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.

Islamic Banking and Employment

Islamic finance operates through the fundamental laws of Sharıah that pertains to the principles laid down in Holy Quran and the Sunnah of the holy Prophet (PBUH). The theoretical structure of Islamic finance guides the people to make their economic choices according to the core tenets of the Shar¯ı‘ah.  Core of Islamic financial system is the prohibition of interest, while the other principles and doctrines of Islam suggest sharing of loss and profits, promotion of joint businesses and discouragement of speculative behavior.

Many Muslims and non-Muslims scholars and philosophers have investigated the principles of Islamic Finance. Following are the general principles of Islamic Finance:

  • The prohibition of rib¯a (usury or interest)
  • The prohibition of gharar (uncertainty about the subject matter, price and delivery   in the contracts) and Gambling (maysir and other games of chance)
  • Risk not to be separated from the ownership
  • Observing ethical and moral values in business transactions
  • Prohibition of short selling (except with conditions of salam sale); and
  • Transparency and disclosure.

The main contracts and instruments available in Islamic finance are mush¯arakah, mud ¯arabah, diminishing mush¯arakah, ij¯arah, mur¯abah.ah, salam, istis.n¯a‘.

Based on the above features, Islamic banking and finance system has the capacity of promoting investments in real production and business sectors in any economy. Thereby, Islamic financial institutions can be instrumental in socioeconomic development by providing finance to micro businesses.

State Bank of Pakistan’s Vision 2020 (2016-20) emphasized on enabling and promoting Islamic Banks in Pakistan (Government of Pakistan, 2017). Performance of Islamic banking Industry is exceptional in Pakistan due to its high growth during last few years which is growing at a pace of fifteen percent per annum (Government of Pakistan, 2018) due to investment of federal government in ij¯arah suk¯uk and other Shar¯ı‘ah compliant instruments.

The contribution of both mur¯abah.ah and diminishing mush¯arakah in the IBI was 56.3 percent in 2015, but subsequently their share declined, while the share of mush¯arakah (Running Finance) increased (Government of Pakistan, 2016). In 2016, all mode of Islamic financing experienced increasing trend excluding mur¯abah.ah, salam and istis.n¯a‘(Government of Pakistan, 2017). The assets and deposits of IBI reached to 13.5 and 15.5 percent of the overall banking industry after its re-launch in 2001-02 with 22 Islamic Banking Institutions in the country in 2018 (Government of Pakistan, 2019).

Conventional financial sector has no significant impact on unemployment in emerging economies. In developing economies like Nigeria, financial credit extension has significant effect on reducing unemployment. When unemployment increases financial sector mostly contracts. In Pakistan, it has been reported that financial accommodation to the private sector improves employment rate. Other factors effecting unemployment are rigid market regulations and the tight monetary policy resulting in increasing cost of capital.

Interest free monetary policy is proved to be better as compared to interest based policy. The productivity of labor force plays an important role in economic development and growth by pushing the efficiency and competitiveness. According to the Labor Force Statistics, total labor force of Pakistan was 61.04 million from which 94 percent were employed and 6 percent (now 6.2% in 2019) were unemployed during 2014-15 (Government of Pakistan, 2018). Out of this, the total labor force in Punjab Pakistan was 35.71 million; 93.67 percent employed and 6.33 percent were unemployed.

Employment also depends on the size of the firms and in this context the SMEs have been considered as the most suitable structure to provide employment, particularly in countries with abundant labor force. Number of studies have emphasized on relationship of firm age, size and growth in different countries of the world. In most of the studies, inverse relationship was found between firm age and employment while very few argue positive relationship based on entry of new firms. This argument was based on the notion that new/entering firms grow faster than older firms

Mostly Firm behavior utilizing Islamic finance is analyzed on the basis of business size, assets formation, firm age and technological adoption.

Results of model reveal that assets formation had positive relationship with employment generation while firm’s age, firm size and technology have inverse relationship with employment generation. This indicates the importance of assets formation through financial support of borrowers in employment generation.

It is, therefore, recommended that Islamic Financial institutions in the country may pay more emphasis on assets formation while extending Islamic finance to their clients. Furthermore, the State Bank of Pakistan may enhance focus on financing of SMEs carrying proposals of more assets formation, by Islamic financial institutions, as a tool to meet the challenge of reducing unemployment in the country.

Islamic banking in Afghanistan


ISLAMIC banking in Afghanistan has nearly tripled its holdings in 2019 since 2014, but is constrained by uneven profitability, limited investment options and few financing tools, the Islamic Financial Services Board (IFSB) says. Afghanistan’s banking sector is small, but Islamic finance is regarded as a feature that could help attract more people to the formal economy in a country where only 15 per cent of adults have a bank account. The country is now home to a full-fledged Islamic bank and six Islamic windows in conventional banks. They hold a combined 27.8 billion afghani ($500 million) at the end of the second quarter of this year, versus 9.7 billion afghani at the end of 2014.

Tax treatments of Islamic Finance in Malaysia in 2019

Tax incentives were given to 10 year tax holidays on income earned from the Islamic banking business conducted in foreign currencies by International Islamic Banks and International Currency Business Units of a licensed institution, namely the commercial banks, investment banks and Islamic banks from years of assessment 2007 until 2016.

10 year stamp duty exemption was also given on instruments executed pertaining to Islamic banking activities in foreign currencies undertaken by International Islamic Banks and International Currency Business Units from years of assessment 2007 until 2016. 20% stamp duty remission was given on Islamic finance instruments as approved by BNM & SC from 2 Sept 2006 until 31 December 2015. On Personal basis Tax exemption was given on any profits paid out by an Islamic bank to individual residents and non-resident depositors. Withholding tax exemption was also given on income received by non-resident experts in Islamic finance.

Now Malaysia’s finance minister Lim Guan Eng has tabled the government’s budget for 2020 on October 11 according to which Tax deductions on the cost of issuance and additional deductions on sukuk wakalah will be extended for five years until 2025. Last year, the government had extended the double tax deduction policy for additional expenditure incurred when issuing two types of sukuk—ijarah and wakalah—for three years starting in 2019 as the year of assessment. There will be a tax exemption for funds companies managing Shariah-compliant and SRI funds.

The allocation for Islamic affairs under the Prime Minister’s Department will be increased to 1.3 billion ringgit from 1.2 billion ringgit last year and 1.1 billion ringgit in 2018. The Department of Islamic Development Malaysia (JAKIM) will get 10 million ringgit to “develop a greater understanding of Maqasid Shariah via a series of advocacy programs and deliberations”, says the finance minister.


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