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.

Historical developments of Islamic Finance in Pakistan

Like other countries of the world, growth of Islamic Banking and Finance started in Pakistan onward 70,s era

In 1970,s era some efforts started with no conspicuous results.

In 1980,s era some initiatives were undertaken. The Islamization measures included the elimination of interest from the operations of specialized financial institutions including HBFC, ICP and NIT in July 1979 and that of the commercial banks during January 1981 to June 1985. Pakistan was ranked amongst the three countries of the world for commencing non-interest based banking. Various legislations (Companies Ordinance, 1984, Negotiable Instruments Act, 1882, State Bank Act and Recovery of Loans Laws etc. were reviewed to bring these in line with the tenants of Islam. A new interest free Instrument namely; PTC (Participation Term Certificate) for Corporate Financing was introduced and was later replaced with TFC (Term Finance Certificate). Non-Interest Based Instruments (NIB) were announced. In the Conventional Banks separate interest free counters were opened on January 01, 1981. For meeting working capital needs of trade and industry, Musharaka was introduced on July 01, 1982. Profit and loss sharing basis was introduced in Conventional Banks on April 01, 1985. An Ordinance was promulgated to allow the establishment of Mudaraba companies and floatation of Mudaraba certificates for raising risk based capital. Amendments were also made in the Banking Companies Ordinance, 1962 (The BCO, 1962) and related laws to include provision of bank finance through PLS, mark-up in prices, leasing and hire purchase.

From July 1, 1982 banks were allowed to provide finance for meeting the working capital needs of trade and industry on a selective basis under the technique of Musharaka.

As from April 1, 1985 all finances to all entities including individuals began to be made in one of the specified interest-free modes. From July 1, 1985, all commercial banking in Pak Rupees was made interest free. From that date, no bank in Pakistan was allowed to accept any interest-bearing deposits and all existing deposits in a bank were treated to be on the basis of profit and loss sharing. Deposits in current accounts continued to be accepted but no interest or share in profit or loss was allowed to these accounts. However, foreign currency deposits in Pakistan and on-lending of foreign loans continued as before.

In 1990,s era In November 1991, Federal Shari at Court was established. An announcement was made on December 23, 1991 that transactions involving interest in banks ceased to have effect finally by June 30, 2001.

In 21st century, Commission for Transformation of Financial System was constituted in State Bank of Pakistan. Task Force was set up in SBP to suggest ways and means to eliminate interest from Government financial transactions. However, parallel banking system namely; Conventional and Islamic Banking continued as of today

The legal framework of Pakistan’s financial and corporate system permitted issuance of a new interest-free instrument of corporate financing named Participation Term Certificate (PTC).

Regarding investment of funds, bankers were instructed to provide financial accommodation for Government commodity operations on the basis of sale on deferred payment with a mark-up on purchase price. Export bills were accommodated on exchange rate differential basis. Financing of import and inland bills and that of the then Rice Export Corporation of Pakistan, Cotton Export Corporation and the Trading Corporation of Pakistan were shifted eralier to mark-up basis. Simultaneously, necessary amendments were made in the related laws permitting the State Bank to provide finance against Participation Term Certificates and also extend advances against promissory notes supported by PTCs and Mudaraba Certificates.

Now going forward in 2020, Pakistan needs to take more aggressive role in promoting Islamic Banking in line with the uniform standards being promoted by Islamic Financial Services Board (IFSB).  Core purpose however, should remain unaltered, i.e.  bringing  financial  innovation  to  cater  the  need  of  industry,  corporate  sector,  country’s infrastructure and population; with the objective to nurture the faith based system of financing consistent with the Sharia principles.

Since deposit works as life blood for any bank’s progress.  Therefore, in order to promote Islamic banking, it is also fundamental for Islamic banks to offer good products for mass majority in order to induce them to place their deposits with Islamic banks.  Banks can capture large deposits by employing good marketing techniques.  May be spreading Islamic education through mass media prove to be a leading advantage for banks to hold the attention of majority of population who are Muslims.

Islamic  Banks  need  to  offer  good  financing  products  as  per  the  need  of  individuals,  entrepreneurs and industrialist.  This will not only be helpful for banks to improve their profitability but, also make them eligible to meet the social and economical responsibility.   Instead to focus big groups for financing in their initial phase, Islamic banks should focus on small groups of people.  Possibly, for this purpose Islamic banks need to make joint venture with micro finance banks to meet their objectives.

Sharia Compliant Treasury bills need to be launched for making secondary  market for Islamic banks to create lines for sale and purchase of contracts or to offload their short term liquidity.   Therefore, it is assumed that to address the issue of excess liquidity with Islamic banks, T-bills will be introduced together with structuring Islamic Repos.  Of course, it requires changes / amendments in SBP Act and setting up specific assets of public sector by the Government.

In addition to regulatory requirements and guidelines given by SBP, Islamic banks  need  to  adopt  Islamic  Financial  Services  Board  (IFSB)  and  Accounting  and  Auditing  of  Islamic  Financial

Islamic banks  have been  given responsibility to not only  practice  and  promote sharia  based  principles  of Islamic economic system, but also the sound  risk  management  principles by following good  corporate governance  framework in  conformity with guiding principles  of Islamic  Financial Services Board (IFSB).

In addition to promote capacity building for mass majority, Islamic banks need to Inculcate the importance of training and development for effective implementation of standards promulgated by  Islamic Financial Services Board (IFSB) and Accounting and Auditing of Islamic Financial Institutions (AAOIFI).   It  is  not  appreciating  that  still  banking  industry  is  facing  shortage  of  trained  resources  in  the  field  of  Islamic  Banking.


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