Islamic Banking & Finance Page 04th January 2019

islamic finance

Islamic Products are required for National Savings Schemes in Pakistan

Muhammad Arif

While the Islamic Banking industry in Pakistan has been growing at a pace ever since its re-launch in 2002, but efforts should also be made to develop an alternate system for all segments of the banking industry.

It is being claimed that a plan of Islamic products for National Saving Scheme (NSS) is also under consideration and likely to be launched soon.

But for that government has to change the whole structure of NSS. In other countries such schemes are meant for old age citizens or pensioners, but in Pakistan government has also allowed corporate and companies even to invest in some schemes of NSS leaving aside Behbood and Pensions schemes. The institutions can invest in the individual funds such as pension, gratuity, superannuation, contributory provider of fund and trusts etc in DSCs, SSC, SSA, RICs, STSCs and Savings Account. However, a public or private sector, Institutions, excluding banks, Insurance companies & mutual funds can invest in Premium Prize Bonds. Currently government has procured Rs 2.9 trillion out of total government domestic debt of Rs 17.7 trillion (Sept 2018).

So as a first step Government should limit NSS to Bebood and pensioners like schemes meant for Old age persons only. In 2005 government tried to make NSS a separate entity from the government by making a draft of legislation but it never saw the light due to government policy to snatch funds through NSS.

Presently, Islamic banks in the country represents over 13.6-percent of overall banking industry with 21 Islamic banking institutions offering Islamic banking products and services through a network of over 2709 branches across the country. Islamic banks are leaders in several sectors like in corporate financing 72.7% as compared to 69.9% of conventional side. However in Agriculture and SME they lag behind with 0.3 and 3.0 % of their total financing.

In the financial world today Islamic Banking is reckoning today its merits in the backdrop of the last financial crises of 2007-08. Excessive leveraging and de-linking of the financial system from real economy, the very cause of the last financial crises, is against the core principles of Islamic finance. Policymakers are increasingly seeing the value proposition offered by Islamic finance and are working towards introducing policy environment for its smooth functioning.

However when it comes to financing, Islamic Banking Industry continues to prefer the conservative style as depicted by its preferred choice of clients. Corporate sector financing gulps the major share of 76.9 percent, followed by consumer financing (11.9 percent) and commodity financing (5.3 percent). Thereby, SME and agriculture, which are supposed to be on the top of the priority list, are left in the lurch.

Experts believe that a truly Shariah-compliant product is a must for the Islamic banking model to be sustainable. Islamic banks must be 100-percent Shariah-compliant. They insist that Islamic banks should tap un-banked markets through their asset-based and risk-sharing products and contribute to catalyzing growth in the real economy as only 20 percent of farmers have access to the formal financial system while just 5-6 percent of SMEs have access to bank financing.

However unfortunately we have not been able to define riba or interest and the matter is pending before the judiciary. But most of the Ulema hold opinion that fixed interest in %age on money without any fear of loss is riba and so is haram irrespective of how good projects are invested by this money.

There are two schools of thought on this subject. You go with the one you believe in
Religion and its believing. Sometime in sectarian environment it is apprehended that what you believe is your religion, and what I believe is mine. But this discussion should be stopped. It is like discussing and searching in the streets of London, a shop for Halal meat holding a bottle of wine in one hand.

National Saving role should be to Promote Saving, Social Security and Financial Inclusion in a society.

According to NSS authorities it is managing Rs 3.5 trillion savings of vulnerable segment of society like pensioners, the retired, widows, orphans and senior citizens etc. Out of 7 million investors and savers, more the 50 percent are women. Special people are also allowed to invest in Bahbood Certificate and get special rates.

NSS is now trying to move towards an Islamic product called Sarva Islamic account. This will be linked with government development projects.

For overseas Pakistanis, dollar and Pak rupee investment scheme is also under consideration. Overseas Pakistani product will be outsourced just like prize bonds are outsourced to SBP.

Today the National Savings is the largest investment and financial institution in Pakistan with a portfolio of over Rs. 3.4 trillion and more than 7 million valued investors are being served through a large network of 376 branches nationwide controlled by 12 Regional Directorates of National Savings (RDNS) and 4 Zones. Hence it is required to offer all kinds of products for its investors and Islamic products should be at the top.

Retail Islamic Banking in Practice

Manzar Naqvi

Retail banking for customers mostly revolves around that how they can keep their money with the banks and how they can get financing in moment of their needs. For keeping money current accounts and savings accounts are mostly used.

Current accounts are the most basic form of banking product and do not necessarily require any particular changes to be made from a conventional current account to make it a Sharia’s-compliant one. In many countries, it is not expected that conventional current account deposits will earn interest – and equally it is not allowed for account holders to have overdrafts. In these circumstances, no interest elements are involved in such conventional current accounts; these accounts sole purpose is to provide a safe place for the account holder to hold their money and to pay their earnings and other income into and from which to draw money for cash and through cheques and electronic withdrawals and payments.

Islamic current accounts are no different in practice to these basic conventional accounts; they offer the account holder a way of managing their earnings and payments so that they can operate in today’s economy. No interest is applied at any stage. It is attractive to banks to offer these services even if they cannot earn any money from them, as they build relationships with the customers that they potentially can develop into use of other services for which fees can be charged. The account holders’ deposits also help to strengthen the bank’s balance sheet which improves its ability to meet regulatory requirements and potentially lend money profitably elsewhere. Banks do run the risk of account holders overspending with unapproved overdrafts; in these circumstances pre-defined “management” fees are usually applied and in certain circumstances “penalty” fees can also be charged to disincentivize the account holder from creating an overdraft situation. While management or administration fees are usually retained by the bank to cover their costs, penalty fees will normally be paid into a charitable account so that the bank, the lender, does not profit from the borrower which would be contrary to core riba principle.

Most Islamic current accounts provide cheque books, debit cards and allow direct debits and permit standing orders. Internet and telephone access to accounts also exist.

Savings accounts in conventional banking attract higher rates of interest from the bank to the saver than might be available in an interest paying current account. They usually will not offer any form of lending (overdraft). Competition to provide the most attractive rate of interest is strong in conventional banking, and usually the higher rate accounts have more restrictions in terms of the frequency of times withdrawals can be made and in what form they can be made.

An Islamic savings account is structured completely differently from a conventional savings account. An Islamic savings account is in fact an investment account, where the bank invests the money deposited in the account. This is a straightforward mudaraba process. Mudaraba is where the provider of the funds, the saver, entrusts their money to an expert investor, the bank, so that they can make a profit from it. The bank will pool all such savings account money and invest it collectively in Shari’a-compliant businesses. The profits from such investment are then shared between the saver and the bank. How the profits are distributed between savers and the bank will depend on the contract applicable to the account. The amount returned will vary according to the profit generated and will be paid to the saver usually as a percentage figure based upon the lowest balance retained in the account during the period of calculation, whether that be a month, quarter or year. In the event of a loss occurring then the saver will lose money but under most terms the bank will not. The fact that the holder of the savings account may lose capital indicates that Islamic savings accounts are very different products to conventional savings accounts where deposits held in a conventional savings account would only be lost in the event of the bank itself going into liquidation (and even then most banks have such deposits insured by central bank schemes to a certain extent).

The third major product of retail banking is that of secured loans to private individuals. Secured loans are those that are guaranteed by the value of an underlying asset. The most obvious secured loan, although it is not commonly referred to as such, is a mortgage where the bank lends a significant sum of money to the lender to purchase an asset, usually property, but retains the right to take ownership of it if the borrower is unable to repay the loan amount.

Other secured loans would be a car loan, where the ownership of the car is retained by the bank until the loan is repaid. Unsecured loans do not have such assets to guarantee the repayment of the loans and as such are charged at considerably higher levels of interest in conventional banking products.

Clearly in Islamic banking loans cannot be made through the same structure as in conventional banking. If interest cannot be charged the whole loan structure as it exists in conventional banking is void. For this reason retail banking customers requiring funds through an Islamic compliant product have to apply for loans that are rather more complex.

The most popular retail loan is made through a murabaha contract or process. The murabaha sale contract allows the seller of a good to make a profit on a transaction and requires the profit margin to be agreed at the outset of the contract. In banking, this at its simplest form would mean that the bank customer approaches the bank and seeks funding to purchase a particular good or asset, say a car or a new kitchen or a household good. The bank would then purchase the good from the supplier or manufacturer and immediately resell it to the bank customer at a pre-agreed cost-plus profit price. The customer would then be contracted to repay the bank in installments over an agreed time period. This deferred payment in return for a higher cost of the original good is an acceptable arrangement in Shari’a. In murabaha, the ownership of the goods would pass to the customer who will be liable for all expenses related to it; however, the good will be pledged to the bank as security.

The drawbacks with murabaha are that the repayment terms are inflexible. Unlike with a conventional interest-bearing loan which may be repaid early with a consequent reduction in the interest charge, a murabaha contract is made for a fixed price which will not vary regardless over what time the payments are made. Although the contract will stipulate a schedule for the repayments, there will be no reduction for the bank customer should they repay it early (and so no incentive to do so) and similarly there are, in its purest form, no cost penalties should the customer miss a payment or take over the due period to repay the cost of the asset. There are a couple of incentives/penalties that are sometimes imposed. A “negative penalty”, which is applicable for other financing transactions, where if the customer makes all their payments in full and on time then they may gain a reduction in the final cost or some other benefit; or a “charity fine” where any missed payments, etc, incur a payment to a charitable institution nominated by the bank. For larger items and fixed property assets, there is an alternative contract available to retail bank customers to provide funding. This is ijara or lease to-purchase.


Current Major Developments in Islamic Banking and Finance

Mubesher Mir


  1. Islamic finance is today a $2.2 trillion industry spread over more than 60 countries with the bulk of it concentrated in very few markets. Data compiled by the Union of Arab Banks’ research department shows that just 10 countries account for 95% of the world’s Shariah compliant assets. Iran leads the way with 30% of the total market followed by Saudi Arabia (24%), Malaysia (11%), the United Arab Emirates (10%), Qatar (6%), Kuwait (5%), Bahrain (4%), Bangladesh (1.8%), Indonesia (1.6%) and Pakistan (1%). These countries drive the growth of Islamic finance, set industry standards and foster innovation. Over the past decade, Islamic finance grew at an exponential yearly pace of 10%–12%.

  1. Due to the lack of demand and understanding, the Islamic pension fund segment has long been seen as lagging behind. Over the past few years, only a small number of countries including Malaysia, Pakistan, Turkey, Iran, Australia and the UK have been offering state-backed Islamic pension funds. However, the landscape is moving with the recent introduction of Islamic retirement schemes in Kenya and market players believe that pension funds will play a key role in the future of the Islamic asset management industry.

  1. Over the past three years, interest in consolidation strategy in Islamic finance has grown rapidly and become repetitive in several markets and geographies. This was first pioneered in Bahrain, and over a dozen Islamic financial institutions benefited from this overdue needed strategy. The pattern was then followed in the UAE, Saudi Arabia, Qatar, Malaysia and elsewhere in the world. Perhaps the key driver for this consolidation plan could be a combination of business and financial efficiency workaround plans within the increasingly competitive banking and Takaful practices.


4.  Risk management can be defined as forecasting financial risks and taking the necessary measures to minimize their impact. Risk management in Islamic banking is not significantly different from conventional banking. Overall, there are six main risks, namely credit risk, equity investment risk, market risk, liquidity risk, rate of return risk and operational risk. However, there are additional risks that are unique to the Shariah industry, including the possibility of Shariah non-compliance.


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