ISLAMIC BANKING

Islamic Banking in Pakistan



Islamic Banking in Pakistan

Introduction

This research will discuss the Islamic Finance and Banking in Pakistan. There will also a discussion about the Islamic Banking roots and the basic prohibitions in the Islamic Law (Shariah). The paper will also analyse the social implications of Islamic Banking which include Zakat. The paper will also draw a comparison of Islamic banking in Pakistan to its region.

Discussion

Evolution of Islamic Banking

In the latter part of the 20th century freedom of Muslims from majestic powers was practically completed. There was the birth of Islamic Ideology in the Muslim Societies. The leading Muslim Scholars started looking at the prevailing economic systems in the light of Islamic Laws. These Scholars proposed their modifications based on Islamic Shraiah (Siddiqi, 2000). Three are four factors of production (land, labour, capital and entrepreneur). The three of them get the fixed reward and the entrepreneur has to bear all the risk alone. The Capitalist economy is based on capital as a factor of production. This economic system pays risk free reward to this factor. This risk free reward is interest based (Rana, 2006, pp. 5).

All the injustices and the interest based transactions enforced the Islamic scholars to challenge these systems and propose their own economic system. They called their economic system the Islamic Economic system.

A bank is usually the dealer of money. Conventional banks drive their values from capitalist and socialist economies. They, therefore, operate with interest based transactions. The operations of conventional banking system are forbidden in Islamic Law. This led Muslims to create their own Islamic Financial Institutions. These struggles led to the establishment of Islamic Development Bank in 1973. The decision was taken in the Conference of Foreign Ministers of Muslim Countries. Islamic Banking and Finance has grown well in last two to three decades (Mansoor & Ishaq, 2008, pp. 708).

Basis of Islamic Banking

Islamic banking system derives its values from the rulings of Islamic Shariah. It is the banking system that does not only avoid interest based banking products or transactions but also strive hard to avoid unethical and unsocial practices. Islamic banking, if implemented in its true philosophy, will lead to the prosperity of the economy of the world including Pakistan (Akhtar, 2006, pp. 11).

The banks under the umbrella of Islamic laws cannot exceed the boundaries specified by the Islamic Shariah. Islamic banks cannot deal into transactions which are interest based, which have an element of Gharar or the things which are declared as Haram by Islamic Shariah.

Prohibition of Riba (Interest)

Riba means, according to Shariah, excess or more. If someone charges more on the loan then it will be classified as Riba. The Holy Quran describes the Riba in Surah Al-Baqarah (2:278-279) as:

“O those who believe fear Allah and give up what still remains of Riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent even now, you have ...