What is the Scope of Islamic banking in Pakistan?

Answer 1

The Islamic Shariah had been established ages ago but the formation of a proper Islamic banking system came into being in Egypt in year 1963. Ahmad El Najjar played a pivotal part in bringing Islamic banks into existence and was based on the principles of non-interest based profit sharing as per the philosophy of Shariah. The end of year 1976 saw a total of nine banks in different parts of the country. These banks, when they came into the picture, neither paid nor charged interest; instead, their activities were restricted to industries and trade where these banks invested directly or indirectly as partners of depositors.

As for the functional power of the Islamic banks, Islamic banks were working, more or less, as financial institutions rather commercial banks. The Organization of Islamic countries, or more commonly known as the OIC, established the first bank explicitly based on Shariah principles. As for this bank, it was assigned the primary goal to engage in intergovernmental activities for providing funds for development projects running into member countries. The business model that was structured for this setup included profit sharing financial assistance for projects and fees for financial services. In the 70s, the number of Islamic banks in Asia continued to ascend.

After nearly a decade of their formation, Islamic banks won a huge audience and earned an eminent position in the global industry. Most banks that came into existence were a basic corollary of private initiatives; however, the Iranian government was the first to take the initiative a as state. As per the commandments of Shariah, no bank was allowed to deal in interest or Riba (usury). Later, service charges of 4% to 8% replaced interests, thereby guaranteeing minimum profits.

It is believed that the true phase of development of Islamic financial institution commenced in the 1980s. The former initiatives were more focused on maintaining an interest-free banking but the real emergence of financial systems is said to evolve in the 1980s. In essence, interest free banking still remains the foremost responsibility of Islamic banks as their purpose of existence is the strengthening of financial institution as per Shariah law as it always has been. In addition, the principles of Islamic finance such as property rights, sanctity of contracts and the rules of sharing risk are also supported.

The Organization of Islamic Conference (OIC) took a step forward and declared takaful /Islamic insurance as Shariah compliant in the year 1985. Speaking of adaptability, a massive change was experienced in 1991 when the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established to advice on Islamic finance standards all over the world. This was supported by a few other organizations especially in Malaysia. Ever since that time, Islamic finance has spread all over the world at a phenomenal rate.