Home Publications Islamic Banking & Finance Page 01-03-2019

Islamic Banking & Finance Page 01-03-2019



We have given some briefs of Islamic Banks operating in Pakistan and invite them to add something if they desire on their services and edge over others very briefly. We have also outlined 7 Questions to all the banks in Pakistan for their answers. Finally we are requesting everyone to send their fresh analysis on Islamic Banking and Finance at the following e mails for their display on our Islamic Banking page- marifsbp@yahoo.com, mediafocuspakistan@gamil.com.

Editorial Board for the page

Muhammad Arif Chairman

Manzar Naqvi

Mubesher Mir

Dr Rtd Air Commodore Tahir Bhutta


Seven Questions to all Banks particularly Management and Shariah Board of Banks, Operating in Islamic Banking in Pakistan.

1) How would you differentiate between Islamic Economic and Finance from conventional side and do you treat Islamic banking providing better support to macro objectives of Pakistan.

2) Apart from issue of “Falah” how far it is serving better for the customers in terms of return and risk.

3) How you carry out your market activities and by using what kind of products. Name only two of your high rated products.

4) What about separate legislation for Islamic Banking in Pakistan.

5) Please give brief details about the role of Shariah Advisory Board and how and in what way it coordinates with liquidity management activities of your bank.

6) Do you feel, You are providing customers better financial services  as compared to Other Islamic banks (and even from conventional side of your bank).Please specify your competitive edges.

7) Will you please predict the future of Islamic Banking in Pakistan, where we stand now and what are the obstacles in obstructing its smooth growth?

About 15 Islamic Banks in Pakistan

There are various banking institutions in Pakistan which are providing their services in a competitive environment. Many of which operate under the Shariah Compliant. Many of the banks which aim to provide the Islamic banking are licensed by the State Bank of Pakistan, and they provide their services accordingly. These banks have an experienced Shariah advisor who approves the services and the products which are delivered to the clients according to the basic principles of Islamic banking. The advisor is also responsible for the monitoring and evaluation of the products delivered by the banks

They all are supposed to provide Islamic banking as banking of first choice in order to facilitate their customers in implementation of equitable economic system, and provide them opportunity to establish a fair and just society. They should also provide value added products and services to the customers in accordance with the bounds of Shariah. The core ethics of the banks include the culture based learning, fairness, respect, performance and individual enterprise. It is the premier Islamic bank which ensures timely provision of its products with high quality and aims to promote the Islamic values i.e. to support Government in creating social justice and equitable distribution of wealth. Moreover it also ensures the recognition and high quality banking. Whether these banks are doing this is question to them as well to all. The current data of these banks have been provided that raises various questions.

Position of 15 Banks in Pakistan giving Islamic Banking services
Bank CEO Shariah Advisor Assets Deposits Profit/Loss
Meezan Bank 31-12-18 Mr. Irfan Siddiqui Justice (Retd.) Muhammad Taqi Usmani Rs 938 billion Rs 785 billion Rs 9 billion
Al Baraka


Mr.Shafqaat Ahmed Justice (R) Khalil ur Rehman Khan Rs 123 billion Rs 104 billion Rs 279 million loss
Bank Islami


Mr. Hasan A. Bilgrami Mufti Irshad Ahmad Aijaz Rs 205 billion Rs 172 billion 65 million
Dubai Islamic Bank


Junaid Ahmed Dr. Hussein Hamed Hassan Rs 214 billion Rs 176 billion Rs 640 million


MCB Islamic Bank 31-12-17 Ali Mahoon Mufti Munibur Rehman Rs 52 billion Rs 33 billion Rs 179 million loss
Summit Bank


Ahsan Raza Durrani Mufti Irshad Ahmad Aijaz Rs 26 billion Rs 22 billion Rs 328 million loss
Figures  of Assets/Deposits/profit/loss of Conventional Banks that include only Their Islamic Banking side
Bank Alfalah


Nauman Ansari Dr. Mufti Khalil Ahmad Aazami


Rs 142  billion Rs 131 billion Rs 806 million before taxation
Askari Bank Limited


Abid Sattar Mufti Muhammad Zahid Rs 55 billion Rs 39 billion


Rs 81 million
The Bank of Khyber



Mr. Saiful Islam Mufti Muhammad Zahid Rs 34 billion Rs 30 billion Rs 244 million
National Bank of Pakitan 30-06-18 Arif Usmani Mufti Ehsan Waquar Ahmad Rs 58 billion Rs 41 Billion Rs  48 million loss
Habib Bank Ltd


Mr. Muhammad Aurangzeb Mufti Muhammad Zubair Usmani Rs 202 billion


Rs 162 billion Rs 3.2 billion
Bank Al Habib Limited


Mr Mansoor Ali Khan

Mufti Ismatullah Hamdullah

63 billion 45billion Rs 592 million before taxation
United Bank Ltd. Ms Sima Kamil

Mufti Abdul Rehman


Rs 45 billion Rs 43 billion Rs 535 million
Sind Bank


Tariq Ahsan

Mufti Ibrahim Essa

Rs 5.4 billion Rs 4.5 billion Rs 183 million loss
Bank of Punjab  30-9-18 Naeemuddin Khan

Mufti Muhammad Zahid

Rs 38 billion Rs 34 billion Rs 184 million

Monetary Policy and Islamic Banking

Despite a fast growing Islamic banking industry, the implementation of monetary policy and the transmission mechanism of monetary policy in the presence of Islamic banks remains a challenge for the central banks (CBs). The challenges arise not only from the Islamic finance core principles but also from the macro financial background and monetary policy frameworks of countries where Islamic banks operate. Since early 1990s, the related literature has broadly followed two streams: the first one, theoretical, was derived from the work of Khan and Mirakhor (1990) and was based on the premise that Islamic finance is strongly anchored on the profit-and-risk sharing principle and mainly equity-based. The second one, empirical, has focused on monetary transmission from the conventional segment to the Islamic segment of the financial system (Cevik and Charap, 2011). This builds on both streams and highlights the evolving nature of Islamic financial systems and related complexity of the transmission and operation of monetary policy in dual financial systems (i.e. coexisting Islamic and conventional systems).

Financial systems where Islamic banking is systemic are typically dual and not fully developed. Islamic banks tend to develop side-by-side conventional banks and are influenced by “standard” monetary policy instruments and conditions. As Islamic finance grows in importance, development in that segment may start to influence, under competitive pressure, the conventional financial system and overall market conditions. Islamic banks are not isolated from the macro financial background in which they operate: exogenous shocks, macroeconomic management, and systemic liquidity conditions have implications for monetary policy implementation and its transmission through the Islamic banking system.

Assessing monetary policy effectiveness in the presence of Islamic banking is complex, as it requires examining it through multiple and sometimes conflicting dimensions. These include: the fundamental Islamic principles of ex-ante interest payment prohibition and profit-and-risk sharing; the spillovers from the conventional segment to the Islamic segment of the financial system; and the monetary policy framework and instruments in place. As in conventional systems, monetary policy in the presence of Islamic banking needs to adequately address structural excess liquidity, financial system shallowness, and fiscal dominance issues. Dominant public sectors, direct monetary financing of fiscal deficits, or distorted credit environments also limit the scope of monetary policy transmission through Islamic banks.

Monetary policy mainly works through prices or quantities. However, the CBs’ capacity to influence market conditions varies significantly. The effectiveness of the CBs’ actions through price setting necessitates sufficiently developed financial systems to transmit the signaling effect of monetary policy. Shallow banking systems and underdeveloped financial markets hinder the effectiveness of the monetary policy signal, while rigid exchange rate regimes leave little room for the exchange rate channel to play a role in the monetary transmission mechanism.

When conducting monetary policy in the presence of Islamic banks, caution is required in assessing the monetary transmission mechanism. Islamic financial systems are heterogeneous: they can be full-fledged Islamic or they can be developing side by side a more-or-less mature conventional banking system. Introducing Islamic banks in macro financial environments where the interest rate channel is well established can result in conventional monetary policy transmission through the Islamic financial system, even if this transmission has not been anticipated by the CB. In full-fledged Islamic financial systems, monetary policy transmission could be activated through the credit channel as long as the CBs’ actions affect the supply of Islamic credit. However, the bank lending channel—or financing channel for Islamic banks—may eventually weaken with financial liberalization and financial markets development. Another important consideration is the extent to which the CB can influence the funding costs of Islamic banks by targeting the profit-sharing ratio of interbank Mudarabah markets.

Monetary policy objectives in the presence of Islamic banks have to be adapted to the level of development of the Islamic financial system and its interaction with the conventional one. At an early stage, special attention should be given to the development of Islamic credit, money, and government Sukuk markets, as well as to the design of effective sterilization policies and liquidity management frameworks. As both segments of the financial system become more balanced, a unified monetary policy stance might be feasible when there is arbitrage between the conventional and Islamic segments of the financial system. However, arbitrage between conventional and Islamic banks as well as the resulting monetary transmission from the conventional to the Islamic segment of the financial system incurs the risk of not being accepted by all Islamic finance standard setters. Going forward, there is a need to explore when and how a unified monetary policy stance can be achieved. For the time being SBP has introduced Bai Muajjal i.e a contract between a Buyer and a Seller under which the Seller sells certain specific goods permissible under Islamic Shariah and Law to the Buyer at an agreed fixed price payable at a fixed future date in lump sum or within a fixed period by fixed installments. This window has facilitated Islamic Banks to interact with SBP on daily basis to manage their liquidity.

Growth of Low income Countries and Islamic Banking

Since the modern birth of Islamic banking in the 1970s in Egypt, it has expanded rapidly across the globe. As illustrated by Imam and Kpodar (2013), such expansion has taken place, in particular—though not exclusively—in countries with larger Muslim populations. From an insignificant beginning, the industry has grown to over USD 2.5 trillion in assets in 2018, and is expected to reach USD 6.1 trillion by the end of this decade. Not only have local banks in Muslim countries adopted Islamic banking principles, but large multinational banks have established Islamic windows. Islamic finance has spread beyond commercial banks, and now spans investment banks, insurance companies, as well as investment (e.g. asset management) and financial companies (e.g. leasing). The development of new products, such as sukuks (Islamic bonds), has also broadened the range of products available.

There is mounting evidence—at least for lower and middle income countries—that financial sector development is good for growth. A developed financial sector helps mobilize savings, facilitates the allocation of capital to where returns are expected to be highest, monitors the use of capital once invested, and allows for diversification of risk. Moreover, there is a growing consensus among economists that it does not matter much for economic growth whether the financial system is more bank-based or market-based (Allen and Gale, 2000; Levine, 2002). The particular institutional arrangements that provide financial services to the economy are not so important; what matters is the level of overall financial development.

However, do these findings of financial sector deepening impacting growth also apply to systems where Islamic banking plays a significant role? This is an important question to answer, as with a few exceptions, countries with large Islamic populations are typically not highly developed, and have often not performed well in economic terms, one of the reasons being an underdeveloped financial system.

Thus, the rapid diffusion of Islamic banking represents a growth opportunity for Islamic countries, as much of the empirical evidence suggests a strong link between financial sector development and growth. However, the empirical literature has only looked at conventional banking, not Islamic banking. Thus by research we have to rectify this lacuna, by considering whether Islamic banking is also potent in raising growth. Here we have to establish the positive relationship between Islamic banking and economic growth, and not to answer the question of whether the growth-enhancing effect of Islamic banking goes beyond that of conventional banking. Using a sample of low- and middle-income countries with data over the period 1990-2018, we investigate the impact of Islamic banking on growth and can discuss the policy implications. The results show that, notwithstanding its relatively small size compared to the economy or the overall size of the financial system, Islamic banking is positively associated with economic growth even after controlling for various determinants, including the level of financial depth. The results are robust across different measures of Islamic banking development, econometric estimators (pooling, fixed effects and System GMM), and to the sample composition and time periods.

The objective here is to assess the impact of Islamic banking on economic growth. We find that, holding constant the level of financial development and other growth determinants, countries where Islamic banking is present and hence its impact on growth is measurable, experience faster economic growth than others. This is a powerful result, and robust to various specifications: we use different measures of Islamic banking development, econometric estimators (pooling, fixed effects and System GMM), and control for country and time-specific dummies. This finding is also encouraging as, despite its rapid growth, Islamic banking still represents a relatively small share of the economy and of the overall size of the financial system, and it has yet to reap the benefits from economies of scale. Although we cannot suggest that Islamic banking provides 23 more “bang for the buck” compared to conventional banks; it does, however, establish the positive impact on growth. As indicated, there are uncertainties on the magnitude of the growth effect of Islamic banking, which calls for further research as Islamic banks diffuse further and become larger. Should future studies confirm this finding, the policy implications would be significant.

As the global crisis has illustrated, conventional banking has many weaknesses—its excessive dependence on leverage being one of them. However, Islamic banking, which is one of the fastest growing segments of global finance, has unique features that are highly appropriate for developing countries. In particular, it is based on risk-sharing, making its activities more closely related to the real economy than conventional finance; it is also more flexible against shocks and more inclusive with regards to growth. Not only does Islamic finance help to stimulate growth, but it also appears less prone to risks such as bubbles (Dridi and Maher, 2011).

This means that many countries that currently suffer from low growth—a feature often present in Muslim countries—may want to further develop this segment of finance. As an initial step, it is essential to develop proper legislation and regulation, as well as the supporting infrastructure, including the necessary skill set. While it is true that Islamic countries and sub-national regions with large Muslim populations are characterized by low incomes and a low level of social development, with the exception of oil-producing Gulf countries, they are in fact not much different from other emerging markets (EMs) and LICs. In fact, once adjustments for low education levels, poor institutions, commodity prices, etc., are made, evidence is mounting that Islam per se is not holding back these countries (Nolan, 2003).

Similarly, Islamic countries do not currently stand out in terms of private sector credit to GDP. However, as Islamic banking becomes more acceptable to a large swath of the population, it could expand faster, as it would not necessarily be a substitute for conventional banking, but it would provide financial products to a part of the population that otherwise would not use the financial system, potentially leading to higher financial inclusion and an acceleration of economic growth in these countries.



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