

Murabaha

THE TOTAL ADVAN C ES OF B ANKING SE C TOR

STAND AT RS.32.0T.


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Product & ServicesNon-fund based

Letter of Credit (Sight & Usance)

Guarantees (Bid bonds,Performance Bonds, AdvancePayments)


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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


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The HR Outlook

HRRequirement

2008 2009 2010 2012

No. of employees

9, 6 01 1 3 ,0 63 16 ,181 20,9 53

Annual

Growth rate 36% 24% 14%


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Mountains to be crossed - I

Enhance access of financialservices to all populationsegments

Enhance coverage of financialservices to all Shariah-compliantsectors

Induce, motivate and draw non-Shariah compliant sectors toIslamic banking


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Mountains to be crossed - II

Development of standardized products Achieve standardization in Shariah

laws, Legal, Regulatory andSupervisory frameworks

Comprehensive system for inter-bankliquidity management

Development of Islamic capitalmarkets


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Mountains to be crossed - III

Product DevelopmentShort-term placement of Treasury fundsLong term tradable instruments

Risk Management tools IT Banking solutions Shortage of qualified, experienced

professionals


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Mountains to be crossed - IV

Strengthening of supervision of Islamic banks:

Shariah-based mindset criticalTransparency & DisclosureRisk Management


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Islamic Banking is Reality

The Islamic banking system is not aimaginary thing. There is need to

develop insight, educate and trainthe bankers in the Islamic economicand banking system.


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Islamic Banking is Reality

Without having a deep understandingof the principles of Islamic banking, itis difficult to offer its products andservices that confirm to the true spiritof Islamic Shariah.


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Current banking situationDeposit rates are not increasing

due to increase in NPLs.Five major banks enjoying 5 1% of

banks deposits.The current deposit is 27 % ,

saving is 4 0% & fixed is 33% of

total deposit.The average deposit rate is 8 % to

9%

The spread is from 5% to 10 % .4 1


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