The article discusses the key features and foundation of the Islamic Finance and Banking System across the world. It also shares the progress of Islamic banking in Pakistan. Islamic banking or finance is known as non-interest banking or sharia-complaint finance which refers to a banking system based on the principles of Islamic Law and guided by Islamic Economics. The two main principles of Islamic Banking based on the sharing of profit and loss and prevent the collection and payment of interest by lenders and investors.
The commercial banks of Pakistan have separate windows and sections which provide Islamic Banking services to customers. They follow Islamic Banking procedures according to Sharia. The transactions which take place in Islamic Banking is called Fiqh al-Muamalat. These transactions are culturally different form of ethical investing. For instance, the investments in gambling, alcohol and other forbidden items are prohibited.
The principles of Islamic Banking follow Sharia law which based on the teachings of the Quran and the Hadith, the recorded quotes and actions of the Prophet Hazrat Muhammad (PBUH). In case, if more guidance is required Islamic bankers look up to learned scholars or use independent reasoning based on scholarship and customs. The bankers also ensure that their concepts do not deviate from the fundamental principles of the Quran.
The history of Islamic Banking goes back to the beginning of Islam in the seventh century, when our Prophet Hazrat Muhammad (PBUH) acted as an agent for his wife Hazrat Khadija (RA) for her business, using many of the same principles followed in contemporary Islamic Banking. The trade and business activity which took place in the middle ages relied on the values of Islamic Banking. These banking principles were spread throughout Spain, the Mediterranean, and the Baltic States, arguably providing some of the basic foundations for the western banking principles.
In the following decades, interest in this type of banking continued to grow substantially. Soon, the first widely recognized financial institution – the Mit Ghamr savings project in Egypt opened for business. A co-operative organization, all depositors could also obtain small loans for practical productive reasons. Additionally, this co-operative also invested in certain projects on a profit-sharing basis. In 1971, this project was incorporated with the Nasser Social Bank. In 1974, the Organization of Islamic Countries (OIC) established the first Islamic bank called the Islamic Development Bank or IDB which aimed to provide financial assistance and support for profit-sharing. The idea continued to develop theoretically until 1974 when the first Islamic commercial Islamic Bank was established in Dubai, United Arab Emirates. The same year also witnessed signing of the agreement to establish the Islamic Development Bank IDB as an intergovernmental pan-Islamic bank. This was followed shortly by the emergence of Faisal Islamic Bank in Egypt and Sudan in 1977. Subsequently, Bahrain Islamic Bank and Jordan Islamic Bank came into being in 1978. By the mid 1980’s, Islamic banking principles became a fundamental part of mainstream banking and continued to grow and spread across in the East and South Asia.
Islamic Banking has grown rapidly in Pakistan, since its Independence in 1947, there has been a growing demand from the religious leaders to eliminate interest from the financial system of Pakistan. The Constitution of Pakistan highlights that Riba (interest) has to be eliminated from the economic system of the country. From 1947 to 1960, the elimination of interest from the economy engaged the attention of scholars but no serious efforts were made to find out an alternative to the interest-based system. However, from 1960 to 1977, the Council of Islamic Ideology (CII) put forward a number of reports to the Government examining the meaning of Riba which clearly stated that the present day interest charged in the financial system is prohibited in Islam under the term Riba. From 1977-1980, the Council of Islamic Ideology and the experts from the State Bank of Pakistan proposed concrete steps for removing interest from the economy. In 2002, the State Bank of Pakistan issued first Islamic Banking License for offering the Islamic banking products and services in the country. Currently, five full-fledged Islamic banks and various conventional banks are offering Islamic banking products and services in the country.
The Islamic Banking industry of Pakistan is fulfilling the needs of our customers by offering Shariah compliant financial solutions while following the core values of service excellence, consistent high performance, innovation and growth for all the stakeholders.
(Factual information for the article has been compiled from various online sources)