Zubair Ahmed Bin Naseem Ahmed

PhD Researcher, National University of Malaysia (UKM)

Mufti Dr. Irshad Ahmad Aijaz

Chairman, Shari’ah Advisory Committee, State Bank of Pakistan

Islamic Banking is a prominent part of the current Islamic finance industry, which uses the Islamic finance concepts in the current era. Statistics inform that 71.7% of Islamic financial services Industry assets consist of Islamic banking (Source: Islamic Financial Services Board 2019).

Islamic banking is growing very fast, especially after the global financial crisis in 2008. Now, it has got attraction from other than Muslim population as well.

The following details summarise the historical development of Islamic banking worldwide:

• Islamic Banking: Conceptual Phase 1930-40
• Towards Practical Institutionalization Phase 1960-70
• First-Step of Execution Phase 1970s
• Initial Growth & Regulatory Infrastructure Building Phase 1975-2000s
• Growth of Islamic Banking Phase 2000s Onwards
• Maturity and Stability Phase 2010-Ongoing

In Pakistan, the effort to Islamize the banking and financial system is not new. The overall efforts can be divided into three phases; the first phase starts from 1947 and stretches to 1960s, the Second from 1960 to 2000, and the last from 2000 onwards. 

The first phase started with the independence of the country in 1947. The founder of Pakistan, Muhammad Ali Jinnah, advised the State Bank of Pakistan during its inaugural ceremony that the team of State Bank should make efforts towards a social justice system that consists of Islamic principles. After some years, in 1957, the Government of Pakistan established the Council of Islamic Ideology (CII).

In the second phase (1960 – 2000), efforts went on the peak, and Pakistan attempted to make the whole economy Islamised. In 1969, Council of Islamic Ideology (CII) declared the interest-based system against Islam. In the 1980s, CII provided suggestions to make the country’s economy Islamised.

In 1980, Pakistan started a unique experiment in the form of Mudarabah Companies. Mudarabah Companies regulatory framework was issued in 1980, which had two-tier funds taking system and permission for doing business. By 1985, 65% of deposits were converted to PLS (Profit and Loss Sharing) accounts. In spite of these developments, scholars and people did not consider these changes as per Shari’ah, and they criticised and filed many petitions.

In 1991, the Federal Shari’ah Court decided that the time multiple counter loan is Shari’ah non-compliant and advised the Government to do several reforms. The decision was appealed in the Supreme Court and remained pending up till 1999. In 1999, the Supreme Court confirmed the decision of the Federal Shari’ah Court and directed Government for the reforms with the deadline set at 2001. Then, the deadline was extended to 2002. This decision was also challenged in the Supreme Court, and the case is still pending ever since.

This point in time became the starting point of the third phase of Islamizing the economy and the financial system. State Bank of Pakistan allowed the dual banking system (similar to the Malaysian banking system), which means that the Islamic banks can work parallel to conventional banks.

As a result of the dual banking system being practiced since 2002, Islamic Banking grew to reach a market share of 17% in assets and the Islamic banking products are being offered from 3,250 branches and 22 Islamic banking institutions. There are five full-fledged Islamic banks operating in Pakistan together with 17 banks with dedicated Islamic banking branches.

Pakistan’s Islamic Banking Institutions (IBIs) can be divided into two major categories in the current phase. As mentioned above, the first category consists of four banks namely Meezan Bank Limited, Bank Islami Pakistan Limited, Dubai Islamic bank Limited and Bank Al Barakah Pakistan Limited which work only in Islamic business and the first category also includes one full-fledged subsidiary of a conventional bank, i.e. MCB Islamic bank Limited.  Along with these banks, 17 banks provide Islamic and conventional banking services, but Faysal Bank Limited is now converting its entire business into Islamic banking.

In short, although the total banking system’s Islamization attempt did not prove entirely successful in Pakistan, the developments in this current phase provided basis for launching Islamic banking in a dual banking system.

Although Islamic banking is growing very fast, especially after the global financial crisis in 2008, there is still less share of Islamic banking as reported by the Islamic Financial Service Board (IFSB). According to the IFSB report, in most Muslim countries, Islamic banking share in the total banking assets is less than 20%.

The share of Islamic Banking can grow with multiplying speed in Muslim majority countries because the conventional system is Riba-based and is strictly prohibited in Islam (See Al-Qurán, Surah Rum 30:39; Surah Nisa 4:61; Surah Al – Imran 3:132; Surah Baqarah 2:275-281). In Surah Baqarah, dealing in Riba is referred to as war against Allah and His Messenger (2:279). However, there is lack of understanding about Islamic banking in the masses.

According to the KAP (Knowledge, Attitude, and Practices) Study, which surveyed 10,000 people in Pakistan, 95% of Non-banked and 83% of Banked respondents do not understand the Islamic banking model.

Therefore, there is need for more awareness and regulatory support to promote Islamic banking so as to realize the vision of the Founding Leader and comply with constitution of Pakistan, which clearly urged for eliminating Riba as soon as possible.