Publications Islamic Banking & Finance Page 16th November 2018

islamic finance

Challenges to Islamic Banking Business-The Islamic financial law has long history but Islamic banking and finance industry came into existence with profit and loss sharing investment by Egypt’s Mit Ghamr Saving Banks in 1963. After official existence Islamic banking has grown in the area of finance, banking, insurance, mortgage, and assets management business with annual growth rate of 10-15 %. But actual development in Islamic banking has started after 1970 with new investment techniques, strategies and product development. Dubai Islamic Bank (DIB) is known as world first Islamic bank, it was formed in 1975.Currently it has lot of branches which provide great services. DIB offers higher returns than conventional banking system as well they provide auto, home and personal finance products

In some countries such as Iran and Sudan all banks are operating according toIslamic financial law but in some other countries such as Pakistan, Bangladesh, Egypt, Indonesia,Jordan and Malaysia Islamic banking services are provided through Islamic Banks or windows provided by the conventional banks.

The main hypothesis presented in favor of Islamic Banking is that Muslim population wants to spend their lives according to their faith. According to Islamic teaching interest is strongly prohibited in Islam and they want to take banking services such as saving accounts, current accounts, home finances, insurance and loan according to Islamic Sharia law. Since in most of the countries their banking and financial rules are most in favor of conventional banking system hence due to this Islamic banking is facing some difficulties in the way of its progress. In other word these problems are great challenges for Islamic banking if they work hard Islamic banking will be developed in short period of time.

This raises a question about faith, what we mean by it, since Islam is a natural religion and its all beliefs are based on scientific principles or some understandable arguments. Islamic finance means business and no business can go without profit and loss. This is contrary to conventional finance where profit is already fixed irrespective of the fact whether business is at loss. Apparently this is exploitation. But if Islamic Banks get loss in its investment on trading basis than it is not liable to pay any profit under arrangement of Mudarbah or Musharkah. This also creates exploitative kind of business in environment of inflation or time value of money which is also not permissible in any religion or on moral values. From this angle Islamic finance becomes more risky; hence to cover this risk, element of higher return becomes inevitable. However most of the Islamic Banks normally pay less return than conventional banks due to some obvious reasons. The reasons are as follows:-

  1. Whether Islamic banking sector has a potential for product development?
  2. Whether Islamic banking is in a position to satisfy its customers?
  3. Whether Islamic banking has a potential to perform active role in the Financial Market

and its growth in market development?

  1. Whether Islamic banking is able to enhance the investment opportunities in the country and whether it can play prominent role for the country’s economy?
  2. Whether is there any affect of any country’s environment (ground realities based on political, social and geographical basis) on growth and development of Islamic banking?
  3. Whether Islamic banking has proper regulatory and institutional framework in thejurisdiction where it is working?
  4. Whether Islamic banking has any problem in any country in respect of supervision and sharia committee?
  5. Whether Islamic banking is fully informative to its customers
  6. Whether Islamic banking is facing any difficulty in its marketing area?
  7. Whether Islamic banking is in a position to survive and develop in the age of competition and globalization?

Unfortunately we have no cogent answers for the above questions particularly in Pakistan. This requires immense research which cannot be done by the degree holders coming out of Madrasahs. For this a joint effort is required from the Bankers having full knowledge of conventional and Islamic Banking, legal experts, Shariah Advisors and Market practitioners. This combination on joint basis can come up with the required answers.

Sukuk Issuance for‘Diamer-Bhasha Dam-Pakistan Engineering Council (PEC) has demanded government to launch ‘Diamer-Bhasha Dam (DBD) public limited company’ and float its shares in the market for public subscription to generate funds for the mega project. These shares may be issued on the pattern of sukuk (Islamic bonds). It has been claimed that by doing so the dam component cost – which has been estimated close to Rs500 billion – could be reduced by about Rs200bn.

After getting Prime Minister Imran Khan’s green light, Finance Minister Asad Umar has said that in next few weeks the government would issue dollar-denominated Sukuk bonds to generate finances from overseas Pakistanis.

Looking at Primary issuance of Sukuk by GCC entities, including Central Banks Local Issuances, GCC Sovereign and Corporate Issuances it has totaled $174.17 billion in 2017, a 3.96 per cent increase from the total amount raised in 2016.

Sovereign issues continued to dominate the GCC Sukuk market in 2017 contributing 62.6 per cent to the overall market with a total value of $65.28 billion as compared to $65.82 billion in 2016. Total value raised by corporate entities in 2017 increased by 6.46 per cent, to $38.98 billion in 2017 from $36.61 billion in 2016.

Issuances with tenures of six to ten years raised the highest amount, $42.9 billion, through 35 issuances, representing 41.2 per cent of the total amount raised. However, maturities of five years or less increased to $39.79 billion representing 38.2 per cent of the market as compared to $11.93 billion in 2016 representing 11.4 per cent.

Comparing Pakistan, it can once again tap international capital market to issue sukuk within next couple of months to generate at least $ 1-2 billion or more to build the country’s foreign exchange reserves. Likewise ‘Diamer-Bhasha Dam (DBD) public limited company’ can also issue Sukuk to meet its demand guaranteed by the government

Up till Dec 2017, Government has already issued 3 years Ijarah Sukuk in the domestic market to the amount of Rs 385 billion. From external sector it has raised $ 7.3 billion through Sukuk. They mostly carry profit margin running between 5.625% and 6.875% using KIBOR or LIBOR. For external sector Sukuk Pakistan has used 5 years tenor. As far as geographical interest of investors is concerned it were well distributed with 35% subscriptions coming from Europe, 32% from the Middle East, 20% North America and 13% from Asia. Last time the sukuk was five times oversubscribed with offers of 2.3 billion against initial size of $500M which was upped to $1B. The Sukuk were issued as per governing law over the Purchase Agreement and the Lease Agreement Laws of Pakistan.

How to improve growth of Islamic Banking in Pakistan-It is again stressed that the growth of Islamic Banking in Pakistan is related with latest banking trends and there is no other debate indeed. Banking sector is mobile and versatile one as per rebounding economy demands. The growth related issue is best in driving change and issues accelerated growth aspect without any demanding aspect. The accelerated growth of banking aspect is no doubt a gap without issuing any emergency.

The growth challenge lies under demanding environment for economic system of Pakistan. Right now Human resource is the biggest challenge while managing Islamic finance in this industry. The limited supply of human resource is being considered by departmentalization without any new reform that is not so much possible indeed.

The new endorsements from Islamic finance banking are related with growth objective but Pakistan is not showing same increase in human resource. The first lacking is related with capacity building and it is biggest endorsement with objective of growth. The capacity building means banking system requires chain of human resource to manage activities both at micro and macro level. From last five years, in Pakistan, Islamic banking has been struggling with the same challenge.

This is the only reason that Pakistan is unable to found new reforms about capacity building and managing human resource without any hurdle. The capacity building is related with issues that should be tackled with Islamic banking and its situations indeed. The second level thing is related with liquidity management and it also endorses that Pakistan’s growth rate of Islamic banking because of its own mistakes and lacking of reform.

The previous five years has experienced that Islamic banking’ growth rate is only 17 percent that has now come down to 12-13% which is not compatible with growing needs of the country  in any way.

The projected figure for next five years has been laid down as 20 percent that seems not achievable. The liquidity management is related with human resource and product development. The product innovation is another missing link that is not present in Islamic banking right now. So lot is required to do on these fronts.

Latest News on Islamic Banking and Finance

  • Indonesia’s finance ministry sold 4.115 trillion rupiah ($277.95 million) of Islamic bonds at an auction this week, above the indicative target of 4 trillion rupiah.
  • The weighted average yields of some of the project-based sukuk sold this week were lower than yields of comparable sukuk at the previous auction on Oct. 30.
  • Omani real estate developer Tilal Development Co plans to raise $137 million worth of five-year Islamic bonds to refinance maturing debt since part of a growing number of corporates choosing to use sharia-compliant financing in the Sultanate of Oman. Credit agency Moody’s has assigned a B1 senior secured rating to Cayman Islands special

Purpose vehicle setup by Tilal for the issuance, with a stable outlook.

  • Meezan Bank Limited has won the 3rd Pakistan Banking Awards in the category of the Best Islamic Bank for 2018.The 3rd Pakistan Banking Awards ceremony was organized by the Dawn Media Group, Institute of Bankers Pakistan (IBP) and A.F. Ferguson. The jury decided to choose Dubai Islamic Bank as the Best Emerging Bank in Pakistan for 2018.
  • Islamic banking in Pakistan has been growing fast enough to meet by this year the 15% target of Islamic banking market share that the central bank has set. While it appears to be a straight forward yes with no questions but still it is actually more difficult than expected as earlier this target was set as 20%. Like Pakistan, Malaysia and Turkey are homes to thriving Islamic finance sectors. Starting from a low base and boosted by strong political will, their industry has experienced swift growth with different objectives set in terms of Islamic banking market share for 2018, 2020 and 2025 according to the countries themselves.
  • Pakistan Stock Exchange (PSX) has given its approval for the listing and quotation of the units of two open-ended mutual funds: AKD Islamic Stock Fund and AKD Islamic Income Fund. According to separate bourse filings, the listing of the funds has commenced since 21st June.
  • AlHilal Shariah Advisors() Ltd. has become the first Shariah advisory company in Pakistan to be registered by the Securities and Exchange Commission of Pakistan (SECP) under the Shariah Advisory Regulations 2017, according to a statement.


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