islamic finance; growth potentials and bottlenecks

Islamic finance: Growth Potentials and Bottlenecks

Under the supervision ofMs. Saira Shahzad

Presented to

SBP-BSC, NNO, Karachi

June 2015

Research Project


ISLAMIC FINANCE: GROWTH POTENTIALS AND BOTTLENECKS

Abdul Baseer Abdul HaseebAliha Azhar

Amir Aurangzeb Alamgir

Irfan ul HaqRamsha Ali

Shehriyar KhanSarfaraz Shahbuddin

Ms. Saira ShahzadACM (IMU)Supervisor

SBP-BSC, NNO, Karachi

Abstract

During the last twenty years, Islamic banking has shown a tremendous growth, both, locally as well as globally. In fact, it did not collapse even in the period of economic recession and showed a consistent growth. Currently the market share of Islamic banking in the banking industry of Pakistan is 10%, which is expected to rise by 100% in the next five years (Ahmed, 2014). This purpose of this research is actually to provide the analysis of Islamic banking by highlighting its growth potential factors and obstacles that hinders its growth. Rather than just to examine its features, this study focused on the impact that Islamic banking is leaving on the economy, as this area is not taken into consideration for research. After detailed examination, the study concluded that Islamic banking could be very beneficial and secure in the upcoming future and that is why, majority of the countries in the world are now opting for Islamic finance rather than conventional banking.

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1. Introduction

The majority of the world's Muslims are not very genuine that they completely repudiate normal trust: even in Saudi Arabia, the upsides of Islamic banks address barely 50% of every keeping money resource. Muslim account-holders have a tendency to be more concerned with the things and association on offer than with the strictures of sharia (essentials in context of Muslim blessed substance). Notwithstanding, Islamic money, he says, has find the opportunity to be sufficiently present to offer on both numbers. Humphrey Percy, who heads the eight-year-old Bank of London and the Middle East, recognizes that the greater part of his clients came not out of savage devotion, yet rather "totally as a quality proposal".

Slighting the way that the benchmarks covered Islamic trust are as old as the religion itself, current banks did not begin offering sharia-unsurprising things until the mid-1970s. The interest made by this quickly making pool of Islamic capital has influenced the headway of sharia-solid things. These take different structures, however none may pay or charge premium, nor would they have the ability to place resources into things that Islam disallows (so no liquor, pork, wagering or obscenity). In an Islamic home credit, for occasion, a bank does not offer cash to a man who purchases a property; rather, it purchases the property itself. The client can then either purchase it back from the bank at a higher cost paid in parts (murabahah) or make much of the time booked bits to the bank including both a reimbursement of the sticker and rent until he affirms the property general (ijara).

In like way, a holder of sukuk has not really loaned the patron cash; rather, he affirms a clear offer of whatever the cash was spent on and gets pay not from premium but rather either from the point of interest made by that purpose of premium or from rental bits made by the supporter. Toward the end of the sukuk's term, the supporter gives back the way to the budgetary ace by getting his offer of the purpose of inclination. Skeptics may call attention to that the refinement between these structures and a standard bond or home credit is, basically, rather slight: both give evident remuneration to the individuals who make their capital open.

On the other hand, that does not appear to have hosed their appeal. Most sukuk are named in the cash of the guarantor and expected for close-by fiscal experts.

Western firms are in like way starting to utilize sukuk to raise cash. Despite solid late headway for Islamic budgetary things, there still is space for further growth, both in generally unbanked Muslim nations really taking shape scene and in the West.

2. Research Methodology

This is a secondary research i.e. descriptive. Its type with respect to data is qualitative that is based on the philosophy of social constructivism (The science of drawing patterns based on knowledge and experiences, applied by the society). The data and vital discoveries are extracted from the existing literature that is research papers, theories, blogs, and existing ways of conventional banking and Islamic banking. First, the existing procedures that are used by Islamic banking and their impact are discussed. Next, this paper explores the benefits and viability of those procedures, and the loopholes that restricts the organization to use different methods for respective situations.

This study also focuses on realistic market practices that well-known organizations are following today. By this methodology, the study will be able to conclude by giving the best reasons whether Islamic banking should be used or not.

3. Literature Review

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In the saving money piece, the ampleness of banks is thought to be a fundamental issue. Generally, keeping money ability can be measured in two ways, (i) Technical Efficiency; and (ii) Cost Efficiency (CE). A maker is considered really productive if, and in the event of some unforeseen issue, it is difficult to make a more unmistakable measure of any yield without making less of some other yield or utilizing a more conspicuous measure of two or three inputs (Koopmans, 1951). Enhancing the ability of the managing a record zone has been seen as an essential issue in Pakistan. The Government encompassed the national commission on cash, saving money, and credit recalling the last target to discover responses for able operation and association of the managing a record framework. Likewise, a taskforce was shaped to shape systems to impel the change of the managing a record and money related region (Shameem, 1995). To gage feasibility of Islamic banks in Pakistan, We took a gander at the execution and operational ability of Islamic banks and endorsed that Islamic banks can survive even inside of a standard managing a record structure. Islamic banks offer things and associations, which are in a wide sense the same to routine banks. Notwithstanding, the procedures of Islamic banks are unmistakably not precisely the same as the ones of ordinary banks. On another matter, there is an unfortunate insufficiency of interbank currency market which besides affects the execution of the Islamic keeping money. Real store prerequisites have additionally been seen. As indicated by Ahmad and Hassan (2007), the autonomous saving money act ought to be constituted to control, arrange and direct the operations and practices of Islamic banks. From the exact studies that have been driven, there is solid confirmation to recognize that ability increments can be secured through rivalry. Appropriately, regulation, if really finished, will improve dispute and make the bank more attainable in the business center structure.

The change effect of Islamic saving money and huge sending of her amidst the most recent two decades has highlighted the essential for financing examinations and imaginative Islamic contracts were not astounding at the early Muslims, for occasion, rent, finishing with possession and the parallel peace, Diminishing "Musharaka" and Takaful protection association. These contraptions and assorted contraptions used to relate to a weight unmistakable certifiable that fall delineation, budgetary building, yet it is not right the depiction of subordinate contracts in light of the way that the understanding are not stay particular contracts. Among the most fundamental sorts of financial instruments faulty in the money showcase all around:

"Ijara" is an assention whereby the less or proprietor to the assigned "Baijarha" eye for get-together (social affairs) keep going for a particular rental costs to be settled upon in the lease contract. Moreover, supplant the relationship is not propel bosses and duties between property proprietor and inhabitant, however are identified with the buy and offer of the advantages of the first store lease.

Considering this, the "Ijarah" is a security corresponding quality issued relates to the estimation of the rented property permits the holder access to rental pay to the obligations, which pushed the instrument holder in thankfulness to particular assistants. (Kharufa, 2000)

Changed lease securities: They relate to relentless rent where the Islamic Bank to issue these securities and a brief while later purchase cash guaranteeing building arrangement, for case the rent for the individuals who wish to do in that limit should be the cost of rent is the passage toward the end of every period to holders of these securities as the proprietors of this property. (Iqbal, 1998)

Securities lessening rent: Like as before however the bit of trusts for the buy of mechanical assembly dedicated for rent way. The guided Finance House Tunisian Saudi time back to issue affirmations of this kind as a result of offer and proposition supervision certifiable and he had acquired from Tunisian renting and operation is as indicated by the going with, increment Tunisian hardware rental and rented to its clients at rental specific and the change of commitment in regards to gear to the client toward the end of the decade and pay all rent bits, and for the compass of the lease issued Tunisian Company for rental presentations for specific purchasers quality relating to an offer of the sticker of the device, and purchasers get offer backings of rent pay. (Khan, 2002)

Theoretical instruments: "Muqarada" or speculative means a seeing between two parties which offers one

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of the get-togethers of capital, and called the Lord of the cash while the other work to be part benefits by this try and as indicated by degrees. Upon by the social events beginning in both spots of the comprehension. It varies from usury, in the truth, that the arrival is a foreordained rate of capital, yet a rate of points of interest and likewise is variable and may not be understands it. (Kamel, 1998)

Hypothesis Funds: Collection of stores through the IPO: the instruments with the choosing target of putting resources into the field of try completely ID in the diagram. Location open-finished backers after genuinely adjusted on the reason of prohibitive equation speculation, mother scientific articulation for one another sort of instruments that are exchanged the Islamic money market. (Ramadan, 2005)

Murabaha: "Murabaha" Islamic scientific proclamation proposes the offer of a stock data at spreads expenses despite a general pay concurred between Seller (bank, for case) and the purchaser. The likelihood of issuing instruments "Murabaha" conceivable due to the imperative business and especially by ideals of broad estimation of the favorable position or try replaces "Murabaha" (air transport, for case, or a change significant undertaking). While exchanged the associate business is illegal in light of the way that "Murabaha" course of action may be surrendered. (Saleh, 2005)

Musharaka: Rely fundamental on contract joint effort might genuinely, an all that much vague instruments

Muqarada' or speculative portrayed above yet the guideline capability is that the instruments theory that all the cash from the party, while in 'Musharaka', we find that the dissension (which are issued instruments for financial experts) is an embellishment of the social gathering analysts bondholders in a dish association and in a relative way to what is the condition in an open shareholding affiliation. Issuing bonds can take an eagerness on several photos as takes after:

Voting Shares: consolidate property rights and the advantage of association, voting and race.

Non-Voting Shares: relate to just the advantages of enthusiasm for the upsides of the attempt without the proprietors the advantage to interrupt in the association or voting or race. (Kharufa, 2000)

Pakistan utilized this kind of security, after the saving money framework entire year 1981 the banks to issue affirmations of support for a vehicle disclosures as demonstrated by the assention structure tune in for a most convincing of 10 years and locations participation between the monetary foundation and masters.

Pakistan used this sort of security, after the sparing cash system whole year 1981 the banks to issue confirmations of backing for a transport presentations as demonstrated by the assention structure tune in for a most compelling of 10 years and identifies with cooperation between the financial establishment and specialists.

4. Data Findings and Analysis

There is a great part of the time need of transient financing for securing of inclination. Subsequently, it is irrational to issue new regard all the time and when held compensation are missing for the buy of knotty resources financing, bank financing is utilized as a wellspring of brief trusts. Murabaha serves the transient financing needs. Routinely, it is speaking to lever the advantage when opportunity drops by. Keeping uneven resources all the time will oblige stock reinforce expense and may accomplish underemployment of points of interest now and then. It will hose liquidity and turnover degrees and thus affect stock cost of affiliations. Henceforth, not all favorable circumstances can be gotten from paidup capital instantly. Along these lines, it is engaging utilization brief bank financing than to utilize rich wellspring of value financing. Quality financing may not be fitting in running tries in which ventures and pay sources cannot be effectively disengaged. In such a case, Murabaha is a simple to utilize transient financing arrangement. Habitually, the cash related aces with bank (the store holders) are risk negated and need persevering returns. With quality financing, the working cycle of two or three meanders perhaps long and may not bring strong money streams needed by such budgetary aces. In light of current circumstances, Murabaha

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financing is gainful for budgetary experts. Murabaha connects with financing of harsh materials furthermore completed stock. This enhances the store framework association and lessens bottlenecks brought because of pay issues or bobble. Offer Murabaha can enhance liquidity in quality markets and keep the business meet towards huge estimations of stocks. Occasionally, for the value business to achieve friendliness and soundness, liquidity is a vital issue. Murabaha financing keeps the huge exchanges going and from this time, forward more exchanges will lead the business to exchange close or at basic qualities. Quality financing assistants in foundation of affiliations. Notwithstanding, once settled, affiliations have essential for financing and coordinating money streams intermittently. Murabaha financing permits a Shariah unfaltering unmistakable decision for trust brief resources buy needs and subsequently makes generation of stock and associations in an economy, which can comprehend budgetary progression and its noteworthy purposes of hobby.

From the danger point of view, Murabaha financing keeps the Islamic money related structure fluid and less inclined to risk because of good position sponsorship. From this point forward, with Murabaha, liquidity comes yet not to the drawback of stretched out monetary danger to the framework. From the welfare and worth perspective, with each extra financing gave, favorable position is acquired. The usage on resource levels with pay got by variables of time utilized as a bit of the creation process. Also, the representing body finds the opportunity to get time and game plans related commitments which it can use to give open stock and other welfare associations for masses.

As frequently as could be allowed, in business financing, tremendous financing is needed for unmistakable tries that oblige basic dare to be done; for occasion, progression of plant, interstate, dams and so on. The firm offering associations to attempt and execute such errands may have limit, however need stores to handle such activities. Money related intermediation can bring pivotal financing, liquidity and risk adjusts that empowers the dull counterparties to handle such tries. Giving trusts for harsh material buy especially by the customer will identify with particular difficulties of affiliation clash and awesome risk. In such a case, the money related focus individual can help with better authenticity, standing, and economies of scale in certifying the counterparties and the capacity to sensibly and satisfactorily execute contracts. There is as often as possible need of making segments for asset supplies before creation is finished. To keep the period cycle going, Istisna can be utilized to guarantee asset supplies accessibility and creation. As regularly as could reasonably be expected, it is engaging keep low levels of stock and enhance turnover degrees. Keeping titanic stock all the time will oblige stock upkeep expense and may understand underemployment of inclinations sporadically. It will hose liquidity and turnover degrees and therefore affect stock cost of affiliations. Utilizing Istisna right when financing is required for new interest will reduce operational and budgetary inefficiencies. Much of the time, headway and arranging affiliations go into goliath volume, however changed contracts with institutional customers. Keeping stock early is neither monetarily conceivable nor operationally real. Henceforth, financing the try essentials after try arrangement is checked will empower firms to work with less money tied up. From the danger and proficiency point of view, Istisna financing keeps the Islamic financial framework fluid and less inclined to peril in light of favorable position backing. Islamic money related go-between connects with credit accessibility to guarantee that accommodating exchanges are executed furthermore, it diminishes the exchange and checking expenses which acknowledge more profitable exchanges happening in the economy. Regularly, the scholars with bank (the store holders) are danger hesitant and need predictable returns. Regardless, little savers don't have enough subsidizes to back huge volume increases direct. Regardless, utilizing investors‟ pool of trusts to give financing through Istisna, the inspectors can partake in purpose of inclination of such cash related exercises. Financing colossal attempts without budgetary intermediation will be an exceptionally troublesome undertaking. Quality financing is in like way absurd in a few courses due to high floatation cost, risk of under enlistment and determination in altering capital structure when required. Yet, utilizing investors‟ pool of stores to give financing through Istisna, the banks can adequately store such enormous activities that host positive central focuses to direct social events included furthermore positive externalities expanded in worth by masses in the general society.

5. Conclusion

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Amidst this steady time of energetic change in Islamic record, market people need to keep up the method for their associations and swear off letting veritable practices skim a long way from center rules of Islamic money. As down to business previous in this note, these stress evading of riba and gharar; adherence to the models of danger sharing; regard for property rights and contractual obligations; and voyage for good association. Taken together, these will manage the relationship between the monetary domain and the confirmed division. A basic change of the showing of Islamic money will oblige surrendering the mechanical duplicating of standard instruments and bundling them as obviously Islamic cash related instruments. Interests in human capital and examination and progression are likewise discriminating to engage the change of Islamic record arrangements and things to react to budgetary needs and financing necessities. By watching out for the difficulties noted above, Islamic money could sensibly meet the inclinations of near to social requests and help budgetary joining and intermediation. Islamic money could correspondingly help gather financing for little and medium endeavors, and besides entire arrangement supporting for base and other change meanders, which are isolating for energizing sensible and comprehensive headway. Appropriately, Islamic trust has been driven redominantly by supply-side segments and examinations. Regardless, as highlighted above, there are fundamental parts from the premium side that are slanted to change the development of the showing of Islamic money. One of the variables justifying observing soon is the making excitement for Islamic money related things by business visionaries crosswise over domains and with grouped sizes of operations. The second portion is a potential ascension unmistakable by sovereign and semi sovereign parts in getting to Islamic capital markets. This would help drive some Islamic store things that were made on a principal level; however had irrelevant shot of being executed in every practical sense, for occasion, mudarabah and musharakah. Additionally, with unmistakable supplement on danger sharing, Islamic store could contribute genuinely to budgetary quality.

6. Bibliography

Ahmed, S. (2014, August). Retrieved from thenews.com.pk.

Ali, S. (2011). Discussion on Textile Sector. Textile Journal, 10(2), 10-12.

Iqbal. (1998). Challenges facing Islamic banking. Institut Islamique de Recherché et de Formation.

Kamel. (1998). Development of Islamic banking activity: Problems and prospect. IDB Prize Winners’ Lecture series – No12.

Khan. (2002). Fiqh foundations of the theory of Islamic economics. A survey of selected contemporary writings on economics relevant subject of Fikh, in Ahmed, H. (ed), Theoretical foundations of Islamic economics.

Kharufa. (2000). Shari’ah and its contribution to the science of contemporary law. Centre Islamique de Recherche.

Koopmans. (1951). An analysis of production as an efficient combination of activities. New York, NY.: Wiley Press.

Ramadan. (2005). Islamic law, structuring Islamic finance transactions. Euromoney Books, London.

Saleh. (2005). The development of Islamic banking in Lebanon. Prospects and future challenges, Review of Islamic economics, 77-91.

Shameem. (1995). Impact of Flexible Interest Rate on Savings and Investment. Bangladesh Journal of Political Economy Vol. 13 No. 2, 62-78.

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islamic finance; growth potentials and bottlenecks

Economy & Finance