ACKNOWLEGEMENT:

Apart from our efforts, the success of any project depends largely on the encouragement and guidelines of many others. We take this opportunity to express our gratitude to the people who have been instrumental in the successful completion of this project.

We would like to show our greatest appreciation to Mr. Shakeel Awan. We can’t say thank you enough for his tremendous support and help. We feel motivated and encouraged every time we attend his class. Without his encouragement and guidance this project would not have materialized.

The guidance and support received from all the members who contributed and who are contributing to this project, was vital for the success of the project. We are grateful for their constant support and help.

ABSTRACT:

This research is conducted just to explore that what are the issues and challenges as also what opportunities are there for the Islamic banks in Pakistan. As Pakistan is a Muslim country and the main population is of Muslims, there is a great importance of Islamic banking in this country and people are getting aware of this financial system. But the main challenge here that is faced by the Islamic banking is that Pakistan govt. is supporting conventional banking more.
For this research interviews were taken from the employees and the customers of Islamic banks. These interviews are about the basics of the Islamic banking, about the awareness of Muslim society, the opportunities for the development and growth and the challenges that are faced by the Islamic banks in Pakistan.
This research shows that as the Muslims in Pakistan want halal banking and are switching towards Islamic banks as they want to live their lives according to Islam, so there are opportunities for the Islamic financial system in Pakistan.
In order to make this financial system successful the banking authorities should educate the people about it and keep them updated with the passage of time. The information system should be improved and should work hard in order to make it the best financial system in Pakistan.

Table of Contents:

Contents | Page No. | Acknowledgement | | Abstract | | Chapter No. 1: Introduction | | 1.1: Background | | 1.2: Problem Statement | | 1.3: Purpose and objectives of study | | 1.4: Significance of study | | 1.5: Limitations of study | | 1.6: Study layout | | Chapter No. 2: Literature Review | | Chapter no. 3: Data/Methodology | | 3.1: Instruments and measures | | 3.2: Sample size | | 3.3: Response rate | | 3.4: The paradigms & Methodologies | | 3.5: Reason for choosing qualitative research | | 3.5.1: Reason for choosing in-depth interviews | | 3.6: Data sources | | 3.6.1: The primary data | | 3.6.2: The secondary data | | 3.7: Limitation of study | | Chapter No.4: Findings | | 4.1: Interviews from bank employees | | 4.2: Interviews from customers | | Chapter No. 5: Key issues faced by Islamic banks | | Chapter no.6: Conclusion and Recommendations | | References | | Annex – 1 | | Annex – 2 | |

CHAPTER No. 1
INTRODUCTION:

1.1 BACKGROUND:
The Islamic Banking Department of the State Bank of Pakistan has a mission ‘to promote and develop Islamic Banking industry in Pakistan in line with the best international practices, ensuring Shariah compliance and transparency’ (State Bank of Pakistan, 2008). Islamic finance (IF) is assuming a growing importance all over the world. Today it is practiced in almost 60 countries including non-Muslim states. While it is being recognized by the world community today, Quid-e-Azam Muhammad Ali Jinnah emphasized the virtues of the Islamic principles in 1948 in his address at the inauguration of the State Bank of Pakistan. He said: “I shall watch with keenness the work of your organization in evolving banking practices compatible with Islamic ideas of social and economic life. We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice.” Islamic banking over the years has proved its potential to provide service to high net worth clients (whether Muslim or non-Muslim) and attract cross border oil revenue surpluses. Globally Islamic Financial Institutions (IFIs) is now a one trillion dollar industry. It has a network of more than 250 IFIs that have managed to mobilize $400 billion across over 60 countries including non Muslim countries as well.

The Islamic banking movement was started in Pakistan in 1980s. During these years sweeping changes were made in the Banking Companies Ordinance, 1962 and other related laws and regulations to accommodate non-profit based banking transactions. Some of the basic developments are as under: * National Investment Trust (NIT) and Investment Corporation of Pakistan (ICP) started to eliminate interest from their operations in 1979 by eliminating interest bearing securities. Investment scheme of ICP was substituted as from October 1, 1980 by a new scheme based on profit and loss sharing. * House Building Finance Corporation (HBFC) eliminated interest from its operation from July 1, 1979. * In June 1980, legal framework was amended to permit issuance of a new, interest-free instrument of corporate financing called Participation Term Certificate (PTC). * A new law, namely, the Modaraba Companies and Modarabas Ordinance, 1980 along with the Modaraba Companies and Modoraba Rules, 1981 was promulgated to introduce modorabas, as a two-tear fund structure, for undertaking Shariah complaint businesses. * In 1984, the Banking and Finance Services Ordinance, 1984 amended seven laws and Banking Tribunals Ordinance, 1984 provided a new system of recovery of non-interest based modes of financing. * From January 1, 1981, separate interest-free counters started operations in all the nationalized commercial banks to mobilize deposits on profit and loss sharing basis. Banks were also prohibited from specified interest based transactions, which resulted in development of Islamic modes of financing. * Finally, State Bank of Pakistan issued a circular in 1984 that called for elimination of Riba from the banking system and in January 1985 all financing Federal and Provincial Governments, public sector corporations and public joint stock companies was directed to be only through interest-free modes. * In July 1985 all commercial banking in Pak Rupees was made interest-free. Resultantly, profit and loss sharing (PLS) deposits, as a percentage of total deposits, rose from 9.2 percent at the end of 1981 to 61.6 percent by end of 1985.

Difference between Islamic and Conventional Banking:

Like conventional bank, Islamic bank is an intermediary and trustee of money of other people but the difference is that it shares profit and loss with its depositors. This difference that introduces the element of mutuality in Islamic banking makes its depositors as customers with some ownership of right in it (Dar and Presley 2000).

Islamic banking and conventional banking differs in that while the conventional banking follows conventional interest-based principle, the Islamic banking is based on interest free principle and principle of Profit-and-Loss (PLS) sharing in performing their businesses as intermediaries (Arif 1988). Rationale behind prohibition of interest and the importance of PLS in Islamic banking has been discussed in many Islamic economics studies8. Moreover, Islamic PLS principle creates the relationship of financial trust and partnership between borrower, lender, and intermediary (Yudistira 2003).

Islamic finance is a financial system with the aim to fulfill the teaching of Holy Qur’an as opposed to reaping maximum return on financial assets. Conformity to norms of Islamic ethics is the main concern of Islamic financial system. These norms of Islamic ethics as enunciated by the Shari'ah govern all transactions in an Islamic financial system. At a fundamental level, an Islamic financial system can be described as a “Fair” and a “Free” system where “Fairness” is the primary objective; however, it also circumscribes the “freedom” of the participants in the system. Though, in Islam participants are free to enter into transactions but this basic norm of freedom doest not imply rampant freedom to contract and is constrained by other norms, such as, the prohibition of Riba and Gharar.

An Islamic bank is essentially a partner with its depositors, on the one side, and also a partner with entrepreneurs, on the other side, when employing depositors' funds in productive direct investment as compared to a conventional bank which is basically a borrower and lender of funds. Difference between the two banking systems also lies in terms of governance structure. Islamic banks must obey a different set of rules – those of the Holy Qur’an – and meet the expectations of Muslim community by providing Islamically-acceptable financing modes (Suleiman 2001).

Islamic banks are similar to those of non-Islamic banks in that both offer similar (financial) services and play a pivotal role in the economic development of their societies.
But they are different in that Islamic banks, unlike non-Islamic banks, are bound to follow Islamic Shari'ah in their operations. For instance, according to Islamic Shari’ah exploitative contracts based on Riba (usury or interest) or unfair contracts that involve risk or speculation are unforeseeable.

According to Siddique (1985), Islamic banks compared with non-Islamic banks seek a “just” and “equitable distribution of resources”. Islamic bank is based on Islamic Faith and its operations must be within the boundaries of Islamic Law or the Shari'ah. There are four rules that govern investment behavior (Suleiman 2001):

a. the absence of interest-based (RIBA) transactions;
b. the avoidance of economic activities involving speculation (GHARAR);
c. the introduction of an Islamic tax, ZAKAT;
d. the discouragement of the production of goods and services which contradict the value pattern of Islam (HARAM).

1.2 PROBLEM STATEMENT:

What are the Issues and challenges being faced by Islamic Banks in Pakistan? 1.3 PURPOSE AND OBJECTIVE OF THE STUDY :

The purpose of the study is to know about the issues and challenges being faced by Islamic banks, while being operated in Pakistan. What are its effects on society? We also wanted to know how we can improve our Islamic banking system and make it equaling to the conventional banking in Pakistan. Whether Islamic products are according to Islamic principles or not. To present results and implications that will be insightful to customer interested in knowing about customer perception towards Islamic banking.

1.4 SIGNIFICANCE OF THE STUDY:

Islamic Banking is operating in Pakistan with many banks are in operation. Some interest-based Banks such as MCB, Bank Alfalah and Askari Bank has also started Islamic Banking, with specialized branches for Islamic Banking. Although Pakistan is an Islamic country and ideally Islamic banking should be the first priority of a Pakistani but how a Muslim living in Pakistan perceive Islamic Banking is very significant.

Therefore customers of different Islamic and conventional Banks are chosen to study customer perception about Islamic banking. There are two reasons to choose these Banks. The first reason is their location. They are located near to my home so easily accessible. The second reason is my father has some reference in these Banks which help me in conducting the interviews.

1.5 LIMITATION OF STUDY:

* The research is conducted in only one Branch of each Islamic bank that we have chosen in our sample size. * Respondent were busy and some time they are in hurry. Some Respondents asked to translate questions into Urdu because of their difficulty in understanding English so there is a chance whether they understand question properly or not.

* Dubai Islamic Bank doesn’t allow a third person to interact with their customers when their customers are at their respective Branch. This is the reason why we were not able to conduct interview with neither their management nor any customer.

* No bank officer was able to express his feelings to full potential, the reason could be any.

* Without any references, no one is willing to give appointment, which was a challenging task for us to perform.

1.6 STUDY LAYOUT:

Having discussed about the background of our topic along with purpose of the study, problem statement and limitations of the study, the study continues with literature review in chapter 02, followed by data and methodology used for the study are discussed in detail in chapter 03. Results and discussion on interviews being conducted from the selected banks and customers respectively, in chapter 04, while conclusion constitute in chapter 05. The study ends up with the recommendations along with references, some modes of Islamic financing, the terms beings used, some tables for our help and questionnaire that we have adopted for conducting interviews and website & web links.

CHAPTER No. 2
LITERATURE REVIEW:

CHAPTER No. 3
DATA/ METHODOLOGY:

3.1 Instruments and Measures:

The data is of primary type and instrument that was used for the research was structures interview with the aid and help of unstructured questions. This research is constructed in such a way that it helps to ask the sample that what their feedback is regarding issues and challenges faced by Islamic banks. This structured interview was conducted in different branches of banks of different sectors of Islamabad and was filled by the relationship managers of these branches. The data gathered through this instrument is being used for our results and findings.

3.2 Sample Size:

The total sample size which was chosen for this research is all Islamic banks except Dubai Islamic Bank, because of no reference. We conducted three interviews from each relationship manager of these banks for our study. We also conducted interviews from customers, who are using the services of Islamic banks and also customers who are using conventional banking. In this study we have also interviewed customers at one time members of both Islamic and Non-Islamic banks at one time.

3.3 Response Rate:

The response rate was highly satisfactory. We personally met these relationship managers, customers and conducted these structured interviews.

3.4 The Paradigms and Methodologies:

The most frequently and alternatively used the terms are quantitative research method for positivistic and qualitative for phenomenological (Collis and Hussey, 2003). Importance of paradigm in research cannot be neglected as it gives one’s path to perform research in a positive and better way to acquire results. According to Collis and Hussy (2003 p.55) “Regardless of which paradigm you are employing, it is important that you pay attention to all the features, and ensure that there are no contradictions or deficiencies in your methodology”.

The paradigm of this research is phenomenological because it tends to produce qualitative data not quantitative. The quantitative research is objective in nature that involves analysis of numerical data by applying statistical tests (Collis and Hussey, 2003).

3.5 Reason for choosing Qualitative Research:

There are various reasons to chose Qualitative research over Quantitative research or Descriptive statistics .In qualitative research methods it is much easier to conduct thorough, comprehensive , theoretical and loaded ideas because these methods provide the results that how people feel and what they think because they feel relax to comments on any specific topic.

In our research it is easier to conduct the qualitative research because it is related to banks authorities and banking customers. From the interviews with banks authorities it is easy to get information about growth and development of Islamic finance in the Pakistan and as well understanding of Islamic financial products between banks and customers.

Since we are conducting exploratory research, as we are exploring the issues and challenges in Islamic Banks. In qualitative research it is easy to explore topic in detail and more depth than quantitative research methods.

It is less expensive there is no need to contact with many participants as well no need to use the expensive methods and software for analysis. The qualitative research is more flexible in term of locations and timing because there is no need to interviews a large number of people to take result. It is resulted that qualitative methods can provide all the information in detailed because in unstructured and semi-structured interviews the participants feel no hesitation to discuss matters in details.

The qualitative research has some demerits as well because it is not able to produce the exact figures that how many people of society understand the topic and it is difficult to express what people like and dislike. It is difficult to analyze the data in qualitative research because the collected information is too much and to conclude this data is a hard job due to time constraint. To quantify the Qualitative data, is not a easy job, for this one has to develop different procedures and it takes a lot time as compare to just simply applying the statistical tools.

3.5.1 Reason for choosing in-depth Interviews:

We have chosen in-depth interview technique for our qualitative research due to its unique advantages over other techniques as mentioned earlier .In the method of in-depth interviews it is trouble-free to speak to an individual and keep his attention on specific topic relatively it is difficult in focus group interviews.

In-depth interview has advantages over questionnaires base research that researcher can get the information itself and there is no any discrepancy in understanding and analyzing the data for result. In questionnaires there is possibility that some participants are unable to respond on time and as well some time there is difficult to understand the theme of questionnaires.

3.6 Data Sources:

For our research we have used Primary data and secondary data for our understanding and help. Without these resources, research cannot take place.

3.6.1 The Primary Data:

This research is based on a study of the Islamic Banking of Pakistan, what are the main issues problems and challenges faced by these institutions while applying the Islamic banking. It is of also great importance as many people actually wants to know what the Islamic Banks are and how do they conduct their operations in Pakistan.

In fact most of the Muslims want to spend their lives according to their faith, religion. In this case study it is examined that what are the problems and opportunities in the Pakistan for Islamic banking. I have used the qualitative method of research in this project. There are different techniques of qualitative method but according to the situation the in-depth interviews is more suitable form for this project.

According to Collis and Hussey (2003) in phenomenological approach the interview questions are unstructured or semi- structured in pattern not closed questions like positivistic approach.

3.6.2 The Secondary Data:

For the sake of project necessities and requirements, we have used literature review for the development of research design and layout. For this purpose we have consulted, different journals, research articles, various websites, newspapers, books and other secondary resources which we could use or we have access, we utilized all of them to make our findings easier and practical.

3.7 Limitation of the Study:

According to the proposed planned of three interviews from each bank and its branch along with interviews from conventional banks, which cannot be conducted due to various reasons like, Time shortage, Lack of references and attitude of bank management. Respondent were busy and some time they are in hurry. Some Respondents asked to translate questions into Urdu because of their difficulty in understanding English so there is a chance whether they understand question properly or not. Dubai Islamic Bank doesn’t allow a third person to interact with their customers when their customers are at their respective Branch. This is the reason why we were not able to conduct interview with neither their management nor any customer. No bank officer was able to express his feelings to full potential, the reason could be any. Without any references, no one was willing to give appointment, which was a challenging task for us to perform.

CHAPTER No. 4
FINDINGS:

4.1 Interviews from the bank employees:

1. The concept of Islamic banking:
“Islamic banking is actually Riba/interest free banking.” (Amna Aman, Al – Baraka Bank)

“Islamic banking is commodity based banking.” (Faisal Siddique, Al – Baraka Bank)

“It is a system based in Islamic Sha’riah and Riba is totally prohibited.” (Jawad Lashari, Meezan Bank)

“It is an interest free and asset based banking and the bank deposits on Modarba basis.” (Muhammad Imran, Meezan Bank)

2. Islamic banking; religious or ethical:
“Islamic banking is trying to be religious but it has to survive in this comparative market, so practically it lies in ethical concept.” (Amna Aman, Al – Baraka Bank)

“Islamic banking is both religious and ethical but it is more importantly religious.” (Faisal Siddique, Al – Baraka Bank)
“Islamic banking is totally religious and there are things which are allowed in ethics but not in Sha’riah.” (Jawad Lashari, Meezan Bank)

“Islamic banking is working under religious as well as ethical concept.” (Muhammad Imran, Meezan Bank)

3. Difference between Islamic and conventional banking:
“Islamic banking is Riba free, there are no credit cards and no loans in cash.” (Amna Aman, Al – Baraka Bank)

“Islamic banking is commodity based whereas conventional banking is cash based.” (Faisal Siddique, Al – Baraka Bank)

“Islamic banking is Riba/interest free whereas in conventional banking there is interest.” (Jawad Lashari, Meezan Bank)

“Islamic banking is asset based banking and it is interest free banking.” (Muhammad Imran, Meezan Bank)

4. Treatment of interest and profit factors under Islamic banking system:
“Al – Baraka Bank is offering flexible rate of return, mutual partnership on profit/loss basis and in this way we are treating the interest and profit factors under Islamic banking system.” (Amna Aman, Al – Baraka Bank)

“Islamic banking is treating the interest and profit factors under the concept of commodity change.” (Faisal Siddique, Al – Baraka Bank)

“There is no interest in Islamic banking and they are offering products like Ijarah, they are based on real assets.” (Jawad Lashari, Meezan Bank)

“By declaring profit sharing ratio the bank is treating interest and profit factors under Islamic banking system.” (Muhammad Imran, Meezan Bank)

5. Islamic banking; Halal banking?
“It is not sure that whether Islamic banking is purely halal banking or not, it is being searched.” (Amna Aman, Al – Baraka Bank)

“Islamic banking is purely halal banking and it is according to the Sha’riah board.” (Faisal Siddique, Al – Baraka Bank)

“Islamic banking is totally and purely halal banking.” (Jawad Lashari, Meezan Bank)

“Islamic banking is purely halal banking.” (Muhammad Imran, Meezan Bank)

6. Islamic banking has strong legal and institutional framework?
“Islamic banking is working under the rules mentioned by State Bank of Pakistan.” (Amna Aman, Al – Baraka Bank)
“Islamic banking has a weak legal and institutional framework.” (Faisal Siddique, Al – Baraka Bank)

“Islamic banking is working under the rules which are according to the law of 1984. There should be Islamic laws for the growth and progress.” (Jawad Lashari, Meezan Bank)

“Islamic banking do not have strong legal and institutional framework because the govt. is not serious about this banking system and there is no trend of trust.” (Muhammad Imran, Meezan Bank)

7. Is the bank in a position to achieve its goals from Islamic banking window?
“Al – Baraka Islamic banking is not in a position to achieve its goals from Islamic banking window due to the restrictions like the govt. is not fully supporting this banking system.” (Amna Aman, Al – Baraka Bank)

“Barakah Islamic bank is a full Islamic bank.” (Faisal Siddique, Al – Baraka Bank)

“Meezan bank is a full Islamic bank so there is no need of a window.” (Jawad Lashari, Meezan Bank)

“Meezan bank is in a position to achieve their goals as it has been working for like 7 years.” (Muhammad Imran, Meezan Bank)

8. Do customers have awareness of Islamic banking system?
“People are not fully aware of the Islamic banking system, they are getting awareness with the passage of time.” (Amna Aman, Al – Baraka Bank)

“Majority of the people are not fully aware of the Islamic banking system. Education should be given to the people.” (Faisal Siddique, Al – Baraka Bank)

“People are not fully aware of the Islamic banking and there are very few people who know about the Islamic banking.” (Jawad Lashari, Meezan Bank)

“The customers are not much aware about Islamic banking system and they have a little bit knowledge about it.” (Muhammad Imran, Meezan Bank)

9. Satisfaction level of customers:
“The customers are willing to have more flexible and suitable products as they are not satisfied with the products available.” (Amna Aman, Al – Baraka Bank)

“Some of the customers are fully satisfied with the Islamic banking because of the services provided by the bank.” (Faisal Siddique, Al – Baraka Bank)

“People are religiously satisfied and think they are getting halal products but mentally they are not much satisfied.” (Jawad Lashari, Meezan Bank)
“The customers are satisfied with almost all the products and facilities which are offered to them.” (Muhammad Imran, Meezan Bank)

10. Role of Pakistan government authority:
“The Govt. of Pakistan is trying to support the Islamic banking system in Pakistan but this support is not much significant.” (Amna Aman, Al – Baraka Bank)

“Pakistani govt. should remove restriction of KIBOR, and should provide relaxation.” (Faisal Siddique, Al – Baraka Bank)

“State bank has the regularity authority and it has developed a separate financial system for Islamic banking which is governed separately.” (Jawad Lashari, Meezan Bank)

“Islamic banks in Pakistan are working under the rules and regulations and it has made the rules smooth that the Islamic banking is being promoted.” (Muhammad Imran, Meezan Bank)

11. Role of Islamic banking in the growth and development of Pakistan economy:
“Islamic banking is not playing much role in the development and growth of Pakistan economy as it is in the developing stage.” (Amna Aman, Al – Baraka Bank)

“Pakistani economy is not playing much role for the development and growth of Islamic banking.” (Faisal Siddique, Al – Baraka Bank)

“Because of Islamic banking there is a development of real assets at macro level and there is employment generation.” (Jawad Lashari, Meezan Bank)

“Islamic banks do not have much role on the development and growth of Pakistan economy.” (Muhammad Imran, Meezan Bank)

12. Affects of globalization on Islamic banking system:
“There are hurdles generated due to the globalization on Islamic banking as there is a lack of certain products like credit cards.” (Amna Aman, Al – Baraka Bank)

“Globalization do not have much affect on Islamic banking.” (Faisal Siddique, Al – Baraka Bank)

“Globalization does not have much affect on globalization as it is different system of banking in the world.” (Jawad Lashari, Meezan Bank)

“Globalization do not have much affect on the Islamic banking.” (Muhammad Imran, Meezan Bank)

13. Issues and challenges faced by Islamic banks:
“Islamic banking is facing challenges and issues like to change the minds of people and make them switch to Islamic banking and there is no support of the Govt. of Pakistan.” (Amna Aman, Al – Baraka Bank)

“The issues and challenges faced by the Islamic banks are that there is a lack of knowledge among customers, employees do not get much training regarding different issues.” (Faisal Siddique, Al – Baraka Bank)

“The issues and challenges faced by Islamic banking are like there is no Govt. support, no HR development and no product development.” (Jawad Lashari, Meezan Bank)

“Islamic banking is facing challenges and issues like employees do not get updated knowledge and there is less product development.” (Muhammad Imran, Meezan Bank)

4.2 Interviews from the customers of the Islamic banks:

Variables that affect Customers of Islamic Banking.

There are some variables that affect customer of Islamic banks; each variable is followed by the respondent’s answers…

1. Difference between Islamic and conventional banking?

There are some differences between Islamic and conventional banks, but there is a only significant is difference that Islamic banking is interest free. (Nasir Mehmood)

There is only difference that Islamic banking is interest free.
(Sheraz Hameed)

Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia’h) principles and guided by
Islamic economics.
A banking system is one of the most important aspects of any developed and flourishing economy and financial system, it’s based on interest.
(Imran Rasheed)

In real sense I personally didn’t observe any difference.
(Khalid Kamran)

Conventional banking is normal routine banking while Islamic banking is doing transaction in accordance with Islamic laws.
(Muhammad Salman)

2. Effects of prohibition of intrest on society and econonmy.

It spreads injustice in society.
(Sheraz Hameed)

Interest is prohibited in Islam because it spreads injustice in society.
(Nasir Mehmood)

Interest ruins the society.
(Imran Rasheed)

Interest kills the poor and it increases poverty to an extreme extent.
(Muhammad Salman) Interest is prohibited in Islam because it effects the flow cycle of money in the society. And as a result poor gets poorer.
(Khalid Kamran)

3. Work of scholars of Islamic banking.

They are trying their best.
(Sheraz Hameed)

I think they are working hard for this.
(Khalid Kamran)

They are trying their best.
(Ali Imran)

Yes
(Ali Sattar)

I certainly think that that they are because being a muslim no one has the right to raise doubts over Islamic scholars.
(Muhammad Salman)

4. Muslim people are taken the Islamic banking or other communities also interested in Islamic banking.

Yes at present time only Muslims are attracted towards Islamic banking and it has been observed that Islamic Banking is being appreciated by Non-Muslims as well.
(Nasir Mehmood)

Yes (Ali Imran) I think only Muslim interested in this.
(Imran Rasheed)

I think muslims would be more interested in Islamic banking , but other communities may also be served.
(Muhammad Salman)

Well I think non-Muslims are more interested as you will have observed them following many other Islamic rules so do they follow and love Islamic banking and it is gaining extreme popularity in Europe and America.
(Khalid Kamran)

5. Satisfaction.

May be they are satisfied. (Ali Imran) Yes, all the Muslims are satisfied.
(Imran Rasheed)

Yes, Muslims are satisfied.
(Nasir Mehmood)

Yes overall in general most of the customers would be satisfied. (Kamran Khalid)

Not just satisfied very much satisfied.
(Muhammad Iftikhar)

6. Difficulties in the way of Islamic banking?

Most of us are handy with conventional banking and people think that, Islamic banking rules are very difficult.
(Sheraz Hameed)

Most of us are used to with conventional banking and Govt of Pakistan is not too much supporting it.
(Imran)

Conventional banks, Lack of knowledge, Awareness and products facility.
(Ali Khan)

People are not ready to switch from conventional banking to Islamic banking. (Kashif Ali)

CHAPTER No. 5
Key Issues Faced by Islamic Banking:

1. Lack of knowledge and Awareness
There is a lack of knowledge about Islamic banking in our society. We don’t know how it should be and what is it all about?. Most of the people are now more used to with conventional banking that is why they are hesitate to adopt Islamic banking. 2. GOVT support
GOVT of Pakistan is not playing any supporting role to enhance the Islamic banking in Pakistan. Islamic banking needs support from GOVT to make progress in the establishment of economy by using Islamic rules of finance. Islamic banking needs some proper statements in the policies of KIBOR. 3. IBOR is the benchmark instead of KIBOR
IBOR should be used as a benchmark instead of KIBOR because there are a lot of differences in Islamic banking and conventional banking. Islamic banking needs its own benchmark to freely operate in the economy of Pakistan to make healthy contribution in the annual GDP.

4. Course taught at Bachelors and Masters level
The contents of courses that are being taught at MBA and MS level should be revised so that it should give proper guidance to fresh students about Islamic banking. Now a day’s fresh executives don’t have much knowledge about Islamic banking. To make good progress all of the employees should have complete command on their field. 5. Low rates of return on the basis of profit and loss
Islamic banking is offering rate of returns on the basis of profit and loss so the profit or loss is distributed according to the fixed ratio. People are more attracted towards conventional banking because they offer interest rates irrespective of profit or loss. 6. Limited products Islamic banking is offering limited products and limited offers so people are less attracted towards Islamic banking. Islamic banking is emerging now and offering services to its customers like car Ijarah and house financing. 7. Credit card should be involved
World is now being treated like global village and people are making their business in abroad and they require the facility of credit card. In Pakistan many shopping malls are offering credit card transactions which is the most secure way of payment so a lot of people are demanding credit card issued by the is Islamic banking. 8. More flexibility
Most of the customers perceive Islamic banking as a rigid financing system and they demand some flexibility in transactions. Fact is that Islamic banking is the most flexible mod of finance. 9. Scholars and ACCA should go parallel
Muslim scholars and ACCA should go parallel. Muslim scholars don’t know the financial terms and conditions and also don’t know how to implement all financial terms. To establish proper, successful and according to Shariah Islamic banking Muslim scholars and ACCA executives should work together. ACCA executives know all the financial terms and Muslim scholars know the Islamic rules so this will be the best way to implement the Islamic rules of finance in our society.

CHAPTER No. 6
CONCLUSION AND RECOMMENDATIONS:

Conclusion:

This research is basically focused on the factors like to understand the fundamentals of the Islamic banking, its chances of developing in Pakistan and the challenges faced by it. These factors are associated with the growth of financial structure in Pakistan. The people who are the customers of Islamic banks know that what sha’riah is and that Islamic banking is free of interest. Every type of interest is not allowed in Islamic Banking as the economy gets into the credit disasters. The most important people for the establishment of Islamic banking are the Islamic scholars and their decisions are according to the Islamic sha’riah. Actually the problem is that there are a=not much Islamic scholars and the customers of the Islamic banks are anxious about the less number of Islamic scholars in the Islamic financial area and as the Islamic banking is an area where there is a rapid development and it gives solution a solution to every financial issue. It is hard to make the system up to date as there are less number of scholars to meet the requirements of the people and because of this the expansion of Islamic banking will be affected.
There are a lot of chances for the Islamic banking to make itself developed and to increase its growth in Pakistan. Islamic banking started its working in Pakistan because of the acceptance and popularity, the branches are working properly and they are gathered through online and branch inside. ABIL and MBL are one of those banks in Pakistan which are providing good services to the customers.
If in a country the investments are increased then it will improve and have a positive effect on the economy of that country. As the demand of Islamic financial system is increasing among Muslims, Pakistan government should make such arrangements which will be helpful for the promotion of its working according to the modern issues. Right now the Islamic banking is popular is accepted in the Eastern countries but it is having a problem to make itself get into working throughout the country because people do not have much awareness about Islamic banking and the banks are unable to fulfill all the requirements of the society. In order to survive in the fast growing economic system Islamic banking has to launch new products as there are fewer products offered by them which do not fulfill all the requirements of the Muslim community. Another main issue faced by the Islamic banks is that there is a less number of talented and qualified people in the marketing, sales and finance departments of Islamic banks.
There are challenges that are faced by the Islamic banks in Pakistan but these challenges can be turned into success through appropriate supervision by the approved Islamic scholars, the cooperation of the Islamic society and with the increase in experience.

Recommendations:

A few most important problems and challenges have been discussed in Results and Discussion that if Islamic Banking overcomes these problems and challenges then there will be no difficulty in the advancement of Islamic Banking system in PAKISTAN. Because of the financial setup of the Eastern countries the Islamic Banking has some challenges as the rules and regulations there are more compatible to the conventional banking system and few of them because of its early period in the financial sector. Islamic financial system needs to have suitable and strong institutional system in Pakistan. The branch network has to be improved all over the country. Through the process of working together by Islamic financial provider and other areas where the merge actions are more reachable and useful to the customers, they can improve and expand Islamic financial system without any trouble.
There is a lack of approved Islamic scholars in Islamic banking. In order to make the financial system better Islamic banks have to appoint more approved scholars who could give important information to the service providers ultimately. In order to make the Islamic banking work according to its accurate fundamentals, it has to invest in this sector, otherwise it will be impossible.
Right now Islamic banking is going through the difficulty of different Accounting policies. It is a huge hurdle in the development of Islamic banking as it produces the problem for the internal as well as external investment. Investors would also face difficulties in deciding about the investment. Islamic banking has to work hard to standardize the financial reports. The Accounting and Auditing Organization for Islamic Financial Institutions can play a vital role in the development of uniformity in the Accounting Standards (Shanmugam, Perumal and Ridzwa, 2004). The standardized financial reports will improve the Islamic banking services and it will also be useful for all the stockholders specially the investors and the customers.
It is actually very vital to increase the number if users of Islamic banking as it will help in the development of Islamic banking system. For this purpose it is important to generate understanding regarding the merits if Islamic banking in the society. For this purpose the role of Imams of Masajid is very important. It is necessary to conduct the marketing and awareness seminars at various places and occasions. If the Islamic channels working in Pakistan these days start regular awareness transmission in their programmes then it will help out a lot in the development of Islamic banking system in Pakistan.
At this time the Islamic banking do not have any specific substitute of credit cards, occasional and personal loans that complete the requirements of the customers to pay their daily expenses. If Islamic banking wants to have the business and popularity then they have to introduce the compatible financial policies and financial tools to conventional banking. Even now majority of the Muslims are puzzled that whether to have Islamic banking accounts as their requirements are not fulfilled by the Islamic banking. Even though the Islamic banking has enhanced its business over the last five years but even now it is not in a situation to take over the conventional banking. Islamic banking has to make its services according to the principles of conventional banking as they will help the customers for their needs.
During the time of research we have discovered that the major and critical drawback in the development of the Islamic banking is the unavailability of the good customer services in the branch sector. There is a less number of employees and few of them do not have sufficient information regarding the working of Islamic banking specially in the investment side. The staff members do not have any discussion about the issues related to the fundamentals of Islamic banking. There is a recommendation that the customer services should be improved as per the customer services of conventional banking and it will help out a lot in the development of Islamic banking in Pakistan.
In order to improve and develop a new financial system in Pakistan there should be a complete focus on Research and Development as it will help out a lot in enhancing the system and according to the reports Islamic banking system can make their services better and bring up new products in the market as per the requirements of Muslim society. The marketing and research departments are playing a vital role but they have to work harder in order to make the Islamic banking system a strong pillar in the financial sector of Pakistan. Right now the Islamic banking sector does not have trained, skilled and professional employees. In order to improve the Islamic banking system it is important for them to employ qualified financial engineers and scholars. They should also have the training and teaching programs of the present employees working in order to improve their knowledge and remain up to date according to the current situation. This will also help in making the customer services better and in market and product development of Islamic banking.
This whole discussion clearly state that Islamic Banking is growing with higher rate than the Conventional Banking system in Pakistan, and according to the our research, Islamic Banking will grow more in future.
In our point of view there are following steps should be taken for the growth of Islamic Banking in Pakistan.
Create awareness:

The main focus should be the Awareness, because many people in Pakistan and all around the world imagine that, Islamic Banking is as Similar as Conventional is, there is difference of Name and nothing else, Conventional Bank Called it Interest and Islamic Bank Called it Profit Sharing, therefore our main focus should be on this issue that we can make aware all of them that there is vast difference between Islamic and Conventional Banking system. This awareness creates by effective and efficient marketing strategies.

Experienced and trained employees:

In the wake of high growth rate experienced by Islamic Banks they must pay special emphasis on ensuring that adequately trained human resource is employed by the Islamic Banking Institutions. Banks are asked to provide appropriate training to the staff so that they can work in a better way.

Up gradation of networks:

Distribution Network must be growing, still Islamic Banks are backward than the Conventional Bank in Network Branches, main reason is that Conventional Bank is older than the Islamic Bank in Pakistan.

Investment:

Though Islamic Banks have adequate growing rate in Branches but it need more and more investment to fulfill the current need of the market.

Introduce new product line:

Islamic Bank should introduce new financial products that can easily compete with the products of conventional banking and that cab attracts the new customers for the Islamic Bank.

Gaining the trust of customers:

Know Islamic Banking industry is dependable on KIBOR they haven’t its own Bench Mark. Islamic Scholars and Sha’riah Advisors work to prepare there own bench mark which is according to Sha’riah and its full fill the obligation of Islam KIBOR its also a bench mark of conventional banks and the major misconception is that the because of this KIBOR Islamic Banking is not properly working according to Sha’riah.

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Annex-1
Modes of Islamic Banking:

MUSHARAKAH:

The literal meaning of Musharakah is sharing. The root of the word “Musharakah” in Arabic is shirkah, which means being a partner. It is used in the same context as the term “shirk” meaning partner to Allah. Under Islamic jurisprudence, Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is shared according to the ratio of the contribution. It’s an ideal alternative for the interest based financing with far reaching effects on both production and distribution.

“Shirkah” means “sharing” and in the terminology of Islamic Fiqah, it has been divided into two kinds:

1. Shirkat-ul-milk (partnership by joint ownership): It means joint ownership of two or more persons in a particular property. There are also kinds of “shirkah” which are :

1. Optional (Ikhtiari): At the option of the parties e.g. if two or more persons purchase equipment, it will be owned jointly by both of them and the relationship between them with regard to that property is called “shirkat-ul-milk ikhtiari” here this relationship has come into existence at their own option, as they themselves elected to purchase the equipment jointly. 2. Compulsory (Ghair Ikhtiari): this comes into operation automatically without any effort/ action taken by the parties. For example, after death of a person, all his heirs inherit his property, which comes into their joint ownership as a natural consequence of the death of that person.

3. Shirkat-ul-aqd (partnership by contract):

This is the second type of shirkah, which means , “ a partnership effected by a mutual contract”. For the purpose of brevity it may also be translated as “joint commercial enterprise.”

Shirkat-ul-aqd is further divided into three kinds:

1. Shirkal-ul-Amwal (partnership in capital):
Where all the partners invest some capital into a commercial enterprise.

2. Shirkat-ul-Aamal (partnership in services):

Where all the partners jointly undertake to render some services for their customers, and the fee charged from them is distributed among them according to an agreed ratio.
For example, if two people agree to undertake tailoring services for their customers on the condition that the wages so earned will go to a joint pool which shall be distributed between them irrespective of the size of work each partner has actually done, this partnership will be a shirkat-ul-aamal.

3. Shirkat-ul-wujooh (partnership in goodwill):
The word has its root in Arabic word wajahat meaning goodwill. Here the partners have no investment at all. They purchase commodities on deferred price, by getting capital on loan because of their goodwill and sell them at spot. The profit so earned is distributed between them at an agreed ratio.

These three types of shirkat-ul-Aqd are further divided into two types:

1. Shirkat-al-mufawada: ( capital & labor at par): All partners share capital, management, profit, risk in absolute equals. It is a necessary condition for all four categories to be shared amongst the partners; if any one category is not share, then the partnership becomes shirkat-ul-Ainan. 2. Shirkat-ul-Ainan: A more common type of shirkat-ul-Aqd where equality in capital, management or liability might be equal in one case but not in all respect meaning either profit is equal but not labour or vice versa.

The difference between interests based financing and Musharakah:

| Interest based financing | Musharakah | 1. | A fixed rate of return on a loan advanced by the financier is predetermined irrespective of the profit earned or loss suffered by the debtor. | Musharakah does not envisage a fixed rate of return. The return is based on the actual profit earned by the joint venture. | 2. | The financier cannot suffer loss. | The financier can suffer loss, if the joint venture fails to produce fruits. | 3. | Results in injustice either to the creditor or to the debtor. If the debtor suffers a loss, it is unjust on the part of the creditor to claim a fixed rate of profit.Also if the debtor earns a very high rate of profit, it is injustice to the creditor to give him only small proportion of the profit leaving the rest for the debtor | The returns of the creditor are tied up with the actual profits accrued through the enterprise. The greater the profits of the enterprise, the higher the rate of return to the creditor. If the enterprise earns enormous profits, all of it cannot be secured by the debtor exclusively but will be shared by common people e.g. depositors in the bank. |

Issues relating to Musharakah:

Musharakah is a mode of financing in Islam. Following are some issues relating to the tenure of Musharakah, redemption in Musharakah and the mixing of capital in conducting Musharakah.

Liquidity of capital:

A question commonly asked in the operation of Musharakah is whether the capital invested needs to be in liquid form or not. The answer as to whether the contract in Musharakah can be based on commodities only or on money varies among the different schools of thought in Islam.

Imam Malik is of the view that liquidity is not a condition for the validity of Musharakah. Therefore even if a partner contributes in kind to the partnership his share can be determined on the basis of the evaluation according to the prevalent market price at the date of the contract.

However, Imam Hanifa and Imam Ahmad do not allow capital of investment to be in kind. The reason for this restriction is as follows:

1. Commodities contributed by one partner will always be distinguishable from the commodities given by the other partners therefore they cannot be treated as homogenous capital. 2. If in case of redistribution of share capital to the partners tracing back each partners share becomes difficult. If the share capital was in the form of commodities then redistribution cannot take place because they may have been sold at that time.

Imam Shafi has an opinion dividing commodities into two:

1. Dhawat-ul-amthal: commodities which if destroyed can be compensated by similar commodities in quality and quantity. Example rice, wheat etc. 2. Dhawat-ul-qeemah: commodities that cannot be compensated by similar commodities like animals.

Imam Shafi is of the view that commodities of the first kind may be contributed to Musharakah in the capital while the second type of commodities cannot be a part of the capital. In case of dhawat-ul-amthal redistribution of capital may take place by giving to each partner the similar commodities he had invested and earlier the commodities need to be fixed so well together that the commodity of one partner cannot be distinguished from commodities contributed by the other. Therefore, it should be noted that the illiquid goods can be made capital of investment and the market value of the commodities shall determine the share of the partner in the capital.

MIXING OF THE CAPITAL:

In case of illiquid capital being used the mixing of the capital is an issue. According to Imam Shafi partners’ capital should be mixed so well that it cannot be discriminated and this mixing should be done before any business is conducted. Therefore, partnership will not be completely enforceable if any kind of discrimination is present in the partners’ capital. His argument is based on the reasoning that unless both investments will be mixed the investment will remain under the ownership of the original investor and any profit or loss on trade of that investment will be entitled to the original investor only. Hence such a partnership is not possible where the investment is not mixed.

According to Imam Abu Hanifa, imam Malik and Imam Ahmed bin Humbul the partnership is complete only with an agreement and the mixing of capital is not important. They are of the opinion that when two partners agree to form a partnership without so far mixing their capital of investment, then if one partner bought some goods for the partnership with his share of investment of RS.100, 000 these goods will be accepted as being owned by both partners and hence any profit or loss on sale of these goods should be shared according to the partnership agreement.

However, if the share of investment of one person is lost before mixing the capital or buying anything for the partnership business, then the loss will be borne solely by the person who’s owned the capital and will not be shared by other partners. However if the capital of both had been mixed and then a part of whole had been lost or stolen the loss would have been borne by both.

MUDARABAH:

This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “Rab-ul-Maal” while the management and work is an exclusive responsibility of the other, who is called “Mudarib” and the profit generated are shared in a predetermined ratio.

Types of Mudarabah:

There are 2 types of Mudarabah namely:

1. Al Mudarabah al Muqayyadah:

Rab-ul-Mall’ may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al mudarabah Al Muqayyadah(restricted mudarabah).

2. Al Mudarabah Al Mutlaqah:

However, if Rab-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted mudarabah).

1. | All partners invest. | Only Rab-ul-maal invests. | 2. | All partners participate in the management of the business and can work for it. | Rab-ul-maal has no right to participate in the management which is carried out by the mudarib only. | 3. | All partners share the loss to the extent of the ratio of their investment | Only Rab-ul-maal suffers loss because the mudarib does not invest anything. However this is subject to a condition that the mudarib has worked with due diligence. | 4. | The liability of the partners is normally unlimited. If the liabilities of business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all partners. But if the partners agree that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. | The liability of Rab-ul-maal is limited to his investment unless he has permitted the mudarib to incur debts on his behalf. | 5. | As soon as the partners mix up their capital in a joint pool, all the assets become jointly owned by all of them according to the proportion of their respective investment. All partners benefit from the appreciation in the value of the assets even if profit has not accrued through sales. | The goods purchased by the mudarib are solely owned by Rab-ul-maal and the mudarib can earn his share in the profit only in case he sells the goods profitably. |

Murabaha:

Murabaha is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabaha is not a loan given on interest; it is a sale of a commodity for cash/ deferred price.

The ‘Bai Murabaha’ involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client. In other words rather than advancing money to a borrower, which is how the system would work in a conventional banking agreement, the bank will buy the goods from a third party and sell those goods on to the customer for a pre-agreed price.

Murabaha is a mode of financing as old as Musharakah. Today in Islamic banks world-over 66% of all investment transactions are through Murabaha.

Difference between Murabaha and Sale:

A simple sale in Arabic is called Musawamah- a bargaining sale without disclosing or referring to what the cost price is. However when the cost price is disclosed to the client it is called Murabaha. A simple Murabaha is one where there is cash payment and Murabaha Muajjal is one on deferred payment basis.

Issues in Murabaha:

Following are some of the issues in Murabaha financing. 1. Securities against Murabaha

Payments coming from the sale are receivables and for this, the client may be asked to furnish a security. It can be in the form of a mortgage or hypothecation or some kind of lien or charge.

2. Guaranteeing the Murabaha The seller can ask the client to furnish a 3rd party guarantee. In case of default on payment the seller may have recourse to the guarantor who will be lier to pay the amount guaranteed to him. There are two issues relating to this:

1. The guarantor cannot charge fee from the original client. The reason is that a person charging a fee for advancing a loan comes under the definition of riba.

2. However the guarantor can charge for any documentation expenses.

Penalty of default:

Another issue with Murabaha is that if client defaults in payment of the price at the due date, the price cannot be changed nor can penalty fees be charged.

In order to deal with dishonest clients who default in payment deliberately, they should be made liable to pay compensation to the Islamic bank for the loss suffered on account of default. However these should be made subject to the following conditions:

1. The defaulter may be given a grace period of at-least one-month. 2. If it is proven beyond doubt that the client is defaulting without valid excuse then compensation can be demanded.

Rollover in Murabaha:

Murabahah transaction cannot be rolled over for a further period as the old contract ends. It should be understood that Murabahah is not a loan rather the sale of a commodity, which is deferred to a specific date. Once this commodity is sold, its ownership transfers from the bank to client and it is therefore no more a property of the seller. Now what the seller can claim is only the agreed price and therefore there is no question of effecting another sale on the same commodity between the same parties.

Rebate on earlier payments:

Sometimes the debtors want to pay early to get discounts. However in Islam, majority of Muslim scholars including the major schools of thought consider this to be unislamic. However if the Islamic bank or financial institution gives somebody a rebate on its own, it is not objectionable especially if the client is needy.

Calculation of cost in Murabaha:

The Murabaha can only be affected when the seller can ascertain the exact cost he has incurred in acquiring the commodity he wants to sell. If the exact cost cannot be ascertained then Murabaha cannot take place. In this case the sale will take place as Musawamah i.e. sale without reference to cost.

Subject matter of the sale: All commodities cannot be the subject matter in Murabahah because certain requirements need to be fulfilled. The shares of a lawful company can be sold or purchased on Murabahah basis because according to the principles of Islam the shares represent ownership into assets of the company provided all other basic conditions of the transaction are fulfilled. A buy back arrangement or selling without taking their possession is not allowed at all.

Salam:

In salam, the seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The price is in cash but the supply of purchased goods is deferred.

Purpose of use:

1. To meet the need of small farmers who need money to grow their crops and to feed their family up to the time of harvest. When Allah declared riba haram, the farmers could not take usuri us loans. Therefore Holy prophet allowed them to sell their agricultural products in advance.

2. To meet the need of traders for import and export business. Under salam, it is allowed for them that they sell the goods in advance so that after receiving their cash price, they can easily undertake the aforesaid business. Salam is beneficial to the seller because he received the price in advance and it was beneficial to the buyer also because normally the price in salam is lower than the price in spot sales.
Istisna:

Istisna is a sale transaction where a commodity is transacted before it comes into existence. It is an order to a manufacturer to manufacture a specific commodity for the purchaser. The manufacturer uses his own material to manufacture the required goods.

In Istisna price must be fixed with consent of all parties involved. All other necessary specifications of the commodity must also be fully settled.

Cancellation of contract:

After giving prior notice, either party can cancel the contract before the manufacturing party has begun its work. Once the work starts, the contract cannot be cancelled unilaterally.

Difference between Istisna and Salam

| Istisna | Salam | 1. | The subject on which transaction of istisna is based, is always a thing which needs to be manufactured. | The subject can be anything that need manufacturing or not. | 2. | The price in istisna does not necessarily need to be paid in full in advance. It is not even necessary to pay the full price at delivery. It can be deferred to any time according to the agreement of the parties. The payment may also be made in installments. | The price has to be paid in full in advance. | 3. | The time of delivery does not have to be fixed in istisna. | The time of delivery is an essential part of the sale. | 4. | The contract can be cancelled before the manufacturer starts the work. | The contract cannot be cancelled unilaterally. |

Difference between Istisna and Ijarah:

| Istisna | Ijarah | 1. | The manufacturer either uses his own material or if it is not available with him, obtains it to make the ordered goods. | The material is provided by the customer and the manufacturer uses only his labor and skill meaning that his services. Will be hired for a specified fee paid to him. | 2. | The purchaser has a right to reject the goods after inspection as shariah permits somebody who purchases a thing not seen by him, to cancel the sale after seeing it. The right of rejection only exists if the goods do not conform to the specifications agreed upon between the parties at the time of contract. | Right of rejection of goods after inspection does not exist. |

ISTIJRAR:

Istijrar means purchasing goods time to time in different quantities. In Islamic jurisprudence istijrar is an agreement where a buyer purchases something from time to time; each time there is no offer or acceptance or bargain. There is one master agreement where all terms and conditions are finalized. There are two types of istijrar:

1. Whereby the price is determined after all transactions of purchase are complete. 2. Whereby the price is determined in advance but the purchase is executed from time to time.

IJARAH (LEASING):

Basic Rules:

Transferring of usufruct not ownership
In leasing an owner transfers its usufruct to another person for an agreed period, at an agreed consideration.

Subject of lessee:

Should be valuable, identified and quantified.

All consumable things cannot be leased out:
The corpus of the leased property remains in the ownership of the seller, and only its usufruct is transferred to the lessee.
Thus, anything, which cannot be used without consuming, cannot be leased out. For example, money, wheat etc.

All liabilities of ownership are borne by lessor:

As the corpus of the leased property remains in the ownership of the lessor, all the liabilities emerging from the ownership shall be borne by the lessor.

IJARAH WA IQTINA:
(LEASING AND PROMISE TO GIFT)

In Islamic shariah, it is allowed that instead of sale, the lessor signs a separate promise to gift the leased assets to the lessee at the end of the lease period, subject to his payment of all amounts of rent. This arrangement is called Ijarah wa iqtina.
The validity of this arrangement is subject to two basic conditions:

1. The agreement of Ijarah itself should not be subjected to signing this promise of sale or gift but the promise should be recorded in a separate document. 2. The promise should be unilateral and binding on the promisor only. It should not be a bilateral promise binding on both parties because in this case it will be a full contract effected to a full date, which is not allowed in the case of sale or gift.

Features of a conventional bank:

The conventional banking, which is interest based, performs the following major activities.

1. Deposit creation
2. Financing
3. Agency services
4. Issuing LGS
5. Advisory services
6. Other related services

Comparison of the above activities with Islamic concept of banking:

Deposits (The liability side)
Deposit-qard(loan) not amanah(trust)

The common misconception regarding “deposit” is that it is a form of amanah (security/trust). However, according to shariah definition, a deposit has more resemblance to qard (loan) than amanah. This conclusion is based on the fact that in islam an item is termed as amanah, if it bears all the features of amanah. Deposits cannot be termed amanah, as they do not have two of its special features,i.e.

1. Amanah cannot be used by the bank for its business or benefit.

2. The bank cannot be liable in case of any damage or loss to the amanah resulting from circumstances beyond its control.
Whereas in banks, deposits are primarily placed to earn profit, which is only possible when the bank uses these deposits to invest in other business. Hence deposits do not fulfill the first condition of amanah, which says that it should not be used by the caretaker fro his own business or benefit.

Secondly, the bank is held 100% responsible for these deposits in all circumstances even in case of loss or damage to the bank. This feature releases deposits from the ruling of amanah where the assets will not be returned in case of any damage to the asset resulting from circumstances beyond caretaker’s control. According to this justification, all three kinds of deposits namely current accounts, fixed deposits and saving accounts are not amanah. They are all governed by qard.

Annex-2
QUESTIONNAIRES:

Questionnaire for the employees of the banks:

1. What is Islamic banking?

2. Do you think it is totally religious or more ethical concept?

3. What is the difference of Islamic banking and conventional banking?

4. How you are treating the interest and profit factors under Islamic banking system?

5. Do you think that Islamic banking is purely halal banking?

6. Do you think that Islamic banking has strong legal and institutional framework?

7. Do you think that ABIL is in position to achieve their goals from Islamic banking window?

8. Do you think that the customers have full awareness of Islamic banking system?

9. Do you think that customers are fully satisfied with the product available in the market or they are willing more flexible and suitable products?

10. What is the role of PAKISTAN government regularity authority to make smooth and productive financial system in PAKISTAN?

11. What is the role of Islamic banking for the development and growth of PAKISTAN economy?

12. What are the affects of globalization on Islamic banking?

13. In your opinion what are the issues and challenges that are being faced by the Islamic banks?

Questions asked from the customers of Islamic banks:

1. Islamic banking system 1. What is the difference between Islamic and conventional banking?

2. Why interest is prohibited in Islam and what are its affects on society and economy?

3. Do you think that BANK ALFALAH, BANK AL ISLAMIA, BARAKA ISLAMIC BANK, MEEZAN BANK doing the Islamic banking on same criteria? 4. Do you think Islamic banking is on religious basis or ethical as well?

5. Do you think about scholars of Islamic banking whether they are taking decisions according to Islamic Sha’riah law?

2. Specific Customers (Muslims and non-Muslims) 1. Why you moved to Islamic banking and which products of Islamic banking you are currently using?

2. Have you any account or contract such as mortgages, credit cards and loan in conventional banking?

3. Are you receiving any profit or other benefits from your Islamic banking accounts?

3. Population trend 1. Do you think that only Muslim people are taken the Islamic banking or other communities also interested in Islamic banking?

2. Do you think there is any special guidance or information system to keep the customers up to date about Islamic banking?

3. Do you think the customers are satisfied with the services and products of Islamic banking?

4. Economy/ Politics 1. Do you think Islamic banking is up to date and fulfilling the current age requirements?

2. Do you think about the growth of Islamic banking? 3. Is Islamic banking a system that helpful to growth of Pakistan economy?

4. What is your opinion about the future of Islamic banking in Pakistan?

5. What are the difficulties in the way of Islamic banking?

6. Islamic banking a flexible and easy to adopt financial system?