Muhammad Arif

Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Facts about Islamic Finance in Europe

Information about Islamic finance in European countries is usually provided by professional-style reports, offering practical data on implementation of standardized products. However, precise developments about material legal provisions applicable to contracts and their actual legal regime are not often detailed. In order to fill this gap Researchers from across Europe have now contributed to this project.

At a time when Islamic finance is experiencing spectacular global growth has gone above $2.25 trillion Islamic financial assets a development that is increasingly seen in a few European countries such as the United Kingdom, Luxembourg and France, Austria is the exception.

Austria- Despite the continuing struggle of several organizations over the years, says Günther Ahmed Rusznak, President of the Islamic Information and Documentation Center of Austria, the country remains far behind in this respect on date. Given the uncertainty surrounding the true market potential of Islamic products, as well as the prejudices that exist when it comes to Islam, many Austrian banks see these products as being ineffective. They also say that their customers have not expressed a great deal of interest in these products. Nor should we neglect to mention the Austrian legal system which is not sufficiently favorable for the development of these institutions. So for this Austria has to correct these areas.

France– After 2008 crisis, French authorities tried to attract foreign funds; Islamic finance was seen as an attraction tool. They established some legal measures to accommodate Islamic financial products with the French legal framework. This official activity was limited to the issuance of four tax instructions recognizing four fundamental contracts of Islamic finance and mitigating the tax friction of the Islamic products. The choice of tax instructions avoids political difficulties that may oppose other legislative initiatives such as bills. The insufficient legal framework and the bad tax reputation caused the escape of the foreign Islamic investors and the immobility of the internal market. Despite the presence of the biggest Muslim community in Europe in France and therefore a large potential for Islamic finance products, the French market is stagnant. The main French economic and financial actors prefer to stay in shadow and the market is left to brokers and councils which affected the public confidence in the offers. However, the training sector is characterized by some training programs that have international renown and by the first French-speaking peer-review journals.

Turkey- The Islamic finance has an old existence in Turkey. Naturally spread under Ottoman Empire, it had disappeared between the promulgation of the Republic (1923) and the 1980s. Indeed, Islamic Banks were called “specialized financial institutions”. But, the Turkish Banking Law (2005) has changed its name to “Participative Bank”, and this law rules all their activities like investment account, deposit, credit and card. In order to highlight their specificities, witht ṣukūk assuming an increasingly important role as a financial instrument for economic development, it is clear that Turkey will become one of the countries that will shape the future of the ṣukūk market on a global scale. With its unique geostrategic position as a bridge between Europe, the Middle East and Asia, Turkey is ideally positioned for becoming one of the most important players in the global ṣukūk market industry. If Islamic finance has not always been very popular in the country, this sector has grown steadily and ṣukūk are enjoying a steady success. The Turkish government is therefore determined to make Istanbul a financial hub for Islamic finance on a regional and global scale. With a GDP of US$769 billion in 2017, Turkey ranks 18th among the world’s largest economies and appears in this context well positioned to become one of the leading players in the global ṣukūk market industry. Despite this potential, there are still many legal and financial hurdles, limiting the development of ṣukūk in the country. Efforts still need to be made to ensure a stable environment conducive to the development of this promising market.

Luxembourg. The place of investment funds in this country and the legislative and political frameworks have created conducive environment for Islamic finance. Demand and supply factors, the regulations, the trainings, the leadership of Luxembourg as well as presenting the products as Sharıʿa compliant, all matters in this regard. According to the EY Report 2015, assets of Islamic investment funds in Luxembourg were worth over EUR 3.5 billion. Even though it was only 0.14% of the entire sector total value, the dynamics of Islamic funds’ assets growth is impressive. Luxembourg is followed by Ireland, where in 2012 Islamic assets amounted to about EUR 1 billion. Although in absolute terms it is less than in Luxembourg, Islamic funds’ share in total value of investment funds sector was more than twice as large and amounted to 0.4%. For example, within six months of 2016, Sukuk that was offered by one of the Luxembourg institutions gained 3.6%. In case of its conventional substitute it was only 0.15% (Czupa, 2017).

  1. In 2016 in the United Kingdom 18 Islamic funds existed and their assets value added up to EUR 400 million. Small, but still growing share of such funds is due to the fact that this country prioritizes the development of Islamic banking and Sukuk segment. So far, as the intention of British government is to attract Islamic funds (it is expected that Sharia-compliant investment value will exceed EUR 1.5 billion), investors have been more concerned about potential rates of return and reconciling Western model of turning a profit with recommendations of the Holy Quran (Zielewski, 2017). When it comes to investment funds, they are seen as an appealing product for their investment portfolio diversification, not only for risk dispersion but also for achieving a higher level of ROE.

Germany- Germany is a crucial market for Islamic finance in continental Europe. A lot of attempts and pioneering work were made to establish Islamic compliant products in this market, most of them with hardly any success. In 2015 German financial regulatory authority “BaFin” for the first time has decided to grant license for banking activity to a Sharia-compliant bank. It has been Kuveyt Türk Bank AG headquartered in Istanbul, whose shareholders are mainly entities from Kuwait. It is one of the biggest banks in Turkey (considering the value of assets as a measure) and it has been applying for the license in Germany since 2011 – while running its department in Mannheim (Kuveyt Türk Bank, 2011). Bank’s management board hopes that 4.5 million Muslim minority in Germany, which is dominated by people of Turkish descent, will quickly become its clients. They refer to a market study according to which 21% of Muslims would prefer to use services from a Sharia-compliant bank. Kuveyt Türk Bank AG plans to achieve balance sheet total similar to a medium-size credit union in Germany (popular in this country financial institution, organized on a cooperative basis). The bank aims to establish its departments in Berlin, Frankfurt, Mannheim and Cologne (Rzepecka, 2017). It is worth to mention that license granted in Germany enables Kuveyt Türk Bank AG to operate in all member-states of the European Union without the necessity to obtain separate licenses for each of the countries. It is worth to mention that license granted in Germany enables Kuveyt Türk Bank AG to operate in all member-states of the European Union without the necessity to obtain separate licenses for each of the countries in Europe. In 2012 Munich-based Investment Company FWU Gruppe offered its clients Sukuk certificates for more than USD 55 million. The issuance was sold in full.

Ireland- Over the last decade, Irish authorities have introduced accommodative measures to clarify and legislate for Islamic finance activity under Irish law. These measures have focused on the taxation of certain Islamic finance structures and have been designed to increase the alignment of tax treatment between these Islamic finance structures and their conventional alternatives. While there remains shortcomings in the current treatment of Islamic finance under Irish law, the steps taken to date by the Irish government to accommodate Islamic finance activity are to be welcomed and they go some way towards positioning Ireland as an economy in which Islamic finance activity is encouraged.

Italy- Since the establishment of the first Islamic retail bank in the UK, in 2004, several European countries have developed a regulatory and fiscal treatment for Sharıʿa-compliant financial products and services. Italy formally joined this trend in 2010, when the Bank of Italy issued the first guidelines aimed at comparing Islamic finance with the conventional financial and banking system.

Although there are no major regulatory barriers, and already there is a wide range of financial instruments which could easily be adapted to the scope and objectives of Islamic finance, some issues, such as limited political support for specific fiscal adjustments and poor technical expertise, still prevent the full integration of Islamic finance into the national markets. On the other hand, the evidence arising from the analysis of the individual initiatives of market players and the legal framework show that a number of Italian contracts and investment mechanisms could facilitate the implementation of Islamic finance for the benefits of national Small and Medium Enterprises (SMEs) and financial inclusion. The research suggests that the analysis of the complementarily between ethical banking and Sharıʿa-compliant investments is worthy of further research. Despite the divergent operating standards and parameters, the case study of socially responsible investment discloses unsuspected commonalities regarding concept and vision of values-oriented financial systems. Best practices of cooperative and ethical banking are likely to help establish a level playing field for Islamic finance in Italy by pointing out the compatibility of financial transactions which pursue similar socio-economic goals while maintaining different operational backgrounds.

Russia- Muslims in Tsarist Russia played a pioneering role in establishing Islamic economics and banking. The Tatar scholars ensured a profound reflection on Islamic economics. Tatar Islamic press also contributed to the diffusion of Islamic economics awareness and appealed to Muslims to enhance the economy, to develop industry and financial institutions, and to prohibit ribā. Their efforts led to the appearance of the first known journal, named Iqtisad, dedicated to the Islamic economy. Tatar theologians used the mutual banks prototype to launch Islamic banking activity, as was the case of the mutual bank of the city of Samara. Sources mention that an Islamic bank was established in 1912 in St. Petersburg.

Spain- Islamic finance in Spain looks at the rich Islamic legacy, particularly the development and flourishing of waqf in Al-Andalus, that makes Spain unique in the whole of Western Europe; and yet, today Islamic community does not benefit from it.  However on the other hand, Takāful as the one constituent pillar of Islamic finances that would have a realistic opportunity of implementation by way of taking advantage of a culture of mutual insurance which exists in Spain. All this is in a context of crisis in Takāful which, paradoxically, may provide Spain with an opportunity. Islamic finance has a future in Spain, it will have to be based on an ambitious and daring agenda, namely, that of presenting Islamic finance as a social impact solution.

Role of Islamic Banking in Pakistan in 2018-19 by taking a look on four major Islamic Banks.

A Look at Meezan Bank in 2018

At the end of 2018 the total assets of the Bank crossed Rs 900 billion and grew by 19% to reach Rs 938 billion in 2018 from Rs 789 in 2017. Financing portfolio of the Bank crossed half a trillion benchmark closing at Rs 513 billion – a growth of 22%. The Bank increased its financing exposure in all sectors. The Bank’s Corporate, SME / Commercial and Consumer financing increased by 14%, 44% & 41% respectively. Advance to deposits ratio (ADR) of the Bank grew to 65%, with all the risk acceptance parameters well within limits. The Bank’s investments and placements (under Bai-Muajjal) increased to Rs 309 billion as compared to Rs 266 billion in 2018. Although, there has been no fresh issue of GOP Ijarah Sukuk, the Bank managed its liquidity position through interbank placements and the Open Market Operation (OMO) conducted by the SBP using Bai-Muajjal. 18% growth in deposits was seen during the year – twice the average banking industry growth of 8%, closing at Rs 785 billion. The average current account deposits of the Bank grew by 24% from last year. The Bank’s market share of deposits grew to 5.9% as compared to 5.4% in 2017. The Bank’s market share for the Islamic Banking Industry as a whole including Islamic Banking windows of conventional banks in Pakistan is 35%.The Bank’s equity also increased to Rs 40 billion as compared to Rs 35 billion last year. the final cash dividend of Rs 2.00 per share ( 20%) bringing the total payout to Rs 3.50 per share (35%) as Rs 1.50 per share i.e. 15% interim cash dividend was paid along with issuance of 10% Bonus Shares. Another development during the year was the successful issuance of Additional Tier I Sukuk of Rs 7 billion that further strengthened the Bank’s Capital Adequacy Ratio. The Bank’s CAR now stands at 14.55% – well above the minimum mandatory level of 11.90%. During the year, the Bank further expanded its foot prints and opened 59 new branches bringing the total number of branches to 660 in 181 cities.

A Look at Dubai Islamic Bank for 2018

At the end of 2018 the total assets of the Bank crossed Rs 232 billion from Rs 185 in 2017. Financing portfolio of the Bank crossed Rs 155 billion from Rs 121 billion in 2017. Deposits of Bank remained by area as Rs 20 billion of Corporate Banking, Rs 38 billion of SME & Commercial Banking, Rs124 billion of Consumer Banking and Rs 51 billion of Treasury with total as Rs 182 billion. Leverage Ratio (LR) for 2018 remained as 7.05% against 6.22% for 2017.Liquidity Coverage Ratio (LCR) for 2018 remained as 185.45% against 121.49% for 2017.  Net Stable Funding Ratio for 2018 remained as 106.63% against 113.02% for 2017. Profit of the bank for 2018 remained as Rs 15 billion against Rs 11 billion for 2017. Its employees remained 1962 in 2018 as compared to 1863 in 2017.

  A Look at Bank Islami for 2018

 During the year 2018, its deposit base grew by 3.6% and closed the position at Rs. 184.7 billion with emphasis on mobilization of core deposits.  FI deposits, current and saving accounts (CASA) mix of the Bank increased from Rs. 113.9 billion as at December 2017 to Rs. 119.4 billion as at December 2018.There was a slight dip in Bank’s net financing, consumer finance being the flagship business line of BankIslami, grew by 21.6% to Rs. 24.2 billion in December 2018 from Rs. 19.9 billion in December 2017. Going forward, though the Bank envisions growing trend in its consumer segment, increase in benchmark rates and prevailing inflationary pressure may put some constraints for the Bank and it may adapt a cautious approach to extend consumer financing particularly in housing sector. However, the Bank will be making strides in the year 2019 to increase its exposure towards rated corporate clients, SME sector, Agriculture financing and public sector entities anticipating an overall improvement in its assets base and credit risk profile. With gradual inflow of funds through deposits together with an increase in policy rate, the Bank was able to improve return on its average earning assets throughout the year, resulting in an increase of 18.2% in its net spread earned. However, on the other side its net spread margins remained at the same level of 49%. This was mainly due to certain non-earning investments/assets on the balance sheet for which the Bank has formulated a strategy to address the same. The Bank reported profit after tax of Rs. 213 million in the year 2018 as compared to Rs. 1,563 million of last year. This variation mainly pertains to one-off deferred tax adjustment considered in the year 2017. The operating profits of the Bank have remained under stress since its amalgamation with defunct KASB Bank; nonetheless signs of improvement have started on the back of efforts made by the Management of the Bank by bringing in synergy, growth in balance sheet and eradication of process inefficiencies. Resultantly, BankIslami posted operating profits to the tune of Rs. 439 million for the year 2018 in contrast to the operating losses amounting to Rs. 235 million and Rs. 1.19 billion posted during the years 2017 and 2016, respectively.

A Look at Al-Barkah Bank March 2019 (Q comparison)

At the end of first Q of 2019 the total assets of the Bank crossed Rs 129 billion from Rs 128 in first Q of 2018. Financing portfolio of the Bank remained at Rs 78 billion in first Q of 2019 from Rs 79 billion in first Q of 2018. Deposits of Bank remained by area as Rs 92.8 billion of consumer side in first Q of 2019 as compared to Rs 92.7 in first Q of 2018 and Rs 98 billion of institutions in first Q of 2019 as compared to Rs 92.7 in first Q of 2018. Leverage Ratio (LR) for first Q of 2019 remained as 5.21 % against 5.35% in first Q of 2018.Liquidity Coverage Ratio (LCR) for first Q of 2019 remained as 110.46 % against 1110.96 % in first Q of 2018.  Net Stable Funding Ratio in first Q of 2019 remained as 121.92% against 122.11% in first Q of 2018. Profit of the bank in first Q of 2019 remained as Rs 139 million in first Q of 2019 against Rs347 million in first Q of 2018.

Words from writer. Although picture of above banks look quite rosy apparently but within deep there are lots of challenges that are-

  1. Definition of Riba has not been defined to actually provide line of action to design Islamic banking products and Financing modes for the customers.
  2. Role of Islamic Banks are still negligible in lifting of macro economy of the country. On Agro based their financing is negligible. Further they have no role in combating inflation and unemployment along with government and SBP.
  3. Their financing products are almost based on debt based financing i.e Murhabah and Diminishing Musharkah both are leasing products that are not in true sense close to spirit of Islamic Banking
  4. There is no legislation on Islamic Banking and Finance in Paakistan.


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