The Islamic Banking and finance industry has achieved substantial growth on the global scale the dawn of the new millennium . In the middle of the financial and economic crisis of 2007-2010 and even afterwards. the Islamic Banking and finance industry witnessed significant growth in double digits.
In Pakistan the second phase of Islamic banking stated in 2002 with the launch of Pakistan full fledged Islamic bank, Meezan Bank. The first phase during 1980 under patronage of Zia-ul Haq was not successful. However with the increased participation pf shariah scholars in the policy making product design , audit and supervision has been oversimple consistent growth.
Now Islamic banking in Pakistan is an established industry with 10 % market share achieved in just over a decade . Currently there are 5 full fledged Islamic Bank and 18 commercial banks that operate Islamic banking windows alongside conventional banking in Pakistan.
The basic structure of Islamic banking can be explained as follow. First an Islamic bank creates an asset pool which consist of the bank ‘s equity and deposit . Deposit include two further classified i.e remunerative deposit . Remuneration deposits are mobilized using partnership mode Mudarabah with the bank’s shareholder and depositors as partners. The profit sharing ratio is agreed at the start of this partnership . Non remunerative deposits are mobilized using Qarz( non compensatory loan)
This pool of assets used to provide asset backed financing . These financing asset are based on different underlying financing contracts i.e Ijarah, Diminishing Musharakah , Murabaha . Istisna , ect. An Islamic bank does not lend money to a borrower. It provides asset backed financing in which the asset is owned by the bank. These financing modes can be categorized as lease based financing or credit sale based financing. Income stream is generated either through profit on credit sale or rent for the use of asset.
Currently Islamic Banks use the same inter bank benchmark rate Karachi Inter banks Offered rate (KIBOR) in Pakistan for pricing asset in credit sale for profit determination and computing rentals to mortise the cost of the asset during the lease period.
Income from the sale of lease of real asset is distributed among the contributors in the asset pool, including the bank shareholders and depositors. To achieve the spread for financial intermediation function profit sharing is done between the bank and depositors according to the pre agreed profit sharing ration. Having describe the basic structure of current practiced in Pakistan , we now analyses whether it is fully complement the Islamic economic ideals and Masqasid -e Shariah. It is a well known fact to even novice readers of Islamic finance that Islamic encourages equity financing over debt financing . Equity financing results in the actual fruits of investment . It ensures better results from the perceptive of redistribution and better cooperatives behavior since payoffs for all parties are linked with productive sector of the economy.
In an overall economy , this will have several positive effects too. Markets will not have to produce speculative surplus output just to service exorbitant amount of debt and that could stabilize business cycle Almost all academic literature on Islamic banking and finance obtain its legitimacy and support by mention of preferable equity modes of financing like Murabaha and Musharakah.
However in the currently practiced Islamic finance in Pakistan , debt based financing comprises more than 90% of financing product and contracts while combined share of Mudarabah and Musharakah is less than 5 %.
The state affair lead one to conclude that there is limited originality in product structures and most importantly , they do not hit the roots of the evils of the interest based system and financial capitalism . If interest is prohibit due to exploitation as explained in Quran then how does Islamic banking having higher spread than conventional and using primary the debt based modes of finance justify avoiding exploitation and providing everything substantially different from the conventional banking system on its effects?
Not only do Islamic banks not use Mudarabah and Musharakah in their asset side operation , the Islamic financial haves\d showed no inclination to develop an equity market with Islamic investment banks facilitating IPOs through bridge , seed and venture financing using preferable equity modes.
The state affair is not because of low profitability. It can be seen that initially some bank took time to considerate and reach break even but in later periods , they registered strong growth with ROE up tp 18% and sustaining to be in double digits despite the security energy and fiscal crisis in the country .
With surplus liquidity at their disposal, Islamic banks have provided financing using preferable equity modes to facilitating new IPOs in the market and hence encourage equity financing to be used in the economy.
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