Department of Management Sciences

COMSATS Institute of Information Technology

Abbottabad

SUBJECT:
Islamic Finance
___________________

Assignment # 2

Submitted by: Registration:

Hamid khan FA09-MBA-012
Anwar Zada FA09-MBA-057
Sanauallah FA09-MBA-036
Kamran uddin FA09-MBA-065
Zeeshan javid FA09-MBA-048

Submitted to: Sir Jamil Anwar

Submission Date: March 21, 2011

Assignment Question:

Write a very brief history of Islamic Banking and Finance (worldwide and
Pakistan’s).

Also write a brief description of Islamic Banking Bulletin and do a comparison of its
first issue with its latest issue with respect to industry progress, modes of financing,
composition of deposits, sector wise breakdown of advances and market share
growth.

Objective:

The objective of this assignment is to get a better understanding of the subject of

Islamic Finance and become knowledgeable about the history of Islamic Banking and
Finance.

To increase awareness and help remove some widely spread misconceptions about
Islamic Banking and Finance.

To have a clear picture of what the Islamic banks are offering.

To find out current share of Islamic banks in overall banking sector and the
expansion rate of Islamic Banks.

2
 Table of contents

Title Page #

Assignment question 01
Assignment objective 01
Table of contents 02
Brief history of Islamic Banking and Finance-worldview 03
Brief history of Islamic Banking and Finance-Pakistan 30
Brief description of Islamic Banking Bulletin 04
Industry progress and market share 05
Modes of financing and their share 06
Composition of deposits 07
Sector wise breakdown of advances 08
Islamic banking growth 09
Summary/Conclusion 10
13. References 11

3
Brief history of Islamic Banking and Finance:

World view: With conventional brick and mortar roots going back to the 1960’s and
Quran teachings dating back nearly 1,500 years, Islamic banking is both an
established school of thought and a relatively recent addition to the global
financial market. There are now Islamic financial institutions operating in more
than 75 countries worldwide. 1963 saw the very first Islamic bank Myt Ghamar
Bank in Egypt, Tabung Haji in Malaysia and the Phillipine Amanah Bank.

Dubai Islamic Bank and Islamic Development Bank were launched in 1975. Iran
passed its usury free banking laws in 1983. Sudan launched Islamic banking in
1984. Indonesia’s Bank Muamalat was established in 1994. The IMF issued its
first study on Islamic banking in 1987. The Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) is in contact with the
standards committee of the Bank of International Settlements Switzerland.

Pakistan: Interest was eliminated from the operations of specialized financial

institutions in 1979 and from commercial banks during 1981 to 1985. The legal
framework of Pakistan's financial and corporate system was amended on June 26,
1980 to permit issuance of Participation Term Certificate (PTC). An Ordinance was
promulgated to allow the establishment of Modaraba companies. Amendments were
also made in the Banking Companies Ordinance, 1962. On January 1, 1981 Separate
Interest-free counters started operating in all the nationalized commercial banks.
From July 1, 1982 banks were allowed Musharaka.

Meezan Bank Limited was granted a license on 31st January, 2002 and became the
first Islamic bank of the country. Currently there are 6 full fledged licensed Islamic
banks (IBs) and 12 conventional banks have licenses to operate dedicated Islamic
banking branches (IBBs). All of the five big banks in Pakistan are providing Islamic
banking services. It was suggested that Pakistan should follow the example of
Malaysia, Egypt and Saudi Arabia and adopt a dual/parallel banking system. In this
context SBP worked on a three pronged strategy for promotion of Islamic Banking.

4
Description of Islamic Banking Bulletin:

Islamic Banking Bulletin is a quarterly publication of State Bank of Pakistan. Its first
issue was released in Feb 2007 with data from sept to Dec 2006. Islamic Banking
Bulletin gives an overview of the Islamic Banking Industry and provides information
regarding the developments taking place in this industry locally and internationally.
Governor’s Welcome Note, Industry Progress and Market Share, Events &
Developments at IBD as well as Local and International Islamic Banking News are its
regular features. Every issue also reviews a bank and a book. There are also sections
for Frequently Asked Questions and detailed Islamic Banking Branch Network.
Contacts Details of IBD Officials are provided at the end. Some other items that were
included in the first issue but disappeared from the later issues included things like
Analysis of Balance Sheet, Modes of Financing, Deposit Structure, Ratio Analysis
and Industry Progress and Market Share.

5
Industry Progress and Market Share:
Islamic banking in Pakistan continued to expand during the quarter ended-sept 2010.
The industry progress during the time period is shown in the table below.

Industry progress and market Sept 2010 Dec 2006 %change

share (Rs. In billion)
Total Asset 424 119 256.30
Share in industry 6.4 2.8 128.57
Deposits 338 84 302.38
Share in industry 6.7 2.6 157.69
Net financing & investment 233 73 219.18
Share in industry 4.6 2.3 100.0

450
400
350
300 Industry
Progressand
250 Market share
Sept 2010
200
150
100 Industr
Progressand
50 Market share
0 Dec 2006
Total Assets Deposits Net Financing
&Investment

Modes of Financing:

6
The financing mix remained concentrated in Murabaha financing. Musharaka,
Mudaraba, Salam, and Istisna modes increased hundreds of times although their total
contribution remained very low. Ijarah and Diminishing Musharaka showed steady
growth.
Mode of Financing Rs. in billion Sept 2010 DEC 2006 % CHANGE
Murabaha 69.31 26.5 161.54
Ijarah 21.80 19.63 11.05
Musharaka 1.85 0.53 249.05
Mudaraba 0.40 0 40
Salam 1.22 0.46 165.21
Istisna 8.60 0.89 866.29
Diminishing Musharaka 51.39 10.59 1059
Others 5.53 7.09 -22
Total 160.1 65.69 2530.144

Sep-10Modesof Financing

4%

Murabaha
Ijarah
32%
43% Musharaka
Mudaraba
Salam
Istisna
Diminishing Musharaka
Others
5%

14%
1%
1%
0%

7
 Dec 2006 Modesof Financing

11%

Murabaha
Ijaraha
16% 40% Musharaka
Mudaraba
1% Salam
1% Istisna
0%
Diminishing Musharaka

1% Others

30%

Composition of deposits:
Break-up of Deposits Rs. In Millions Sept 2010 Dec 2006 % Change
Deposits 338,216.6 83741.9 303.8
Customers 318,255.9 70978.18 348.38
Fixed Deposits 128,155.1 30444.25 320.95
Savings Deposits 113,229.1 21371.28 429.81
Current accounts- Non-remunerative 74,266.1 18281.57 306.23
Others 2,605.5 881.08 195.71
Financial Institutions 19,960.7 12763.71 56.38
Remunerative Deposits 19,735.3 12752.13 54.76
Non-remunerative Deposits 225.4 11.58 1846.45
Currency Wise
Local Currency Deposits 320,519.1 77896.07 311.47
Foreign Currency Deposits 17,697.4 5845.84 202.73

8
Sector wise breakup of advances:
Financing Concentration - % Share June 2010 Sept 2010 Industry
Chemicals and Pharmaceuticals 9.01 % 9.91 % 4.3 %
Agribusiness 1.09 % 0.91 % 6.1 %
Textile 18.11 % 17.91 % 16.8 %
Cement 3.44 % 3.63 % 2.7 %
Sugar 3.51 % 2.30 % 1.6 %
Shoes and leather garments 1.10 % 1.19 % 0.6 %
Automobile & transportation equipment 1.84 % 2.53 % 1.4 %
Financial 1.33 % 0.96 % 1.0 %
Production & transmission of energy 4.79 % 6.40 % 9.6 %
Individuals 18.91 % 18.83 % 12.5 %
Others 35.98 % 34.41 % 41.7 %
Insurance 0.01 % 0.03 % 0.0 %
Electronics appliances 0.87 % 0.95 % 1.6 %s
Total 100 % 100 % 100 %
The IBIs financing is concentrated in a few sectors like Textile, Chemical &
pharmaceutical and Individuals, where IBIs have around 18.3, 9.1 & 19 %
concentration compared to 16.9 & 4.1 and 12.8 % respectively for the rest of the
banking industry.

Islamic Banking Growth: The following table compares data from December 2006
with sept 2010 data and reveals a remarkable growth over that period.

9
Description (Rs. In billion) Dec 2006 Sept Growth (%)
2010
Total Asset 119 424 256.30
Deposits 84 338 302.38

Net financing & investment 73 233 219.17

Total Islamic banking institutions 16 19 18.75

Total number of branches 150 667 344.67

800

700

600

500

400
Dec-06
300
Sep-10
200

100

0
Total Assets Deposits Net Financing & Total Islamic Total Number
Investment Banking of Braches
Institutions

Summary:
The consistently high growth trends being exhibited by the Islamic Banking industry
over the last 4-5 years is indicative of growing acceptability of Islamic Finance as

10
 a commercial option for the different stake holders. The high growth in various
components of Islamic banks balance sheet has enabled the Islamic Banks to
make further inroads in the overall banking industry in Pakistan. With the size of
the
industry increasingly at an appreciably high rate, the future growth ratio may slow
down marginally The IBIs have sufficient liquidity since last couple of years due
to continued growth in deposits coupled with the dearth of liquidity management
instruments.
The prime target market of IBI’s has usually been the big conglomerates and MNC’s.
This in turn enables them to maintain a sound quality of their financial and investment
portfolio. However this squeeze the profit margins of IBI’s as due to the peculiar
nature of their clientele, clients are able to solicit credit on their own terms. Moreover
this also leaves the SMEs and startup business ventures devoid of Islamic financial
services. The IBIs have fared relatively well during and post 2008 global financial
markets crises; however the recent floods—worst in the history of Pakistan—are
likely to adversely affect asset quality of banks including IBIs. Consequently, the
performance of the banking system including IBIs during the coming few quarters
may remain under stress.
The branch network of IBIs has increased to 667 branches by end-June 2010. There
was an addition of 210 branches in 2008 and 143 branches in 2009. The increase of
29 branches during Jan-Sept 2010 does not seem very impressive. The slowdown is
attributable to fast pace expansion of branch network during last two years with
current focus on making the branches fully operational. Further, the growth in branch
network during next 1-2 years would largely be emanating from conventional banks
having IBBs both through conversion of existing conventional branches into Islamic
Banking Branches (IBBs) and new IBBs. The IBs accounts for 416 branches and
IBBs accounts for 183 branches while the rest 68 are sub branches of both IBs and
IBBs. The geographical coverage of Islamic banking extends across the four
provinces, Azad Kashmir, Northern areas and Federal capital covering 84 cities.
Sindh, Punjab, Balochistan, Khyber- Pakhtunkhwa, Azad Kashmir, and the Federal
Capital accounts for 223, 297, 73, 34, 7, and 32 branches respectively.

11
References

http://www.sbp.org.pk/ibd/bulletin/bulletin.asp
Islamic banking bulletin Oct-Dec 2006 (first issue)
Islamic banking bulletin June 2010 (latest issue)
.Islamic Finance Outlook 2009, Standard & Poor’s, February 2009
The Next Chapter in Islamic Finance - Higher Rewards but Higher Risks”, Oliver “
.Wyman, April 2009
Islamic banking and finance: Growth and Challenges ahead.www.sungard.com/ambit
ISLAMIC BANKING SECTOR REVIEW 2003 TO 2007 www.sbp.org.pk.

Lecture Two: Recent History of Islamic Banking and Finance (Anderson Graduate
School of Management, University of California, Los Angeles, November 07, 2001)

12