Performance Of Islamic Bank In Pakistan What is Islamic Banking • A system of financial activities consists with shariah, based on Islamic principles which at the core refuses collecting interest, transaction involving uncertanity and speculation. • It is based on the Islamic economic system. • It is not restricted to Muslim only. Islamic Bank Operating in Pakistan Al-Baraka Bank Pakistan limited Bank Islami Pakistan limited Burj Bank limited Dubai Islamic Bank Meezan Bank limited Product Tree Partnership base Mode (Musharka) (Mudarba) Trade base mode (Mudarba) Rental Base Mode (Ijarah) How it is different from Conventional Bank • Islamic orders not to use money as a commodity. • They operate under the concept of lenderborrow relationship and the profit generated through his relationship are divided between the two parties as per agreement. How Islamic Bank work • The bank entirely depend upon the fixed deposits and does not borrow money from central bank. • Bank gives loan on the basis of mutual agreement. • Majorly focuses on sales transactions. Key Challenges Faces by Islamic Bank • • • • Shariah interpretations Shariah experts Product development and execution Competition from conventional bank SWOT analysis • Weakness • Lack of standardization, • There are differences in theory and practice • Misinterpreting in Islam. SWOT analysis • Strengths • Religious appeal, • Zakat, • Innovative asspect, • All bigger bank carry a islamic portfolio because of its success. • Opportunities:• Fastest growing in the world, • Tradational interest base banking losing it value • Threaths:• Loopholes are present in its proper implementation, • Research in product, • Environment of Islamic banking in west has been declined after 9/11. History of Islamic bank in Pakistan • Islamic provision in the constitution of Pakistan (1973) constitution declared:• Steps should be taken to enable to the Muslims of Pakistan, to order their lives, in individual and collective spheres, in accordance with the teaching and requirements of Islam as set out by Quran and sunnah. Con’t • State shall eliminate Riba as early as possible:• All existing law shall be brought in conformity with the injuction of Islam no law shall be enacted which is repugnant to these injuctions. Function of Islamic Bank • Islamic bank works as a trading concern and financial intermediary to perform interest free Activities purely according to principles of Sharia’h. • It is a welfare organization. • Promotes business and trade activities by pooling the financial resources for the sake of Profit and loss for mutual benefit. • It is found that Islamic bank performs activities in the Right direction towards human development. Con’t • It is documented that banks have witnessed more profits on Murabaha facilities as compared to conventional loans due to profit and loss base of Islamic products. • Islamic banks perform a variety of fundbased and non-fund based functions to facilitate their customers. Operations and Products • Islamic bank accepts deposits from general public under general investment fund and specific investment fund that is clearly mentioned in the agreement between the bank and the customer while opening their bank accounts. • Islamic bank actively performs several operations to provide a variety of products according to customers' requirements • It deals with different types of customers i.e. depositors, borrowers and service users. It provides credit facilities, financing products, funds transfer facilities and other services according to customers' needs. Financing pattern and product of Islamic bank • Islamic banks provide a variety of financing products according to principles of Sharia’h to cope with the challenges of the recent age. • These products may be categorized as short-term, medium-term and long-term according to their specific characteristics. • Long-term financing options consist of Musharika, Mudariba and Diminishing Musharika. Services and Quality • Service is defined as a set of benefits delivered from the service provider to the service consumer. It is reported that services have four key features that differentiate it from goods i.e. intangibility, perishability, inseparability and heterogeneity. • It is observed that service quality is a major factor in reference to customer acquisition and retention. • It shows the organization’s ability to meet customers’ desires and needs. Service quality is an important input of customer satisfaction in the banking sector. Customer Satisfaction • Islamic banks are competing for more customers with each other besides stiff competition with conventional banks. • Customer satisfaction is getting importance due to expansion of banking industry and innovative products according to customers’ needs across the globe especially in Pakistan. • It is an action of fulfilling a need, desire, demand or expectation. Performance Of Islamic Bank • Islamic banks require performance evaluation to compete with conventional banks in Pakistan. Bank performance should be evaluated due to stiffer competition and customers' awareness of service quality. • Performance of an organization could be assessed by resource-based view as explored by a number of researchers. • It could be linked with market orientation, organizational learning, human resource productivity, quality improvement or any other component. Dimension of Service quality in Islamic banking • Reliability– This dimension shows the consistency of services towards performance and dependability. • Tangibles- It shows the physical aspects of the services as physical facilities, appearance of personnel and tools & equipment used for provision of services. • Responsiveness-It reflects the willingness or readiness of employees to provide quick services to customers. Dimensions • Assurance- This dimension indicates the employees’ knowledge, courtesy and their ability to incorporate trust and confidence. • Empathy- This dimensions shows the magnitude of caring and individual attention given to customers. Glossary Of Islamic Banking Terms • Gharar: It means any element of uncertainty in any business or contract about the subject of contract or its price, or mere speculative risk. • Hawalah: Literally, it means transfer; legally, it is an agreement by which a debtor is freed from a debt by another becoming responsible for it, or the transfer of a claim of a debt by shifting the responsibility from one person to another – contract of assignment of debt. • ‘Inah (A kind of Bai): Double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit. • Istisna’a: It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. • Maisir: An ancient Arabian game of chance played with arrows without heads and feathering, for stakes of slaughtered and quartered camels. It came to be identified with all types of hazard and gambling. • Mudarabah: A form of partnership where one party provides the funds while the other provides expertise and management. The former is called Rabul Maal and the latter is referred to as the Mudarib. • Murabaha: Literally it means a sale on mutually agreed profit. Technically, it is contract of sale in which the seller declares his cost and profit. This has been adopted by Islamic banks as a mode of financing. • Qard: Legally Al-Qard means lending of a fungible object, such as money, by someone to another person, on condition that the borrower is responsible to return the same object at any specified time. • Qimar: Qimar means gambling. Technically, it is an arrangement in which possession of a property is contingent upon the happening of an uncertain event. • Riba: An excess or increase. Technically, it means an increase over principal in a loan transaction or in exchange for a commodity accrued to the owner • Riba Al-Fadl: Riba Al-Fadl (excess) is the quality premium in exchange of low quality with better quality goods e.g. dates for dates, wheat for wheat, etc. • Riba Al-Nasiah: Riba Al-Nasiah or riba of delay is due to exchange not being immediate with or without excess on one of the counter values. • Shirkah: A contract between two or more persons who launch a business or financial enterprise to make profits. • Salam: Salam means a contract in which advance payment is made for goods to be delivered later on. • Sukuk: It refers to a financial paper showing entitlement of the holder to the amount of money shown on it. • Wakalah: A contract of agency. Differences between Islamic and conventional Bank • 1-Islamic Bank:-Money is not commodity through it is used as a medium of exchange and store of value. • Conventional Bank:-Money is a commodity as a medium of exchange and store of value. Con’t • Islamic Bank:-Profit on trade of goods for charging on providing services is the basis for earning profit. • Conventional Bank:-Time value is the basis for charging interest on capital. Con’t • Islamic Bank:-Islamic bank operates on the basis of profit and loss sharing. • Conventional Bank:-Interest is charged even in case of organization suffers loss by using bank’s funds. Con’t • Islamic Bank:-The execution of agreement for the exchange of goods and services is a must while disbursing funds under Marbaha, Salam and Istisna contract. • Conventional Bank:-While disbursing cash finance, running finance or working capital no agreement for exchange of goods and services made. Con’t • Islamic Bank:-Islamic banking tends to create link with the real sector of the economic system by using trade related activities. • Conventional Bank:-Conventional Bank use money as a commodity which leads to inflations. Con’t • Islamic Bank:-Functions and operations are based on sharia’h principles. • Conventional Bank:-Functions and operations are based on fully man made principles. Con’t • Islamic Bank:-Aim to maximizing profit but subject to sharia’h restrictions. • Conventional Bank:-Aim to maximizing profit without any restrictions.
