lThis presentation includes the historical background of steps taken to implement Islamic Financial system in Pakistan. it also highlights the current challenges, probems and solutions

1. ISLAMIC FINANCIAL
MOVEMENT IN
PAKISTAN

2. INTRODUCTION
• Islam was the basis of creation of Pakistan therefore the
inception of Pakistan should have been marked by the laws
and legislation to put Islam to practice.
• However, this was not the case. there was a stark difference
between 'words' and 'actions'.
• Just after an year, the SBP came into being and
unfortunately our central bank stared working on the un-
islamic principle of Riba.

3. INTRODUCTION
• To make the situation worse, Pakistan started taking loans
from IMF and WB.
• The vicious circle of the interest based loans made the
situation worse.
• The promised war of Allah and His Messenger was eminent
in the past and is eminent today

4. TOPICS TO BE DISCUSSED…
1. Steps towards the Islamic Financial Movement
2. Problems faced by Islamic Financial Sector
3. Challenges for the Islamic Financial Sector
4. Solutions and Guidelines

5. HISTORY OF ISLAMIC MOVEMENT
• Efforts for economy wide elimination of Riba
started during 1970s
• Most of the significant and practical steps were
taken in early 1980s.
• Pakistan was among the three countries in the
world that had been trying to implement interest
free banking at national level.

6. HISTORY OF ISLAMIC MOVEMENT
• 1979: Elimination of interest from the operations of
specialized financial institutions
• 1981-1985: Elimination of interest from the
operations of specialized financial institutions

7. HISTORY OF ISLAMIC MOVEMENT
• 1980: The legal framework of Pakistan's financial
and corporate system was amended on June 26,1980
to permit issuance of a new interest free instrument of
corporate financing named Participation Term
Certificate (PTC).
• An Ordinance was promulgated to allow the
establishment of Modaraba companies and floatation
of Mudaraba certificates for raising risk capital.

8. HISTORY OF ISLAMIC MOVEMENT
• 1981: Separate Interest-free counters started
operating in all the nationalized commercial banks to
mobilize deposits on profit and loss sharing basis.
• 1985: 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.

9. HISTORY OF ISLAMIC MOVEMENT
• The efforts and practical steps undertaken in the 1980’s to
Islamize the economy at national level are considered
significant in the Muslim world.
• 1991: The procedure adopted by the banks in Pakistan
was, declared un-islamic by the federal shariat court in
November 1991 since it was largely based on Markup
techniques.

10. HISTORY OF ISLAMIC MOVEMENT
• After 2000, the SBP formulated the Commission for
Transformation of Financial System (CTFS) and Task
Force was set up in the Ministry of Finance to suggest
the ways to eliminate interest from government financial
transactions
• After 2000 many conventional banks have established
separate branches for Islamic financing. Moreover, some
Islamic Banks have also come into existance

11. CURRENT SITUATION
• The industry has shown tremendous growth
rate of 55% since inception.
• The ever‐increasing share of Islamic Banking
in the local Banking system stands at 5.9%.

12. PROBLEMS
&
CHALLANGES

13. Short Term Liquidity Management
•Islamic Financial Institutions (IFIs) in Pakistan cannot invest
in conventional interest‐based instruments.
•Sukuk which was introduced in 2008 to provide liquidity. But
due to limited supply and high demand, these Sukuk are
rarely traded in the secondary market.
•Absence of secondary market is both a problem and a
challange

14. Lack Of Tax Incentives
In Pakistan, the investors do not get tax
concessions for investing in Shariah compliant
investments. Absence of tax incentive is a
hurdle in growth.

15. Human Capital
• There has always been a dearth of qualified bankers
who are well versed in Islamic laws as well as
contemporary economics and finance.
• Majority of the human resource force working in
Islamic finance industry comes from the
conventional side. They do not have adequate
understanding of Islamic finance which affects their
ability in dealing and convincing their clients.

16. Investment Avenues
• SBP figures indicate that Murabaha, Ijarah and Diminishing
Musharakah, which are all essentially asset‐based, fixed
return products, constitute more than 80% of the financing
portfolio of Islamic banks in Pakistan.
• Now It is a challenge for Islamic institutions to enter into
other modes of Islamic finacing as well

17. Standardization Of Contracts
• All Islamic financial institutions offer the same basic
products but the problem is that each institution has its
own group of Islamic scholars on the Shariah board to
approve the product.
• The very same product has different features. This
prevents standardization.
• Lack of standard financial contracts and products becomes
a source of trouble and dispute.

18. Perception Of Users
• Many people in the Muslim and non-Muslim world do not
understand what Islamic banking actually is.
• Due to unsatisfactory experiences in the name of Islamic
Banking in the past, some Pakistani customers are now
skeptical about the authenticity of Islamic banking
practices.

19. Legal Support
• Appropriate laws for implementation of Islamic financial
contracts do not exist.
• Issues of Islamic banks and conventional banks are dealt
in the same court and by the same judge. But, we know that
issues of both banks are different in nature.

20. SOLUTIONS

21. Human Resource Development
Both business schools and religious schools
should offers specialist courses to prepare the
next generation of Shariah scholars and
Islamic‐financial managers.

22. Tax Reforms
Tax laws are not very much supportive about Shariah
compliant investments.
The Government needs to revamp the existing structure
of taxes and duties to make them conducive to Islamic
finance.
In this regard, stamp duties should be reduced and tax
incentives should be provided.

23. Using Media to Create Awareness
Creating awareness among the masses has been one
of the greatest challenges for Islamic banks.
Media can play a participative role in removing the
misconceptions people have regarding Islam.

24. Investment In Sectors Ignored By
Conventional Banks
Avenues missed out by conventional financial
institutions are a great opportunity for Islamic Banks.
In Pakistan, agriculture and SME sectors are of
paramount importance but these remain largely
ignored. Islamic banks can excel by investing in these
sectors.

25. PRE-REQUISITES
• The taxation system and the legal system should support the
Islamic Investments.
• Efforts are needed at changing the general perception.
Through a comprehensive campaign, people must be made to
understand that Islamic banking does not mean free loaning
to the business and industry and that the savers can
justifiably take return on the basis of results of the business
activity undertaken with help of their funds
• Commitment and determination that are pre-condition
should be visible to the general public.

26. OPERATIONAL GUIDELINES
&
PROPOSALS

27. Guidelines & Proposals
1. Good governance in terms of enforcement of law and control
over the corporate and private sectors need to be ensured.
2. Curbing informal (black) economy and documentation of
economy by banning all bearer instruments like prize bonds
and rupee traveler cheques that have become major vehicle of
black economy.
3. A shariah board needs to be set-up to establish countrywide
uniform shariah interpretation of financial transactions and to
review and supervise the activities of banks including
documents and transactions to ensure that they are in
compliance with its rulings.

28. Guidelines & Proposals
4. The disputed cases of the Islamic banks cannot be
handled by the conventional banks. To ensure a proper,
speedy and supporting Islamic legal system, separate
Islamic banking courts should be established.
5. Providing an effective penal code for willful defaulters,
dishonest clients and corrupt bank officials
6. Separate prudential regulations should be established for
Islamic Banks.

29. Guidelines & Proposals
7. The edifice of financial system needs to be restructured.
The structure should be based on profit/risk sharing i.e as
a whole the system must be equity based and not credit
based.
8. Unit trusts, investment funds, mutual funds, etc should be
establsihed to replace the interest based fund
mobilization schemes.

30. Guidelines & Proposals
9. Treatment of Deposits:
– Deposits of the risk-averse clients should be accepted either in
current accounts that will be guaranteed with no share in return
from financing operations of the banks or by establishing
Murabhaha funds wherein they will be treated as Rabbulmal and
get the quasi fixed return out of profits or rentals earned by the
respective funds.
– Risk-prone deposits will become part of bank’s equity involving a
weight age system (longer the maturity, higher the weight) on
daily product basis (DPB).

31. Guidelines & Proposals
10. Transactions relating to imports, exports and
working capital requiraders/business
community can be financed through
Musharakah or Mudarabah modes. Similarly,
working capital and project financing can be
offered through participatory modes.

32. Guidelines & Proposals
11. Provisioning for bad debts should be replaced by
sharing in possible losses.
12. Credit system needs to be reformed to drastically so
that the credit creation capacity of the banks is
largely reduced.
13. To develop the Islamic financial system in its purest
form and to bring about a structural change, the
government should make the use of participatory
modes compulsory for specified types of transactions