Islamic banking in Pakistan based on ‘Haraam’ formula

Islamic banking is thriving in Pakistan for the past 15 years. Credit goes to Meezan Bank Limited for opening the doors of a full-fledged Islamic banking in Pakistan since 2002. But the most pathetic aspect of this Islamic banking is that it is flourishing on ‘Haraam’ (us-Islamic) formula of calculating profit on almost every product that is offered to the customers. This ‘Haraam’ formula is the Karachi Inter-Bank Operations Rate (KIBOR) that every Islamic bank in Pakistan is using indirectly to work out the cost and rental (profit) of products that is offered to the customers for short and long-term lending under the pre-text of Islamic or Halaal banking in the country.
The officials of different Islamic banks openly admit that they have no other choice but to follow the KIBOR rate indirectly to calculate the rate of rental (return) on financing of different products. Interestingly, a banker working with a famous Islamic bank in Karachi, contacted Manzar Naqvi, Executive Editor of The Financial Daily and tried to convince him to get car on financing saying that the KIBOR rate is very low and bank’s overall charges are also affordable for financing. Manzar Naqvi, however, flatly turned down the offer after hearing that the Islamic bank is using “Haraam” formula in car financing. This is not the only example, whenever the bankers working with the Islamic banks are asked about the rate of financing/rental of car or other products after six months, they simply reply that it would depend on the rate of KIBOR at that time. The bankers openly admit that the KIBOR-based financing is un-Islamic, but they say that they don’t have any alternate way of calculating the rate of profit/rental.
Interesting to note is that the commercial banks (which we believe is un-Islamic banking) have developed the Karachi Inter-Bank Operations Rate (KIBOR) for years to calculate the rate of return on their financing to all types of customers and clients. The irony is that instead of developing their own ‘Halaal’ framework, the Islamic banks in Pakistan are following the KIBOR formula from the day one and still they believe that the Islamic banking that they are promoting in Pakistan is all ‘Halaal’.
Some of our religious clerics have declared the existing mode of Shariah-based banking ‘Halaal’, but some others believe that this Islamic banking is not 100 percent pure and it needs to be made all-Halaal.
The State Bank of Pakistan and all the Islamic Banks have engaged religious scholars and experts of Islamic banking to oversee the affairs of Halaal banking in the country. But they appear indifferent to the Islamic banks tilt towards KIBOR in the Islamic banking in the country since 2002. In other words, after a lapse of 15 years, the Islamic banks in the country are still unable to find out ‘Halaal’ mode of financing by giving up KIBOR-mindset. How would they justify this mode of financing on the Day of Judgment? How are they satisfying their conscience on this issue?
Who will bell the cat? These are the questions that strike in the mind of the people who believe that the Pakistani Islamic banks must give up pursuing ‘Haraam’ banking formula and evolve a ‘Halaal’ mechanism to make this banking pure and true to the spirits of the Shariah.
A senior retired banker said that internationally the Islamic banks are using London Inter-Bank Operations Rate (LIBOR) which is followed by the commercial banks and in Pakistan the KIBOR is being pursued by Islamic banks indirectly. He said that a difference between Islamic and commercial banks is that the Islamic banks issue credit against assets and they have developed Shariah-based products of financing. He, however, admitted that the Islamic banks have no alternate option except the KIBOR and they (the Shariah-based banks) should diversify their banking and mode of financing.
Meanwhile, during July-Sept quarter of 2017, the assets of Islamic banking industry (IBI) have increased by Rs. 48 billion and amounted to Rs. 2,083 billion compared to Rs. 2,035 billion in the previous quarter. Deposits of Islamic banking industry were recorded at Rs. 1,729 billion by end September, 2017compared to Rs. 1,720 billion in the previous quarter. Market share of Islamic banking assets and deposits in overall banking industry was recorded at 11.0 per cent and 13.7 percent, respectively by end September, 2017. Profit before tax of Islamic banking industry was registered at Rs. 17.6 billion by end September, 2017 compared to Rs. 12.1 billion in the same quarter last year. Other profitability indicators including return on assets (before tax) and return on equity (before tax) were recorded at 1.2 percent and percent, respectively.
The network of Islamic banking industry consisted of 21 Islamic banking institutions; 5 full-fledged Islamic banks and 16 conventional banks having stand-alone Islamic banking branches by end September, 2017. Branch network of Islamic banking industry stood at 2,368 branches by end September, 2017 and the Province/Region wise breakup of branches shows that Punjab and Sindh accounted for 47.2 percent and 29.7 percent share respectively, in overall Islamic banking industry’s branch network. In terms of cities, 54.6 percent branch network of Islamic banking industry is based in five big cities (Karachi, Lahore, Rawalpindi, Islamabad and Faisalabad).
The number of Islamic banking windows operated by conventional banks having standalone Islamic banking branches was recorded at 1,275 by end September, 2017. Assets: set of Islamic banking industry witnessed growth, whereas, in contrast, investments (net) of Islamic banking industry declined by 2.3 percent during the review quarter Market share of Islamic banking industry’s assets in overall banking industry’s assets increased to 11. percent by end September, 2017 compared to 11.6 percent in the previous quarter The share of net financing and investments in total assets (net) of Islamic banking industry stood at 49.7 percent and .2 percent, respectively by end September, 2017 (see section below on Investments and Financing for details). Bifurcation of assets among full-fledged Islamic banks and Islamic banking branches of conventional banks reveals that assets of full-fledged Islamic banks witnessed quarterly growth of Rs. 23 billion during the review quarter to reach Rs. 1,233 billion compared to Rs. 1,210 billion in the previous quarter.
Likewise assets of Islamic banking branches of conventional banks witnessed quarterly growth of Rs. 25 billion and were recorded at Rs. billion compared to Rs. 825 billion in the previous quarter. The share of full-fledged Islamic banks and Islamic banking branches of conventional banks in overall assets of Islamic banking industry was 59.2 percent and 40.8 percent, respectively by end September, 2017.


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