Islamic Banking in Pakistan A case of Deposit and Investment Accounts

Prepared by: Abidullah MBA 2nd Semester Email: ims.abid@gmail.com

Introduction:
The traces of Islamic Banking meet with the Constitution of Pakistan 1973, where in article (f) of the said constitution says that The State shall . Eliminate Riba as early as possible. The process of satisfying this article was started in 1979. The aim was to convert the conventional banking system to Islamic System. All the Financial Institutions were made Riba free by the year 1985. Banking accounts were converted to PLS accounts. Mudaraba contract was introduced for investment banks. However some products were declared un Islamic in 1991 by the Shariah Court of Pakistan. The real Islamic Banking was then started in year 2003 when State Bank of Pakistan provided the first License to Meezan Bank Ltd. The regulatoing authority i.e. Islamic Banking Department in State Banking of Pakistan was established on 15 September, 2003 to promote and develop Islamic Banking as a parallel and compatible banking system in the country. Accounting Standards for Islamic banks are adapted from AAOIFI FAS and are mentioned under National Islamic standards ICAP IFAS. The standards are developed by Institute of Chartered Accountants Pakistan. Almost ten years have been passed since Islamic Banking has been introduced during ten years of Islamic Banking era, Pakistan has five full fledge Islamic Banks, while there are 308 Islamic branches of Conventional Banks.

Deposit and Investment Accounts:

There are three types of accounts for the customers of Islamic Banks namely, current accounts, saving accounts and fixed accounts. The current accounts are operated under Qard ul Hassan contract, whereas saving and fixed accounts under Mudaraba contract. Fixed account is also called as Investment Account or Term Deposit Account. In such account investment can be made from at least one month to maximum of 7 years. In worldwide Islamic Banking Industry, current accounts are operated under Al-Wadiah principle. In Al-Wadiah (Trusteeship), the Bank acts as a custodian of the asset whereas the customer is the owner of the asset. Al-Wadiah is treated as Al-Wadiah yad Amanah contract. The problem with this contract arise because of the fact that it does not impose any liability on custodian in case of lose or damage except the case of negligence. As the Bank (custodian) is not taking any risk, hence he is not authorized for taking any benefits derived from that asset. This problem is overcome by introduction of Al Wadiah Yad Dhamanah, the contract of safekeeping with guarantee. In this case the custodian is liable for the asset in case of any loss or damage to the asset. As the custodian is held liable for the loss and damage hence he can derive profit from the asset. But the owner of the asset cannot claim his portion in the profit derived from his asset. He can get Hibah (profit), if the custodian is willing to give. In Pakistan, only Dubai Islamic Bank is practicing Al Wadiah contract for its current deposits. All other Islamic Banks, including the Islamic branches of conventional banks use Qard al Hassan for its current accounts. In Qard al Hassan contract, the bank is borrower and the customer is lender. The customer provide loan to the bank to spend it according to the banks own will, apply the condition as long as the bank spend the money in halal activities. The customer cannot claim profit extracted by the bank from his assets, although by the will of the bank, he can be awarded with hibah. For saving accounts, most of the Islamic Banks in the world are using Al Wadiah contract but there is issue of Hibah related to Al Wadiah. Hence to avoid this issue the Islamic Banks in Pakistan use Mudaraba contract for saving accounts. According to this contract, the bank acts as Mudarib and the customer as Rab ul Maal. The customer provides the money where

as the bank provide services to invest it and generate profit out of it. The profit is then distributed by a predetermined ratio pre decided between both the parties. Due to implementation of transparent contracts in deposit and investment accounts by the Islamic banking industry of Pakistan, the share of Deposits for Islamic Banks is increasing in the overall banking industry. The share of Islamic deposit was 1% in year 2003 but in June 2012, it is recorded as 8.9% of the overall banking industry deposits.

Issues:
There is no certain Shariah related issue attached with the deposits and investments accounts contracts. But the saving accounts are in heavy criticism from the people who want to open an account in the Bank. The argument that is given by those people is about the nature of risk sharing that the bank is not sharing the risk while in case of conventional banking all risk is borne by the conventional bank. Second argument says that why not Islamic banks use Al Wadiah for saving accounts in order to shift the risk to the bank. Although this kind of issue is always solved by the banks on the spot by providing right information to the customer about the contracts. But there are a lot of potential customers who are sitting outside the banking and shouting about the said issue. Hence a proper awareness program is needed to let the people understand about the Islamic Banking. As far as year 2012 is concerned, the percentage of Investment accounts deposits is more that current as saving accounts. Given figure shows that fixed deposits have share of 39% as compare to saving deposits 33% and current deposits 24% in total deposits of the Islamic Banking Industry.

Conclusion:
The Islamic Banking Industry in Pakistan is growing with a steady pace and it is assumed that by the end of year 2017, the share of deposits of Islamic Banking Industry will rise to 15%. The Islamic Banking Industry in Pakistan is committed to provide best contracts and products for the Banking System in order to avoid any misunderstanding and criticism from the outer world as well from the present and potential customers. Hence in order to avoid uncertainty related to Al Wadiah, Mudaraba and Qard ul Hassan have been introduced. This positive approached led the Islamic Banking Industry to grow fast. The Islamic Banks branches throughout Pakistan are increasing. The deposits share of Islamic Banking Industry in overall Banking Industry has been increased to 8.9% in year 2012 as compare to 1% in year 2003, when the Islamic Banking was started in Pakistan. According to SBP, in the upcoming 15 years, Islamic Banking Industry will need about 15,000 Islamic Finance Experts. This will open the way for research in the field of Islamic Finance in order to get more transparent products.

Discussion Questions
Question 1 : The criticism has been seen from the people on saving account contract .i.e. Mudaraba that how can the bank save itself from risk. According to Shariah, is it justifiable for the bank to pull their hand out of the risk? What about ethical justification? Questions 2: To avoid such criticism, is it good for Islamic Banks in Pakistan shift to Al Wadiah yad Dhammanah contract in Saving accounts instead of Mudaraba? What kind of difficulties the banks can face shifting from one contract to other? Question 3: Under what conditions the borrower (Bank) can give hibah to the lender (customer) in Qard al Hassan contract?