Developments in Islamic Banking: The Case of Pakistan (Palgrave Macmillan Studies in Banking and Financial Institutions)

Explores The Theoretical And Practical Features, Recent Developments And Future Prospects Of Interest-free Banking, Illustrated By A Detailed Analysis Of The Past Twenty-five Years Of The Interest-free Banking Movement In Pakistan (1980-2005). It Helps The Reader To Understand The Model Underpinning Interest-free Banking, Based On Principles Of Free Market Mechanism, Efficiency, Ethical Investment And Socio-economic Justice. And It Assesses The Practical Success Of Interest-free Banking At Individual Islamic Banks And At State Level, As In The Case Of Pakistan.--book Jacket. Foreword / Rodney Wilsoll -- Foreword / Agil Natt -- Glossary Or Arabic Words And Terms -- 1. Introduction -- 2. Islamic Economics: Divine Vision Of Distributive Justice -- 3. Islamic Banking And Finance Movement Worldwide : Performance And Prospects -- 4. Conceptual Developments In Islamic Banking And Finance In Pakistan (1977-1980) -- 5. Islamic Banking And Finance Practice In Pakistan (1981-1991) -- 6. The 1991 Federal Shariat Court (fsc) Judgement On Riba (interest) And Islamic Banking And Finance Practice In Pakistan -- 7. Efforts To Revive Islamic Banking And Finance In Pakistan (1992-1998) -- 8. The Impact Of The Supreme Court Judgements Of 1999 And 2002 On Riba (interest) On The Ibf Movement In Pakistan (1999-2007 -- 9. The Causes Of The Failure Of Islamic Banking And Finance In Pakistan -- 10. Summary And Conclusions. M. Mansoor Khan And Ishaq Bhatti ; Forewords By Rodney Wilson And Agil Natt. Includes Bibliographical References (p. 220-230) And Index. Cover 1 Contents 7 List of Tables and Figures 15 Foreword by Rodney Wilson 16 Foreword by Agil Natt 18 Preface and Acknowledgements 20 List of Abbreviations 22 Glossary of Arabic Words and Terms 24 A 24 B 24 F 24 G 24 I 24 K 25 M 25 Q 25 R 25 S 25 T 26 U 26 W 26 Z 26 1 Introduction 28 1.1 Preamble 28 1.2 Outline of the book 32 2 Islamic Economics: Divine Vision of Distributive Justice 34 2.1 Introduction 34 2.2 Ethical dilemmas of Conventional Economics 35 2.3 Guiding principles and goals of Islamic Economics 39 2.3.1 Right of private ownership 42 2.3.2 Free consent and mutual co-operation 42 2.3.3 Law of inheritance 44 2.3.4 Honesty, fairness and promise-keeping 44 2.3.5 Benevolence 45 2.3.6 Payment of zakah (obligatory religious tax) 45 2.3.7 Spending wealth on charity (sadaqah) 46 2.3.8 Condemnation of extravagance, hoarding and black marketeering 46 2.3.9 Condemnation of bribery, fraud and embezzlement 46 2.3.10 Prohibition of gambling and speculative (grarar) activities 47 2.3.11 Prohibition of the wine trade 47 2.3.12 Prohibition of riba (interest) 47 2.4 Modern theories of equity and justice 52 2.4.1 John Rawls's theory of justice 53 2.4.2 Right-libertarianism 55 2.4.3 Left-libertarianism 56 2.4.4 Utilitarianism 57 2.4.5 Pluralism 61 2.4.6 Strict egalitarianism 62 2.5 Summary and conclusions 63 3 Islamic Banking and Finance Movement Worldwide: Performance and Prospects 65 3.1 Introduction 65 3.2 Evolution and growth of IBF 65 3.3 The IBF infrastructure 68 3.4 Factors contributing to exponential growth in IBF 69 3.5 Salient features of IBF 70 3.5.1 The value-based paradigm 70 3.5.2 Banking for the poor 71 3.5.3 Market-based credentials 71 3.6 Theory and practice of IBF 72 3.6.1 PLS modes: Mudarabah and Musharakah 72 3.6.2 Interest-free modes: Murabaha (deferred payment sale) 78 3.6.3 Interest-free modes: Ijarah (lease financing) 81 3.6.4 Interest-free modes: Bai Salam (advance payment) and Bai Istisna (procurement engagement) 81 3.7 Islamic financial market 84 3.7.1 Islamic capital market: Sukuks 84 3.7.2 Islamic equity investment funds market 86 3.7.3 Takaful or Islamic insurance market 87 3.8 IBF: Worldwide growth 89 3.8.1 IBF in the Middle East 90 3.8.2 IBF in South Asia (Subcontinent) 94 3.8.3 IBF in Southeast Asia 94 3.8.4 IBF in Africa: Sudan 96 3.8.5 IBF in European and Western countries 97 3.9 IBF: Challenges and prospects 98 3.10 Summary and conclusions 102 4 Conceptual Developments in Islamic Banking and Finance in Pakistan (1977–1980) 104 4.1 Introduction 104 4.2 Policy instruments for eliminating interest 106 4.2.1 Primary and ideal instrument: The PLS system 106 4.2.2 Secondary instruments: Interest-free modes 108 4.2.3 Unsuitable instruments 116 4.3 Elimination of interest from economy-wide operations 118 4.3.1 Long-term financing: Participation Term Certificates (PTCs) 118 4.3.2 Islamic discounting of trade bills 120 4.3.3 Islamization of bank deposits 121 4.3.4 The evolutionary plan to eliminate interest 123 4.4 Islamic framework for central banking operations 124 4.4.1 Group one: Monetary policy tools requiring minor changes 124 4.4.2 Group two: Monetary policy tools requiring radical changes 126 4.5 The 1980 CII Report's scope and prospects 128 4.5.1 Broader context of the interest problem 128 4.5.2 The paradox of business ethics and moral hazard 129 4.5.3 Fair and truthful accounts versus certified accounts 129 4.5.4 Uncertain future for the PLS system 130 4.5.5 Islamic solutions to interest within conventional reach 130 4.5.6 The biggest obstacle to financial Islamization 131 4.6 Summary and conclusions 131 5 Islamic Banking and Finance Practice in Pakistan (1981–1991) 133 5.1 Introduction 133 5.2 Adoption and growth of IBF 133 5.2.1 Amendments to conventional banking laws 134 5.2.2 Early breakthrough in IBF set-ups 134 5.2.3 Islamization of non-banking financial institutions 135 5.2.4 Public response to PLS deposits 135 5.2.5 IBF framework execution phase 136 5.3 Critical features of IBF practice 137 5.3.1 Mark-up (Bai Muajjal/Murabaha) financing 138 5.3.2 Musharakah (equity participation) financing 139 5.3.3 Mudarabah (joint venture) financing (companies) 141 5.3.4 Participation Term Certificates (PTCs) 142 5.3.5 PLS deposits 143 5.4 Financial performance evaluation of IBF 144 5.4.1 Rate of Return (ROR) on PLS deposits 144 5.4.2 Return on Equity (ROE) 146 5.4.3 Strictly regulated market environments 147 5.5 Some reservations about the IBF practice 148 5.5.1 Gross deviations from the CII's recommendations 148 5.5.2 Lack of proper Islamic training for bankers 150 5.5.3 Public concerns and doubts 150 5.5.4 The cover of Islamic nomenclatures 151 5.6 Summary and conclusions 151 6 The 1991 Federal Shariat Court (FSC) Judgement on Riba (Interest) and Islamic Banking and Finance Practice in Pakistan 153 6.1 Introduction 153 6.2 Judicial status of the FSC in Pakistan 153 6.3 The FSC's questionnaire 154 6.4 The FSC judgement 154 6.5 The un-Islamic features of the Pakistani finance sector 155 6.6 Public response to the FSC judgement 156 6.7 Government reaction to the FSC judgement 157 6.8 The FSC judgement on foreign investments 158 6.9 Appeals against the FSC judgement 159 6.10 Lessons learned from the FSC judgement 159 6.11 Summary and conclusions 160 7 Efforts to Revive Islamic Banking and Finance in Pakistan (1992–1998) 162 7.1 Introduction 162 7.2 The CIE's role and responsibilities 163 7.3 The CIE's first initiative: The 1992 Report on Banks and Financial Institutions 163 7.3.1 Gross irregularities in IBF practice 164 7.3.2 Main recommendations 165 7.3.3 Critical assessment of the CIE's recommendations 166 7.4 The CIE's second initiative: The 1998 IIIE Report 168 7.4.1 The IIIE's banking model 170 7.4.2 IBF practice within Shariah framework 173 7.4.3 Central banking and monetary management 175 7.4.4 Critique of the IIIE's overall themes 180 7.5 Summary and conclusions 183 8 The Impact of the Supreme Court Judgements of 1999 and 2002 on Riba (Interest) on the IBF Movement in Pakistan (1999–2007) 185 8.1 Introduction 185 8.2 The SC's stature in the judicial system of Pakistan 186 8.3 Main observations on the 1999 SC judgement 186 8.3.1 The SC's definition of riba (interest) 187 8.3.2 The Bai Muajjal (deferred payment sale) practice 187 8.3.3 The Ijarah (leasing) practice 188 8.3.4 The service charge practice 188 8.3.5 The PLS practice 188 8.3.6 The indexation system 189 8.3.7 Negotiable instruments and debt-based securities 189 8.3.8 Government borrowings 189 8.3.9 Need for a sound IBF infrastructure 190 8.4 The SC parameters for the Islamization of the economy 190 8.5 The process of Islamic transformation 191 8.5.1 Commission for transformation in the SBP 191 8.5.2 Task force in the Ministry of Law and Parliamentary Affairs 191 8.5.3 Task force in the Ministry of Finance 192 8.6 The Start-up process of Islamization 192 8.7 The government's appeal for an extension 193 8.8 Dramatic U-turn on Islamization 193 8.9 The SC bench manoeuvring 194 8.10 The 2002 riba (interest) case review 195 8.10.1 The government's arguments before the SC 195 8.10.2 UBL's arguments before the SC 197 8.10.3 The religious parties' arguments before the SC 197 8.11 The SC judgement on the 2002 riba (interest) case review 197 8.12 Anomalies in the 2002 SC judgement 198 8.13 Debate over the 2002 SC judgement 200 8.14 Reflection on the government’s Islamization efforts 201 8.15 Present and future prospects of IBF in Pakistan 204 8.16 Summary and conclusions 206 9 The Causes of the Failure of Islamic Banking and Finance in Pakistan 208 9.1 Introduction 208 9.2 Government machinery 208 9.2.1 Lack of genuine political support 210 9.2.2 The noncommittal attitude of bureaucrats 211 9.3 The banking and financial sector environments 212 9.3.1 Lack of professionalism at the SBP 212 9.3.2 Lack of Islamic training and education for bankers 213 9.3.3 Financial mismanagement and incompetence 213 9.4 General socio-economic governance 216 9.4.1 Risk-averse depositors 217 9.4.2 Cold shoulder from business people 217 9.4.3 Huge burden of foreign and domestic debt 218 9.4.4 Weak and slow legal system 221 9.4.5 Rigid and narrowly based tax system 221 9.4.6 Malpractices and rampant corruption 222 9.4.7 The exploitative socio-economic set-up 223 9.5 Privatization and globalization of the market economy 225 9.6 Summary and conclusions 225 10 Summary and Conclusions 227 Notes 234 References 247 Appendices 258 Appendix I 258 Appendix II 265 Appendix III 268 Appendix IV 271 Appendix V 273 Appendix VI 278 Index 282 A 282 B 282 C 283 D 283 E 284 F 284 G 285 H 285 I 285 J 287 K 287 L 287 M 287 N 288 O 288 P 288 Q 289 R 289 S 290 T 291 U 291 V 291 W 291 Y 291 Z 291 This book explores the theoretical and practical features of Islamic banking. Using Pakistan as a detailed illustration, the text discusses recent developments and future prospects, demonstrating the model underpinning interest-free banking. It assesses the practical success of interest-free banking at both individual banks and state level.