BANKING IN PAKISTAN
Banking is one of the most sensitive businesses all over the
world. Banks play an important role in the economy and are considered as the
backbone of an economy in every country and Pakistan is no exemption. Banks are
custodian to the assets of the general masses. The banking sector plays a
significant role in a contemporary world of money and economy. It influences
and facilitates many different but integrated economic activities like
resources mobilization, poverty elimination, production and distribution of
public finance.
Pakistan has a well-developed banking
system, which consists of a wide variety of institutions ranging from a central
bank to commercial banks and to specialized agencies to cater for special
requirements of specific sectors. The country started without any worthwhile
banking network in 1947 but witnessed phenomenal growth in decades to come.
By 1970, it had acquired a flourishing banking sector.
Nationalization of banks in the seventies was a major upset to domestic banking
industry of the country, which changed the whole complexion of the banking
industry. With irrational decision at the top all the commercial banks were
made subservient to the political leadership and the bureaucracy. The
commercial banks thus lost their assets management equilibrium, initiative and growth momentum.
They ceased to be a business concern and became big bureaucracies. The era of
nineties was the climax of privatization, deregulation and restructuring in the
domestic banking industry and financial institutions. The Muslim Commercial
Bank was the first bank to privatize.
Followed by Allied Bank limited, United Bank Limited and Habib Bank
Limited have all been privatized.
Today, the banking sector is providing financial solutions
to the masses and is growing and becoming a solid partner in the development of
the Pakistani economy, this growth potential has seen different acquisitions in
the banking sector, with the Standard Chartered and Union Bank being the most
prominent. Standard Chartered acquired an 80.86% interest in Union Bank Limited
for a cash consideration of US$413 million[1].
Other acquisitions include ABN AMRO acquiring 93.4% interest in Prime Bank for
Rs. 13.8 billion[2]
and Temasek Investment Holding of Singapore taking up a stake in PICIC Commercial
Bank. Temasek also has its stake in NIB Bank.
ISLAMIC BANKING
The thrust for Islamic Banking is founded on the desire to submit
to the Divine Instructions on all transactions, particularly those involving
exchange of money for money. However, it would be quite unfair to limit Islamic
Banking to elimination of Riba only.
Riba is but one of the major undesirable
elements of an economic transaction, the others being Gharar (uncertainty) and Qimar (speculation). While
elimination of these objectionable aspects in a transaction is indeed a
critical aim of Islamic banking system, it is by no means its ultimate
objective.
At the heart of Islamic Banking is a system of commercial
transactions that not only provides Halal modes
of commercial transactions by avoiding that which is obnoxious and
objectionable, but also fosters ethical, fair and just practices.
A key element of Islamic economics is distribution of equitable
rewards to the different factors of production. Islamic economic system seeks
system of Redistributive justice where concentration of wealth in a few hands
is countered and flow of money into economy is fluent. Islamic Banking is,
therefore, seen as a lynchpin to achieving the economic and social goals of the
Islamic economic system.
RIBA
RibaIt has been argued in vain for long in
some circles that the prohibition in Islam is that of excessive interest only.
Or that it is the interest on consumptive loans that has been forbidden and as
such loans extended for commercial purposes are entitled to an excess over the
principal amount lent. Such tendentious arguing fails to give due understanding
to verses 278 and 279 of Surah Al-Baqarah (quoted below).
“O ye who believe! Be afraid of Allah and
give up what remains (due to you) from Riba (usury) (from now onwards) if you
are (really) believers! 2:278
And if you do not do it, take notice of
war from Allah and His Messenger! But if you repent, you shall have your
capital sums 2:279
However, this does not mean that Islam
prohibits any gain on principal sums. In Islam, profit is the recognized reward
for capital. When capital employed in permissible business yields profit that
“excess over capital” becomes the rightful and just claim of the owner of the
capital. As a corollary, the risk of loss also rests exclusively with the
capital and no other factor of production is expected to incur it.
Another important element of Islamic
finance is that profit or reward can only be claimed in the instance where
either risk of loss has been assumed or effort has been expended. Profit is
therefore received by the provider of capital and wages/remuneration by
labour/manager.
A depositor in an Islamic bank can therefore make earnings on his
or her deposit in several ways. Through return on his capital when that capital
is employed in a business venture; through sharing of profit when his capital
is part of the capital that is employed in a partnership, and finally through
rental earnings on an asset that has been partially financed by his
capital.
Islamic financing: Asset-based financing
Islamic financing: Asset-based financing
A key feature of Islamic banking is that
unlike conventional banks which deal primarily in money and financial
securities, Islamic financing is related to an asset that is a feature of the
transaction, and quite often the principal feature itself. From this springs an
important distinguishing feature of Islam wherein Islamic financing is always
based on illiquid assets that have intrinsic value. Profit to Islamic financing
is generated through bonafide sale of these assets.
Conventional banking, on the other hand,
is free of such limitations. It lends money and makes its earnings through this
act of lending. Its earnings are unconcerned with the economic fate of its
lending.
A Perspective:
The history of Islamic banking from its
recorded inception is less than 40 years old. From a humble beginning in a
small village in Egypt in the late 60’s, it has spread to the
four corners of the world. By normal standards in a time span that is less than
half a century it could have hardly been expected to establish foothold in
Muslim world, let alone make its presence felt in Muslim-minority countries.
Yet such has been its phenomenal rate of growth that not only is it taking firm
roots in its homestead, but is also attracting genuine interest among the
standard bearers of conventional banking and in swathes of land where Muslims
are a small minority only.
Still there is much ground left to cover.
In Pakistan, Islamic Banking is less than 3% of the
Banking sector. Even in the Gulf states, where it has a larger footprint, in no
single country is the volume of Islamic banking more than a third of the entire
sector.
Many blame Islamic Banking’s small share
against conventional banking to a smaller portfolio of products. A standard
complaint against Islamic banks is that they do not have the same variety of
financial instruments as found in conventional banking. Though valid to an
extent, this popular jeremiad needs to be seen in the perspective of Islamic
Banking’s brief history against more than two centuries of conventional banking
adopted in full force across the globe, its competition against an entrenched
system of banking and the constraints within which it must operate.
Notwithstanding, Islamic banking is still
growing at more than twice the growth rate of conventional banking worldwide,
and while it may not have the latter’s plethora of financial products, its
repertoire of Islamic financial products is steadily increasing.
In the following space, principal Islamic
instruments are briefly described to acquaint the reader with their fundamental
aspects. Following that, Islamic Products in BAL-IBD’s portfolio are
illustrated in terms of their features.
PRINCIPLE ISLAMIC BANKING
INSTRUMENTS
The thrust for Islamic Banking is founded
on the desire to submit to the Divine Instructions on all transactions,
particularly those involving exchange of money for money. However, it would be
quite unfair to limit Islamic Banking to elimination of Riba only.
Riba is but one of the major undesirable
elements of an economic transaction, the others being Gharar (uncertainty) and Qimar (speculation). While
elimination of these objectionable aspects in a transaction is indeed a
critical aim of Islamic banking system, it is by no means its ultimate
objective.
At the heart of Islamic Banking is a
system of commercial transactions that not only provides Halal modes of commercial transactions by
avoiding that which is obnoxious and objectionable, but also fosters ethical,
fair and just practices.
A key element of Islamic economics is
distribution of equitable rewards to the different factors of production.
Islamic economic system seeks system of Redistributive justice where
concentration of wealth in a few hands is countered and flow of money into
economy is fluent. Islamic Banking is, therefore, seen as a lynchpin to
achieving the economic and social goals of the Islamic economic system.
ISLAMIC FINANCING: ASSET-BASED FINANCING
A key feature of Islamic banking is that
unlike conventional banks which deal primarily in money and financial
securities, Islamic financing is related to an asset that is a feature of the
transaction, and quite often the principal feature itself. From this springs an
important distinguishing feature of Islam wherein Islamic financing is always
based on illiquid assets that have intrinsic value. Profit to Islamic financing
is generated through bonafide sale of these assets.
Conventional banking, on the other hand,
is free of such limitations. It lends money and makes its earnings through this
act of lending. Its earnings are unconcerned with the economic fate of its
lending.
INTEREST FREE BANKING
Being a Muslim state and as required
under the teachings of the Holy Quran the Government of Pakistan decided to eliminate interest in
phases, from the banking financial system of
the country. After a specialized study and research an interest free system has been developed for banks and financial
institutions which will gradually eliminate
the existing interest based system with progressive promotion of new system of interest based system with progressive promotion
of the new system of interest free banking
without adversely effecting the national economy. allowed to withdraw
amount more than fixed amount in one week. Ordinarily two withdrawals are
allowed to be made in one week. Similarly a prior notice (7 to 15 days) is necessary when a customer wishes to withdraw a
large amount of money from the bank. To
make it more popular cheque books are issued to the depositors and customers
are also opened for students in schools,
colleges, and industrial unit employees. Some banks depute their staff
to visit schools, colleges and industrial units regularly to provide
deposit/withdrawals facility on saving bank accounts at their customer door
steps. Usually pass books are issued b y
the bank to their saving bank account holder wherein details of all the
transaction made by them on the account recorded.
PASS
BOOK ENTRIES IN CUSTOMER'S FAVOUR
Entries made by the banker in the pass
book of a customer for his deposit account are prima facie evidence against
banker. The banker has right to prove if any entry has been made by
mistake. In case customer in good faith relying upon the wrong credit entry in pass book has
given consideration and there is change in his position, banker will be in a position to
recover the amount that was erroneously credited to customer account. In view of this banker upon detecting
an}' such wrong credit should lose no time in correcting
the entry.
PASS
BOOK ENTRIES IN BANKER'S FAVOUR
The depositors are issued with
passbooks by banks, these
contain details of deposits and with-drawl made by the account holder from day
to day. Specific conditions relating to the deposit account, mode of
withdrawals and payment of interest are also mentioned in it. e.g 'the pass
book must be produced at the branch where the account is kept whenever money is
deposited or withdrawn from the account".
Saving bank account s are kept in
separate saving bank ledgers
CALL
DEPOSITS OR MONEY AT CALL
On one hand banker's obligations are
mostly to pay cash on demand, on the other hand, profit motive demands that the
funds available remain invested in such a manner as to earn maximum
profit. This conflict sometime results, in a situation where a banker may find himself
short of liquid funds while another banker may have surplus funds requiring investment. In such situation
bankers comes to the assistance of one another and borrowing bank issues a 'call deposit receipt" to the lending
bank. The business classified under
this nomenclature at branch level mostly accrues on account of contractors and
other job performer who have to deposit earnest monies along with their
quotation for Tender issued by Govt. and other Agencies. Are drawn in favor
of the Agency concerned and thus the amount
of the receipt becomes payable to the Agency. In case tender Quotations are not accepted are returned to
the contractors(s) concerned. Receipts as such, are not Negotiable and a
banker has to exercise caution in paying covered thereby.
INTEREST IN THE TEACHING OF QURAN AND SUNNAH
AND ITS EVILS
The term ”Riba” (interest) means
“any excess above the borrowed sum”. The prohibition of Riba is evident from
both Quran and Sunnah.
PROHIBITION OF INTEREST IN HOLY QURAN:
- The Holy Quran commands in verse 278 of Al-Baqra “O believers, Fear God and give up what remains (due to you) from Riba.
- In verse 279 of Al-Baqra the Holy Quran says:
“For
you in principal or you shall have your principal”.
This shows that interest without
any doubt is not only prohibited in Islam but it is the declaration of war
against Allah and his Prophet.
PROHIBITION OF INTEREST IN SUNNAH:
A number of authentic sayings of
the Holy Prophet (peace be upon him) on the Quranic injunctions prohibiting
Riba. These sayings also sternly admonish those who indulge in Riba as well as
those who may be helpful in a Riba transaction.
1. Ibne Masud says that the
Messenger of Allah “cursed the devourer and giver of interest as well as a
witness to and scribe of Riba”.
2. The Holy Prophet in his last
address said, “Riba as it was in the time of ignorance (before Islam) is
forbidden. You have your principal. Oppress no one and no one will oppress you.
The rational for the interest
prohibition is strong and evident not only by Islamic point of view but also by
economic and social approaches. The obligation to pay a predetermined interest
serves as a discouragement to the entrepreneur. It eliminates the possibility
of earning a return with out taking any risk. It also creates instability in
price level and value of money. The allocation of resources become inefficient
and leads to social injustice.
EVILS OF INTEREST: Interest has a large number of economic, normal and social evils as per
following detail:-
1. Injustice: An interest based
system favors one party at the loss of another party. The system results in
economic injustice and inequity mainly for the reason that the rate of interest
in not linked to the operational results of the business.
2. Speculative Hoarding: The
availability of credit on interest induces people to buy and hoard stocks in
the hope of price rise. This practice creates artificial shortage and miseries
for consumers and large profit for the business.
3. Love for Wealth: The fixed
predetermined return, independent of operation result, build up a general
psychology, which leads at the individual level to self centered objectives,
self-fulfillment and stimulates love for wealth.
4. Inefficient use of Resources: It is an inefficient use of national
resources to grant loans to rich persons for consumption.
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