Growth and prospects of Islamic Banking in Pakistan.

Byline: Nazir Ahmed Shaikh

The Islamic banking and finance system offers more ethical and efficient alternative to the interest-based conventional financial system. Islamic banking and finance institutions emerged in the Middle Eastern financial markets in early 1970s, based on models developed by Islamic economists over the past decades. Many Muslim countries, including Pakistan, adopted these models and launched Islamic banking institutions. Some Western banks also launched Islamic banking and finance products to serve their Muslim customers.

Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Shariah. Interest free banking is a narrow concept denoting a number of banking instruments or operations, which avoid interest. Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Shariah but also to avoid unethical and un-social practices. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services.

The model of Islamic banking system leads towards the achievement of a system which helps achieve economic prosperity. Islamic banks focus on generating returns through investment tools which are Shariah compliant as well. Islamic Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk which may arise through trading and investment activities using contracts of various Islamic modes of finance.

Unprecedented growth

Over the recent years, however, it has registered unprecedented growth due to core factors that include consistent high oil prices worldwide, booming economies of the Middle East, increasing diversification of Islamic banking products, clients and markets, and other changes in the world of politics.

The success of Islamic banking and finance in the Middle East and Asian regions bears profound impacts on global financial markets. The increasing numbers of Western financial institutions are using Islamic banking and finance as an opportunity to add innovation and diversity to their operations and attract oil-wealth and local Muslim clientele to their doors. Islamic financial institutions are becoming partners with Western market players to promote Islamic banking and finance products and services in European and Western markets. The Western market environments have turned up more conducive for Islamic banking and finance practice. These developments are very encouraging and have given the Islamic banking and finance industry a window of...