Role of Islamic Banking In Pakistan.Pakistan was founded on the basis of the two-nation theory. The ultimate desire was to have a homeland where Muslims could lead their lives according to the eternal and shining teachings of Islam.
Role of Islamic Banking In Pakistan
The father of the nation, Quaid-e-Azam Muhammad Ali Jinnah, made it clear on number of occasions that the monetary setup of new bom state must be compatible with Islamic theme of social justice, welfare and contentness. Afterwards the Objective Resolution of 1949 further highlighted the matter in a definite way. A part of this resolution read as follows.
“And the Muslims shall be enabled to order their lives in the individual and collective sphere in accordance with the teachings and requirements of Islam as set out in the Holy Quran and Sunnah.”
But unfo-innately, the whole banking system in Pakistan was based on interest. Depositors were paid interest on their deposits, and banks also charged interest from borrowers on these loans. So, there was a need to establish an interest free banking system in the country. It was a challenge, because, all banking system is being operated on the basis of interest in all over the world. But in 1977, the process of Islamization of banking system was started. In October 1977, the Council of Islamic Ideology was charged with responsibility of bringing about Islamic economic and banking system. The council constituted a panel of economists and bankers, which was assigned to prepare a plan for non-interest banking system.
Report of Council:
The panel of experts submitted its report to the Council in February 1980 and after considering the suggestions given in the report, the Council gave its formal report to the Government in June, 1980. The report stated that:
- Real alternative to the interest under an Islamic system is profit or loss sharing deposits and Qarz-e-Hasana.
- To make successful interest free banking system, the government will have to carry a thorough appraisal and reforms of tax system.
Elimination of interest is important for interest free economy but it is a part of overall value system of Islam, some other reforms will have to be made
- Council suggested following methods of non-interest banking system:
- Service charges.
- Hire purchases.
- Special facilities.
- Report also gave important suggestions in respect of commercial banks, specialized credit institutions and for insurance companies.
Criticism on the Report:
Many scholars and Islamic experts criticized the final report of Islamic Ideology Council. The critics were of the view that Council has taken a very superficial view of the state of affairs and confronting problems. They stressed the fact that unless basic legal and legislative reforms are made and a huge collective effort is made to promote particular set of value, elimination of interest alone would not serve the purpose. The critics also expressed the fear that although many of the strategies proposed by the Council are remarkable, yet there are serious hurdles in making them practicable. Some experts also showed reservation > that some of the plans and schemes given by the Council are not fully in accordance with the Islamic principles.
SBP Directive 1984:
After detailed study of the plan proposed by the Council of Islamic Ideology and criticism that was raised from different circles, SBP issued directives for elimination of interest from the economy. The directives were issued in June, 1984 and they included the following:
- From July 1, 1985 local currency deposit shall be accepted on PLS basis.
- Banks were directed to promote the Islamic modes of trade and financing. Moreover, the banks were also advised to open special counters for this purpose.
A Judgement of Federal Shariat Court:
In November, 1991 Federal Shariat Court of Pakistan announced a judgement that interest understood as riba is totally prohibited. The court in its judgement also declared that various prevailing laws or their provisions are completely against the injunctions of Islam and therefore, must be changed.
Historic Ruling of Supreme Court:
The Supreme Court of Pakistan, on the matter of interest and riba finally gave verdict on December 23, 1999. In judgement, honourable court clearly declared riba as un-Islamic and, therefore, directed the government to eliminate interest from all transactions. The court declared a dead line of June 30, 2001 by which government was ordered to reframe rules and to create environment for the working of interest free economy.
Commission for Transformation:
After the judgement of Supreme Court, a commission for the transformation of the economy was setup in SBP. The task of that commission was to devise the strategy in order to change the financial system to bring it in conformity with Islamic banking.
Final Recommendation;Role of Islamic Banking In Pakistan
Islamic banking has seen significant growth in Pakistan over the past few years. The State Bank of Pakistan (SBP) has taken several measures to promote Islamic banking and finance in the country. Here are some key facts and figures related to the growth of Islamic banking in Pakistan:
- Market Share: According to the latest data available, the market share of Islamic banking in Pakistan was around 16.7% in terms of deposits and 15.9% in terms of assets as of December 2020.
- Number of Islamic Banking Institutions: As of December 2020, there were 22 Islamic banking institutions operating in Pakistan, including 5 full-fledged Islamic banks, 16 conventional banks with Islamic banking branches, and one Islamic banking subsidiary.
- Branch Network: The number of Islamic banking branches in Pakistan increased by 15.6% during 2020, reaching a total of 3,630 branches as of December 2020.
- Growth in Deposits: Islamic banking deposits grew by 26.8% during 2020, compared to 9.1% growth in conventional banking deposits.
- Financing: Islamic banking financing grew by 17.4% during 2020, compared to 4.4% growth in conventional banking financing.
- Sukuk Issuances: Pakistan is one of the leading countries in the world in terms of Sukuk issuances. In 2020, the country issued Sukuk worth PKR 625 billion (around USD 3.9 billion).
Overall, the growth of Islamic banking in Pakistan has been impressive, and the sector is expected to continue to grow in the coming years. The government and the central bank are committed to promoting Islamic banking and finance, and there is increasing awareness among the general public about the benefits of Islamic banking.
IMPLEMENTATION OF ISLAMIC BANKING IN PAKISTAN
Stage-1:
Interest was first eliminated from July 1979 from the transactions of NIT, HBFC, ICP and SBFC.
Stage-2:
From first January, 1981, profit and loss sharing saving and term deposits were introduced by commercial banks in place of simple saving and fixed deposits scheme.
Stage-3:
In August, 1981, HBFC was allowed to provide finance on rent sharing basis for house building. Students were allowed Qarz-e-Hasna without interest.
Stage-4:
In 1983, hire purchase system of financing was introduced.
Stage-5:
From July 1, 1984 to December 31, 1984 all banks in the country were to make finance available also on the basis of Islamic modes of financing in addition to existing interest based system.
Stage-6:
From January 1985, all types of finances provided by the bank to the governments and their agencies were permissible on Islamic basis only.
Stage-7:
From April 1985, all types of finances provided by the banks to all clients were to be on Islamic basis only.
Stage-8:
From July 1985, all deposits were to be on the basis ol participation in profit and loss of banks except current account.
