Implementation of Islamic Banking System in Pakistan

Final Year Project

A Research Report about the Impact of Various Factors on the Implementation of Islamic Banking System in Pakistan

Supervisor Name Riaz Ahmed

Submitted By Muhammad Rafay Mansoor

Reg ID BB-1-05-2775

Date January 19, 2009

Submitted To PAKISTAN AIR FORCE KARACHI INSTITUTE OF ECONOMICS AND TECHNOLOGY

PROJECT APPROVAL
Project Title: IMPLEMENTATION OF ISLAMIC BANKING SYSTEM IN PAKISTAN By: MUHAMMAD RAFAY MANSOOR 2775

Project Supervisor: Academic Year:

Mr. RIAZ AHMED 2008

The Board of Advanced Studies at PAF KIET has approved this Project, submitted in partial fulfillment of the requirements for the degree of Bachelor of Business Administration.

Approval Committee:

_______________________ Mr. RIAZ AHMED Supervisor

_____________________ Director Academics

LETTER OF TRANSMITTAL
Mr. RIAZ AHMED Project Supervisor PAF-KIET

Dear Sir, This report is hereby on the IMPLEMENTATION OF ISLAMIC BANKING SYSTEM IN PAKISTAN. The report includes problem statement and a brief literature survey and it is part of my BBA (H) program. I am grateful for your guidance and supervision without which this project could have not been completed.

Yours Sincerely,

MUHAMMAD RAFAY MANSOOR 2775

LETTER OF AUTHORIZATION

MUHAMMAD RAFAY MANSOOR Please refer to your initial proposal for undertaking the study on Implementation Of Islamic Banking System In Pakistan. In the view of subsequent meetings and discussions, the initial proposal was finalized. Kindly initiate the study on the finalized Terms of Reference.

RIAZ AHMED Supervisor

TABLE OF CONTENTS
Page # Acknowledgements..i List of Tablesii List of Figures..iii 1 2 Introduction1 Research Plan3 2.1 Statement of the Problem.3 2.2 Review of Related Literature3 2.3 Statement of the Hypothesis4 2.4 Data Collection...4 2.5 Sampling..5 2.5.1 Non Islamic Banks.5 2.5.2 Bankers and Corporate Customers6 2.6 Instruments..6 2.6.1 Questionnaire.6 2.6.2 Interview..6 2.6.3 Observations..7 2.7 Data Analysis..7 2.8 Time Schedule.8 2.9 Budget..8

3 Limitations...9 4 Dealings, Returns and Standards...10 4.1 Security on Deposits and Investments.10 4.2 Rate of Return on Deposits and Investments..11 4.3 International Dealings..13 4.4 Experts in Islamic Banking..14 4.5 Taxation Policies..16 4.6 Accounting and Auditing Standards..17 4.7 Concluding Remarks 19 5 Portfolio and Accessibility20

5.1 Banks and Branches20 5.2 Customer Services...21 5.3 Research and Development...23 5.4 Shariah Compliant Government Securities and Money Market...26 5.5 Products Offered by Other Banks.28 5.6 Islamic Banking in Rural Areas..31 5.7 Concluding Remarks 32

Other Issues.34 6.1 Awareness34 6.2 Government Support...36 6.3 Religious Convictions..39 6.4 Social, Ethical and Cultural Values...42 6.5 Concluding Remarks

45 7 8 Conclusion47 Recommendations..48 Appendix Appendix A: Questionnaire for Corporate Customers.49 Appendix B: Questionnaire for Bankers.50 Appendix C: Frequency Distribution Table for Corporate Customers...51 Appendix D: Frequency Distribution Table for Bankers..52 Appendix E: Means Calculated for Corporates and Bankers.53 Bibliography.54

Acknowledgement
This research has benefited from the contribution of various individuals; this research study could not be completed successfully without their participation. First of all, I thank Mr. Riaz Ahmed, my project supervisor, for providing us with the opportunity and all the guidance to conduct this research. He has helped me at every step, and beckoned us the right way in every difficulty we faced. In the end, credit goes to all the people who filled out questionnaires, gave their remarks, added valuable ideas, and helped me polish this report.

List of Tables
Page # Table 2.1 Table 2.2 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table A-1 Table A-2 Table A-3 Sampling Techniques for Primary Sources Interval Scale Computation of Mean for Security on Deposits And Investments Computation of Mean for Rate of Return on Deposits and Investments Computation of Mean for International Dealings Computation of Mean for Experts in Islamic Banking Computation of Mean for Taxation Policies Computation of Mean for Accounting and Auditing Standards Computation of Mean for Banks and Branches Customer Services Computation of Mean for Research and Development Computation of Mean for Shariah Compliant Government Securities and Money Market Computation of Mean for Products Offered by Other Banks Computation of Mean for Islamic Banking In Rural Areas Computation of Mean for Awareness Computation of Mean for Government Support Computation of Mean for Religious Factors Computation of Mean for Social and Cultural Factors Frequency Distribution Table for Corporate Customers Frequency Distribution Table for Bankers Means Calculated for Corporates and Bankers 5 7 10 12 13 15 16 18 21 22 25 27 30 31 35 38 41 44 51 52 53

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List of Figures
Page # Figure 2.1 Figure 4.1 Figure 4.2 Figure 4.3 Figure 4.4 Figure 4.5 Figure 4.6 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Figure 6.1 Figure 6.2 Figure 6.3 Figure 6.4 Gantt chart for Research Study Responses to Security on Deposits and Investments Responses to Rate of Return on Deposits and Investments Responses to International Dealings Responses to Experts in Islamic Banking Responses to Taxation Policies Responses to Accounting and Auditing Standards Responses to Banks and Branches Responses to Customer Services Responses to Research and Development Responses to Shariah Compliant Government Securities and Money Market Responses to Products Offered by Other Banks Responses to Islamic Banking in Rural Areas Responses to Awareness Responses to Government Support Responses to Religious Factors Responses to Social and Cultural Factors 8 11 12 13 15 17 18 21 22 25 28 30 32 36 39 41 45

iii

Introduction

Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed by the principles and rules laid down by Islamic Shariah. Interest free banking is a narrow concept denoting a number of banking instruments or operations, which avoid interest. Islamic banking, the more general term is expected not only to avoid interest-based transactions, prohibited in the Islamic Shariah, but also to participate actively in achieving the goals and objectives of an Islamic economy. As the most dominant form of Islamic finance, Islamic banking is rapidly transforming into a viable alternate form of financing. From relatively humble beginnings in 1963 when the first Islamic bank was established in Egypt, today Islamic finance boasts of assets of around US$ 1.0 trillion, and has successfully made inroads into a wide range of products such as infrastructure and housing finance, asset management, Takaful business, debt issuance via Sukuk, etc. The growth rate, particularly in recent times, has been tremendous and geographically broad-based. Islamic banking has also made swift progress in Pakistan since its re-launch in 2002 as a parallel mode of financial intermediation along with conventional financial institutions, as evidenced by the commendable growth rate in excess of 60.0 percent per annum in both the assets and deposit base. Importantly, this parallel system is moving forward on the strength of its own merit, and not because of any religious or legal obligation or compulsion. As a proportion of the overall banking industry, the combined share of Islamic banks and stand-alone Islamic branches of conventional banks is 4.2 percent in deposits, and 4.3 percent in assets. In comparison with other countries, these shares reflect an impressive performance in a short span of 6 years: Bahrain, Malaysia and Indonesia have respective shares of 8.0 percent achieved over 30 years, 13.0 percent over 25 years and 1.7 percent over the last decade or so. To capitalise on the pace and momentum of this growth, SBP has recently launched its Strategic Plan for the Islamic banking industry, which envisions increasing its share to 12.0 percent of the overall banking industry by 2012. The whole financial system of Sudan has been transformed to the Shariah compatible basis in strict sense. Iran also has adopted Islamic banking system at national level, of course with some difference of opinion on some issues. A significant development in this field since late 1980s has been that conventional commercial banks, both within and outside the Islamic world, started offering Islamic banking services side by side with their normal operations. Efforts made during 1980 for Islamization of Pakistans economy at comprehensive and nation wide level failed and the current non interest based (NIB) system was declared un-Islamic by the superior courts in the country. Keeping in view that experience, the authorities during the last one-year or so, have made some important policy decisions. As a part of pronged strategy, private sector has been allowed to establish Islamic

banks and the conventional commercial banks have been allowed to set up subsidiaries and stand-alone branches for conducting pure Islamic banking business. Amendment has also been made in Section 23 of BCO (1962) for establishing subsidiaries by commercial banks to conduct exclusive Shariah compliant banking business. The State Bank issued detailed criteria in December 2001 for establishment of full-fledged Islamic commercial banks in the private sector. Al Meezan Investment Bank received the first Islamic commercial banking license from SBP in January 2002 and the Meezan Bank Limited (MBL) commenced full-fledged commercial banking operation from March 20, 2002. Detailed criteria for setting up of Islamic banking subsidiaries and the strategy, guidelines and criteria for opening of stand-alone branches for Islamic banking by existing commercial banks have also been issued. Thus, those interested in establishing scheduled Islamic commercial banks, subsidiaries or stand-alone branches for Islamic banking may apply to the State Bank of Pakistan, in fulfillment of the determined criteria. The above progress should certainly be regarded as an excellent reflection on the success and viability of the concept of Islamic banking as the achievement so far in laying a solid foundation is no small matter. However, the Islamic banks performance in achieving various socioeconomic objectives is rather modest relatively to the hopes attached to them in Islamic economic thought. They are facing a number of challenges to ultimately play a decisive role in development of Islamic countries, in particular, more than half of which is presently classified as the Least Developed Countries. The main objective in presenting this paper is to deliberate upon the ways and means by which Islamic banking could not only be promoted in Pakistan, but also used as a vehicle for fostering socio-economic development of the country.

2.
2.1

Research Plan
Statement of the Problem

Pakistan initiated a process of the Islamization of its financial system in 1979. Though the financial system of the country had undergone significant changes since then, the process of Islamization is yet to take its full course. Although Pakistan is an Islamic country according to its constitution, it is not an Islamic state, as it does not follow the principal objectives of economic order in Islam. It is an irony that very little has been borrowed from the Islamic concept of economics in the Islamic state of Pakistan, Perhaps the people as well as rulers of Pakistan have not cared to study in depth the Islamic economic concept, given by the Holy Prophet (P.B.U.H.) and the pious caliphs. What we have only succeeded in is making cosmetic changes here and there, and that too, in very few sectors of economy. So what are the factors impeding the growth of Islamic Banking System in Pakistan? The purpose of this study is to discuss the various factors impacting negatively (or positively) in the implementation of Islamic Banking System in Pakistan.

2.2

Review of Related Literature

In order to develop the hypothesis for the aforementioned problem, I have reviewed the following literature. On June 19 2002, an article was published in the Daily Dawn titled Ulema a hurdle in Islamization process about the recommendations of government to supreme court quoting ulema as an obstacle in the implementation of Islamic banking system in Pakistan. The counsel stated that the so-called present-day Islamic banking was in fact unIslamic due to high level of exploitation in these obsolete banking instruments that were being portrayed as Islamic. On February 28 2001, an article was published in Daily Dawn titled Islamic banking and some issues by Abdul Rauf Sivany describing major problem areas of Islamic banking. According to the author, general public is unaware of Islamic banking and therefore the central bank should instruct the banking industry how to conduct general

awareness programs on Islamic banking to enable the ordinary Pakistani to understand its essence. On August 13 2001, an article was published in Daily Dawn titled Protection of depositors interest main challenge: Islamic banking by Jawaid Bokhari describing lack of security and low returns as main challenges of Islamic banking. The author states that the real worth of the depositors' money is eroded by inflation requiring protection and the traditional bankers are supposed to ensure returns to the depositors over and above the rate of inflation to attract deposits while the returns offered by Islamic banks are much lower than traditional banks. On August 30 2004, an article was published in Axcess News titled While Lacking Innovation, Islamic Banking Thrives discussing the growth prospects of Islamic Banking. According to the author the progress of Islamic banking has been very slow; that the majority of Muslims still prefer to deal with conventional banks; and that post-9/11 Islamic banking "has lost much of its glow globally". The author adds that the downward slide will continue unless serious steps are taken to promote transparency and public trust; "innovation not imitation"; and the scale and status of Islamic finance.

2.3

Statement of the Hypothesis

In the light of the literature reviewed above, the following hypothesis is developed: Lack of awareness, low return on deposits and investments, and differences in opinion regarding Islamic Banking are creating obstacles in the implementation of Islamic Banking System in Pakistan.

2.4

Data Collection

Lot of secondary data is available about Islamic Banking and the review of secondary data will aid us in determining the true factors impacting on Islamic Banking. Past editions of various newspapers and magazines will be reviewed to get valuable information. Dawn, The News, Jang, and Business recorder are the most credible newspapers of Pakistan so there current and past editions will be fully explored.

Research reports, which have already been developed on Islamic Banking, have immense significance and they will form an integral part of secondary data. Books published on Islamic Banking are another valuable source and for this purpose, and Internet is, no doubt, the biggest source of information on any topic. There is a lot of material about Islamic Banking available on Internet and shall be referred definitely. The material published by State Bank of Pakistan, and annual reports of various banks form another important source of secondary data. In order to test the research hypothesis, corporate customers and bankers are identified as main primary source of data. Corporate customers form an important part of banking industry and their views will be used in the testing of hypothesis. Bankers have more knowledge about Islamic Banking than any one else and their expertise will enable us to find the shortcomings of Islamic Banking.

2.5

Sampling

Following table illustrates the sources that were identified for sampling. Table 2.1: Sampling Techniques for Primary Sources Sampling Population Source Technique Stratified Random Non Islamic Banks 30 Sampling Bankers Corporate Customers 50000 100000 Judgment Sampling Judgment Sampling Desired Sample Size 3 250 500

2.5.1

Non Islamic Banks

Non Islamic Banks operating in Pakistan include foreign as well as local banks. Since these two groups are totally different, so I decided to use stratified random sampling technique. After applying the procedure of stratified sampling, interviews will be conducted from the top officials of selected banks on some suitable time.

2.5.2

Bankers and Corporate Customers

Judgment sampling technique will be used for bankers and corporate customers. Since population-size of these sources is based on estimation,

so the most suitable technique of collection information from respondents is judgment sampling.

2.6

Instruments

For collection of primary data, I decided that following instruments will be used: 1. Questionnaire 2. Interview 3. Observation

2.6.1

Questionnaire

Questionnaires are very flexible as there are many ways to ask the same questions from different respondents. So, I planned to prepare questionnaire for a. b. Corporate Customers Bankers

Since the focus of the study is to find the factors having the most significant impact on Islamic Banking System in Pakistan, so, I decided that the same set of multiple choice questions will be asked from both set of respondents. A copy of questionnaires is attached at the end of the report in the appendix section.

2.6.2

Interview

Personal Interviews are the most reliable source of getting information from respondents. For this purpose, I shall interview the people having the most knowledge about Islamic Banking. Following people will be contacted on some future time. a. b. c. d. Religious Scholars Officials in Banks Economists Government Officials

2.6.3

Observation

Another instrument that will be used in my study is the observation. People will be observed thoroughly while conducting interviews and getting questionnaires filled.

2.7

Data Analysis

After the data collection phase that will be done through questionnaires, interviews and observations, results will be analyzed thoroughly. Since the purpose of the study is to identify the most critical issues impacting on Islamic banking so in order to test the hypothesis, interval scale will be used. Interval scale is assignment of numbers to rank items such that numerically equal distances on the scale represent equal distances in the property of factor being measured. Following table shows the interval scale to be used in this study. Table 2.2: Interval Scale Degree of Property Code Very High -2 High -1 Average 0 Low 1 Very Low 2

The statistical tools to be used with interval scale are a. Mean b. Percentage

Mean for various purposes will be calculated using the formula mentioned below, Mean = = fiXi The aforementioned tools will be used in summarizing and examining the nature of the results. The results will be then: (i) tabulated for the purpose of analysis, and (ii) figures and graphs drawn from the tabulated data

2.8

Time Schedule

Figure 2.1: Gantt chart for Research Study

2.9

Budget
Rs 1000 500 200 200 300 500 1000 500 500 300 Rs 5000

500 copies of Questionnaires for Corporate Customers 250 copies of Questionnaires for Bankers Computer Time Stationary Transportation Secondary Data Printout Books and Magazines Report Printout Mobile Expense Report Binding Total Expenses

Limitations

This research report is purely an academic work and the research plan is totally fulfilled. Following are the limitations of this research study. More secondary data could be examined but there might be a possibility that the report might be missing on some critical information in compiling the data altogether. The sample size is set limited for this research. The Corporate Customers and Bankers were not easily accessible, and hence, I only managed to contact a few of them. Initially, it was thought that the people from various parts of the country will be contacted but because of various constraints sample is only restricted to Karachi. Some of the Corporate Customers who have filled the questionnaires didnt have much knowledge about Islamic Banking therefore answers were not provided to all the questions. Some even refused to fill the questionnaire saying the term banking is unislamic so the questionnaire in itself is a contradiction. Some took 2-3 days in filling questionnaires so there answers are debatable while few just ticked on the answers randomly. Such questionnaires were discarded from the research. Initially it was thought the top most and senior religious scholars will be approached for interview but because of their unavailability, top scholars were not contacted. Although extreme care has been taken in collection and tabulation of results but there is a possibility that some of the results might not have recorded correctly and hence chance of minor mistakes in the analysis phase.

Dealings, Returns and Standards

In this chapter, I have emphasized the areas of accounting for Islamic financing, their dealings at different levels, returns to investors, and the difficulties that are faced in the promotion of Islamic economic system due to these factors. Since Islamic banking is in embryonic state in Pakistan, many important things are still undefined. I have tried to lionize these parameters.

4.1

Security on Deposits and Investments

Many depositors and investors have reservations about security of their money. They are not sure whether it is safe in Islamic products or not. Numerous reasons are propounded in this regard, e.g., small size of Islamic banking industry, unstable returns, uncertainty of its long-term prosperity, and many other direct and indirect parameters. The most important reason for lack of security is found to be Riba. The definition of Riba, provided by the Supreme Court, includes any increase over and above the principal amount. It does not take into account inflation, depreciating value and declining purchasing power of the rupee. The real worth of the depositors' money is eroded by inflation requiring protection. The traditional bankers are supposed to ensure returns to the depositors over and above the rate of inflation. The incentive is offered to attract deposits. Experts point out that the rise in prices is now an every day phenomenon. Price stability is a thing of the past. Regarding the impact of security on deposits and investments on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 4.1: Computation of Mean for Security on Deposits and Investments Options a b c d e Total X -2 -1 0 1 2 f1 8 13 13 11 5 50 f2 2 6 12 7 3 30 f1 X -16 -13 0 11 10 -8 f2X -4 -6 0 7 6 -3 f1 = Frequency for Corporates f2 = Frequency for Bankers = -0.16 = 0.10

Following figure shows the summarized results, as shown in figure both the groups have rated this factor differently.

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Figure 4.1: Responses to Security on Deposits and Investments

Corporates

Bankers

Results are very different for corporations and bankers. Corporations have shown little interest about low returns. Main reason can be that when intension is to transact in Halal and Islamic way, amount of return becomes a secondary consideration (or looses significance altogether in many cases). They are contended in compliance with Islamic norms and it is more important than any other factor. Bankers have low importance for issue of return. They are dealing in different types of investments and securities in Islamic as well as nonIslamic modes. Many of the non-Islamic instruments are more vulnerable and, hence, insecure than current Islamic products, but they are available in the market. So, security is not a big problem in the eyes of bankers. However, bankers are working hard to improve the security of all types of instruments.

4.2

Rate of Return on Deposits and Investments

Government, with the alliance of SBP and other leading financial institutions, wants to promote investment in country. Many steps have been taken in this regard. One of the important ones is to implement Islamic banking system. Former State Bank Governor Dr Ishrat Hussain said the interest-based prevailing system and Riba-free banking mode would run parallel. Therefore, people who want riba-free products will go to Islamic banks, while the people who want fixed income on investments and deposits will opt for non-Islamic banks. However, return on Islamic products will remain point of concern, as it is not stable. However, return on deposits and investments are bothersome, and many people are reluctant towards Islamic products just because of it.

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Regarding the impact of rate of return on deposits and investments on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 4.2: Computation of Mean for Rate of Return on Deposits and Investments Options X f1 f2 f1 X f2X a -2 6 6 -12 -12 f1 = Frequency for Corporates b -1 16 6 -16 -6 f2 = Frequency for Bankers c 0 15 11 0 0 = -0.20 d 1 6 4 6 4 = -0.27 e 2 6 3 12 6 Total 49 30 -10 -8 Following figure shows the summarized results, as shown in figure both the groups have rated this factor in a similar manner. Figure 4.2: Responses to Rate of Return on Deposits and Investments

Corporates

Bankers

The results are, virtually, consistent for both, corporate as well as banking sectors. Corporations did not heed low returns because it becomes a secondary issue if the intension is Halal and Islamic way of financing. In general, low return bothered very few companies, or bothered all companies in a very negligible amount. Bankers, on the other hand, seem very comfortable with the issue of return, as it is a routine thing for them. Banks are dealing with returns on investments and deposits in all modes of financing, including Islamic mode. So, it might bother them in initial adoption because of differences in terminologies, but they seem comfortable with dealing any type of return under any mode of banking/financing.

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4.3

International Dealings

Islamic bankers have been scrambling for years to cement rapidly growing $200 billion sector into mainstream global finance. Their hard work has paid off, with the rise in the number of firms offering banking products and services compliant with Islamic law and Sharia, from a handful in the 1970s to about 500 today and global banks such as Citibank and HSBC opening units to cater to roughly 1.2 billion Muslims worldwide. Islamic banking has a long way to go to compete with conventional financial institutions. Regarding the impact of international dealings on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 4.3: Computation of Mean for International Dealings Options X f1 f2 f1 X f2X a -2 20 9 -40 -18 f1 = Frequency for Corporates b -1 7 9 -7 -9 f2 = Frequency for Bankers c 0 5 4 0 0 = -0.46 d 1 12 4 12 4 = -0.50 e 2 6 4 12 8 Total 50 30 -23 -15 Following figure shows the summarized results, as shown in figure both the groups have rated this factor quite highly. Figure 4.3: Responses to International Dealings

Corporates

Bankers

Results are almost identical for corporations and bankers and both are considerably concerned with international dealings, especially in the era of globalization and impending WTO regime. From corporations viewpoint, they have to deal with local as well as foreign stakeholders e.g. shareholders, auditors, customers, etc. so, they need smooth international procedures to communicate at all platforms effectively. Same reasons may be quoted for bankers as that of corporations. Banks deal with different types of clients that include local and foreign clients e.g. investors, creditors, companies, individuals, etc. who make deposits and investments in different portfolios.

4.4

Experts in Islamic Banking

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This is, no doubt, one of the core problem areas. It is root-cause of many difficulties that Islamic banking system faces today. Dilemma is that Muslim world has either excellent economists, or excellent Islamic scholars, but not a mix of both features. Not too many experts exist who are good on both the aspects. Proper academic structure should be implemented to offer undergraduate, graduate, and post-graduate level courses in Islamic economic studies. Furthermore, workshops, seminars, training courses etc. should be regularly arranged for the professionals in the field. It shall result in better understanding of Islamic economic system. However, some positive proceeds are underway in this regard. Senior bankers say many other banks also want to start Islamic banking branches and they are making some in-house preparations as well-but there are not many Shariah advisors available. Under the rules, banks need to have Shariah advisors well versed in both Islamic financial system as well as conventional banking to supervise Islamic banking to be undertaken by them-even if it is done through one dedicated branch. Bankers say if they fail to find Shariah advisors from amongst the graduates of Deeni Madaris they will turn to the departments of Islamic learning of reputed universities including the Islamabad University that has international institute of Islamic economics attached with it. Sources in the SBP say if the Shariah advisors fulfill the criteria laid down for them under the set of rules for Islamic banking it is irrelevant whether they come from Deeni Madaris or conventional universities. According to the revised Fit and Proper Criteria issued by the Islamic Banking Department of the State Bank, the Shariah adviser must possess a degree from any recognized Waffaqul Madaris (Dares-e-Nizami) with a minimum of second class Bachelor Degree with Economics. Or, he must possess a degree from Waffaqul Madaris with Takhassus fil Fiqh (specialization in Islamic law) and sufficient understanding of banking and finance. Alternatively, the Shariah adviser must possess a postgraduate degree in Islamic jurisprudence/ Usooluddin or LLM (Shariah) from any recognized university with exposure to banking and finance.

Regarding the impact of experts on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below.

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Table 4.4: Computation of Mean for Experts in Islamic Banking Options X f1 f2 f1 X f2X a -2 15 9 -30 -18 f1 = Frequency for Corporates b -1 14 13 -14 -13 f2 = Frequency for Bankers c 0 12 6 0 0 = -0.65 d 1 4 2 4 2 = -0.97 e 2 4 0 8 0 Total 49 30 -32 -29 Following figure shows the summarized results, as shown in figure both the groups have rated this factor very critically. Figure 4.4: Responses to Experts in Islamic Banking

Corporates

Bankers

Corporations and banks, both, are highly conscious about the lack of experts in Islamic banking, banks being somewhat more conscious. The fear is about authenticity of already scarce number of experts. Banks are bound to appoint Shariah advisors before plunging in Islamic products. Banks fear that if they fail to acquire advisors of required skills and expertise, or if advisor did not proved effective for them, then the whole project shall be marred. They will have to roll back it and bear the consequences. After all, they cannot risk their banks at the mercy of handful of people. Because of meticulous attitude of banks, corporations are also hesitant in investing the banks that dared to start Islamic products. Companies do not want to entangle their money in such places that are already uncertain about their future prospects.

4.5

Taxation Policies

15

Taxation policies are one of the most important issue under the paradigm of standardization of accounting rules for Islamic banking system that will facilitate the dealings at all platforms. It is believed that government will face problems in developing secondary market for Islamic debt instruments and financial products. There are legal and taxation issues involved in launching this type of financing in the local market. The review of legal and tax regulatory aspects should come hand in hand with continuous research and development in the product development. Regarding the impact of taxation policies on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 4.5: Computation of Mean for Taxation Policies Options a b c d e Total X -2 -1 0 1 2 f1 7 10 18 8 6 49 f2 1 4 10 12 3 30 f1 X -14 -10 0 8 12 -4 f2X -2 -4 0 12 5 11 f1 = Frequency for Corporates f2 = Frequency for Bankers = -0.08 = 0.37

Following figure shows the summarized results, as shown in figure both the groups have rated this factor differently.

16

Figure 4.5: Responses to Taxation Policies

Corporates

Bankers

Big differences in opinions exist between corporate and banking sector. From corporations perspective, mean of (-0.08) indicates that most of them have little or no problem in paying tax in Islamic process. After all, they are paying taxes on other transactions also. So it bothers very little to companies how they pay it, what bothers more is that they have to pay it. From banks viewpoint, mean of (+0.37) suggests that banks have had to adjust with taxation in Islamic mode because they are responsible to levy it for government. They have to negotiate all the techniques with SBP, govt., and other bodies. They have to materialize them in effective manner. So, banks face some problems in Islamic way of taxation.

4.6

Accounting and Auditing Standards

Senior bankers have urged for changing accounting mechanism of existing banking system should State Bank of Pakistan (SBP) wanted to launch true Islamic financial system in the country. Uncertainty in accounting principles involves revenue realization, disclosures of accounting information, accounting bases, valuation, revenue and expense matching, etc. Thus, the results of Islamic banking schemes may not be adequately defined, particularly, profit and loss shares attributed to depositors. Sources in the leasing industry said that under the directives of State Bank of Pakistan (SBP), the Institute of Chartered Accountants of Pakistan (ICAP) has prepared an Islamic Financial Accounting Standard for leasing business. This standard would be called IFAS-2 Ijarah. It is applicable with certain qualifications. However, this standard does not apply to agreements that are contracts for services and that do not transfer the right to use assets from one contracting party to other. Regarding the impact of absence of accounting and auditing Standards on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below.

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Table 4.6: Computation of Mean for Accounting and Auditing Standards Options X f1 f2 f1 X f2X a -2 6 2 -12 -4 f1 = Frequency for Corporates b -1 10 10 -10 -10 f2 = Frequency for Bankers c 0 15 12 0 0 = 0.10 d 1 11 5 11 5 = -0.23 e 2 8 1 16 2 Total 50 30 5 -7 Following figure shows the summarized results, as shown in figure both the groups have rated this differently with bankers showing more concern for it. Figure 4.6: Responses to Accounting and Auditing Standards

Corporates

Bankers

Very different opinions are obtained about the accounting and auditing standards for Islamic banking system. Corporations have given low priority to these standards. Reason might be that they have virtually no, or very little, role in the formulation of these standards and policies. The key players are ICAP, SECP, SBP, and other similar authorities. Corporations are supposed to follow the standards only. So, they showed no interest for development of accounting and auditing standards for Islamic banking on the same grounds. Bankers, on the other hand, are somewhat conscious. But, overall, they are comfortable in dealing with it because these standards for Islamic banking are nothing more than just new standards or different standards. They have been, and are, dwelling with so many rules and standards of accounting. They might feel awkward in the beginning but will get used to Islamic accounting system very quickly.

4.7

Concluding Remarks

18

In conclusion, it is observed that overall impression about the Islamic banking system is quite convoluted. People, companies, and in most cases, banks themselves are uncertain as how to deal with certain situations. Investors and depositors fear that they will get low return or no return at all. Some even think their money shall be lost in Islamic method of banks. These notions need to be eradicated sagaciously. Furthermore, dearth of experts in Islamic finance is very big problem. Very few scholars of international acclaim exist who are equally good in Islamic laws and economics. We need many more such researchers. Islamic banking procedures are quite different from those of conventional counterparts; hence, inconsistencies in dealing with them keep the foreign investors from Islamic banking. So the standardization of auditing, accounting, taxation, and overall banking system should be ensured. In this way, Islamic banks would better face the modern challenges at international level.

Portfolio and Accessibility

19

In this chapter, I have tried to evaluate the products and services that are offered by the Islamic banks, and tried to see whether they fulfill the demands of people or not. It is also examined what other features need to be added in the available repertoire to enhance the transactions on higher level. Furthermore, the role of government is evaluated in the perspective of encouraging Islamic financing by launching its own securities and instruments. Accessibility of the Islamic banks/their branches is also canvassed thoroughly.

5.1

Banks and Branches

Islamic banking is in nascent stage yet. However, it is growing gradually in Pakistan. Only Meezan Bank is the only full-fledged Islamic bank operating currently, and several other banks are in the process of starting it. Government and State Bank of Pakistan are working enthusiastically to promote Islamic banks. Several commendable measures have already been taken. Firstly, SBP has decided not to issue any more licenses for conventional/non-Islamic banking. Licenses will be issued only for Islamic banking. Secondly, the State Bank has allowed commercial banks to set up Islamic banking subsidiaries or provide full Islamic banking facilities through dedicated branches. Many other steps are also underway. However, commercial banks hold some reservations about some decisions of SBP. Many local and foreign banks say they are making in-house preparations to start Islamic banking through dedicated branches but none of them is ready to set up an Islamic banking subsidiary. "It is far easier to start with a dedicated branch rather than with a subsidiary," says a top banker whose bank has submitted to the SBP a plan for starting Islamic banking through a dedicated branch. Under the rules, an Islamic banking subsidiary has to be a public limited company and must be listed on the stock exchange with a paid-up capital of Rs 1 billion. Commercial banks are reluctant in starting Islamic banking on a wide scale mainly because they are not sure if the government really wants to convert the financial system into Islamic one, and if so, then how and when? Another reason is that the banks themselves do not believe that interestfree banking is possible. Many even doubt if, at all, the present interestbased banking is violating any of the Islamic laws. Regarding the impact of lack of banks and branches on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below.

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Table 5.1: Computation of Mean for Banks and Branches Options X f1 f2 f1 X f2X a -2 10 6 -20 -12 f1 = Frequency for Corporates b -1 21 13 -21 -13 f2 = Frequency for Bankers c 0 14 4 0 0 = -0.68 d 1 3 6 3 6 = -0.57 e 2 2 1 4 2 Total 50 30 -34 -17 Following figure shows the summarized results, as shown in figure both the groups have rated this factor quite highly. Figure 5.1: Responses to Banks and Branches

Corporates

Bankers

Corporations and bankers are almost equally concerned with the lack of Islamic banks, and their available branches. Corporations do not want to deposit or invest in an industry that is very small, lacks expertise and experience, and lots of speculations and rumors are in the air about it. Similarly, banks are facing lots of difficulties in launching full-fledged Islamic system, as well as starting dedicated branches. They lack Islamic experts, professional skills and exposure in Islamic banking, and somewhat stringent conditions from SBP for maintaining certain levels of funds and financial ratios, etc.

5.2

Customer Services

Marketing is always the integral, and one of the most influential parts of any business. Banking, especially Islamic banking is no exception to it. A company might be better than its competitors in terms of quality, and standards, but might be taken over by competitors just because of poor promotion, customer services, and marketing strategies for its products and services. This gets more important when the business is in inception, or customers/clients lack sufficient knowledge about the industry. In my view, the growth of Islamic banking and products is more of a marketing problem than any other aspect. Pakistani financial institutions and banks are well equipped with professionals who are qualified, experienced, and forward-looking.

21

But the core issue is promotion of Islamic banking as industry and to create awareness in customers (individuals, corporations, banks, etc). Customer services is one of the most important aspect of marketing strategy that interacts with clients at lowest level, i.e., communicates with them directly. This can be effective tool in achieving the aforementioned objectives. Banks should ensure that their customer services are well informed about the latest progressions in this industry on international level and specially the position and policies of their own bank. They should tell their clients/customers about all the intricacies and implications of this new industry because they do not have enough exposure towards Islamic banking. Regarding the impact of customer services on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 5.2: Computation of Mean for Customer Services Options X f1 f2 f1 X f2X a -2 14 4 -28 -8 f1 = Frequency for Corporates b -1 12 5 -12 -5 f2 = Frequency for Bankers c 0 18 12 0 0 = -0.62 d 1 3 7 3 7 = -0.07 e 2 3 2 6 4 Total 50 30 -31 -2 Following figure shows the summarized results, as shown in figure both the groups have rated the impact of this factor differently. Figure 5.2: Responses to Customer Services

Corporates

Bankers

Big differences exist in the opinions of both the sectors about the importance of customer services provided. Interestingly, a customer services are main responsibility of banks rather than corporations, but corporations are more concerned about it than are the banks. I think that this result is the crux of problems of awareness about Islamic banks. Corporations want to invest and deposit in Islamic instruments but they lack adequate information and experience, so they are reluctant in doing so. As the results show, most of the corporations have rated the lack of customer services as area of high concern for them. If proper steps are taken in this regard, the situation will change positively,

22

Unfortunately, banks have not taken the customer services in high priority. Most of the banks are continuing with the existing policies of customer services, and do not update the knowledge of the staff to entertain the clients properly. Very few banks have taken this issue seriously, and have taken necessary measures to keep their staff members abreast of the new policies and procedures of Islamic banking. However, this is not enough, and banks still need to go a long way in this regard. They should arrange workshops, seminars, and training programs etc. for the staff.

5.3

Research and Development

Like in any other industry, research and development (R&D) will play a key role for Islamic banking in answering conflicting situations, coming up with new solutions, and making the things easy. Importance of R&D is realized at all levels in Pakistan. Lot of R&D work is being done and lot more needs to be done. Ishrat Hussain, Former Governor of SBP, particularly spoke of the difficulties of putting Shariah into practice in case of the government's financial operations, which he pointed out, would need a lot of innovations and research to find solutions of many problems that confront officials. For example, he said, the government through a variety of debts and public lending is now financing the deficit of the government budget. "But how would you do this in an Islamic system to mop up finances when there are no assets?" The emergence of Islamic banking has coincided with the rapid growth of research into so-called Islamic economics including an extensive literature, periodicals and scholarly journals devoted to Islamic fiscal and monetary policy, and finance and banking. Today it is difficult to avoid the international attention paid to the Islamic banking phenomena by the media, by scholars and by the banking community. Surveys of the Islamic banking market have recently appeared, among others, in the British Financial Times and Middle East Economic Digest. The researchers find that the flow and symmetry of information between lenders and investors is crucial to the likely success of PLS financing (Aggarwal and Yousef 1996; Kuran 1995; Masoud 1989).The results of the research along these lines are promising in that they adequately rationalize the behavior of Islamic banks in the market place and provide theoretically justifications for the observable facts. The general facts about financing in Islamic banking which have emerged in the past few years have provided researchers with the impetus to focus their study of Islamic banking and finance on the apparent divergence between Islamic banking in practice and in theory.

23

It should be emphasized that the theoretical results employed to analyze the practice of Islamic banking were developed long ago, and have been applied to the study of credit market problems in other developing countries. Research into the problems of Islamic banking and finance would be greatly served by studies that are grounded in sound economic analysis and systematic modeling. This need not imply that the tenets of neoclassical economic methodology should be indiscriminately imposed on every modeling effort of an Islamic economic issue. Interdisciplinary historical research into the origin, rationale and workings of the Islamic financial system is a second avenue of research that holds great promise, but has rarely been looked into. It must be remembered that the basic Islamic legal framework and instruments in use today were developed by jurists back in the Middle Ages, undergoing much refinement at the time, but little since then. How these instruments worked in medieval Muslim societies may have a great deal to tell us about their potential today. Finally, there is little doubt that our understanding of the potential of Islamic instruments would be greatly enhanced by concerted empirical examination of their performance in the market place. This would include cross-sectional studies of Islamic banks focusing on their utilization of specific instruments, their performance relative to conventional banks, and their contribution to sectoral-financing. In addition, emphasis should be placed on empirical testing using panels of transactions within banks to investigate the contractual characteristics of the menu of Islamic financial instruments. Unfortunately, the biggest obstacle to this empirical agenda stems from the paucity of data provided by Islamic banks on their operations. With few exceptions, Islamic banks have been averse to releasing information on a regular and detailed basis. This fact alone accounts for lack of any serious empirics. Ironically, Islamic banks have the most to gain from enabling researchers to better understand the capacity and limitations of the instruments they employ in financing. All innovations require research and development that in turn draws on basic research in universities and laboratories. Islamic finance became a subject of academic research in the 1980s, and every year it is discussed at highprofile conferences, yet the resources devoted to it hardly match the challenges facing the industry.

Regarding the impact of research and development on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 5.3: Computation of Mean for Research and Development Options a b c d e Total X -2 -1 0 1 2 f1 10 19 11 8 2 50 f2 6 8 6 7 3 30 f1 X -20 -19 0 8 4 -27 f2X -12 -8 0 8 8 -4

24

f1 = Frequency for Corporates f2 = Frequency for Bankers = -0.54 = -0.13 Following figure shows the summarized results, as shown in figure corporates have rated this factor more critically than bankers. Figure 5.3: Responses to Research and Development

Corporates

Bankers

From viewpoint of corporations, they realize the importance of R&D. They believe that progress in R&D will bring solutions to many obscure problems. But corporations cannot get involved directly in R&D activities of Islamic banking; they can only rely upon the results and propositions of research conducted by financial institutions. They will carefully scrutinize the outcomes of research in order to develop better understanding of Islamic instruments before investing in them. As we already know, many corporations are willing to invest in Islamic products, but they hesitate because of many unanswered questions. Only research will rectify these questions. Nonetheless, financial institutions are busy in research, and trying to come up with reasonable answers to all the questions that are propounded towards Islamic banking system. Lots of work is underway. But the more important thing is that they conduct research in effective way, because their publications and announcements about proceeds in Islamic banking can persuade individuals, companies, and other clients towards Islamic way of financing. However, the realization of importance of R&D is less in bankers as compared to corporations and other clients. Bankers should realize that research could play the role of glue among bankers, Islamic financing, and clients. They will have to put more funds in R&D, work more diligently, and try to be more effective.

5.4 Shariah Compliant Government Securities and Money Market

25

Securities and financing instruments issued by the government or government bodies are considered the safest of all others. Liquidity management conforming to the rules of Shariah is a big challenge. In the absence of an Islamic instrument for liquidity-management scares not only the already existing institutions but also those commercial banks that plan to start Islamic banking through dedicated branches. The answer lies in developing sort of Islamic T-bills. The Meezan Bank has already developed the module of Ijarah Sukuk or Islamic T-bills and it is currently under review at the State Bank. The SBP sources say what delays the approval of the design for the proposed Islamic T-bills is that the government has to identify the assets to back up this instrument Bankers who are well versed with Islamic banking say government assets in organizations like Pakistan Steel can be securitized under such Islamic modes like Salam or Istisna. But they admit that it may take the government months to work out their nitty-gritty. The State Bank is at an advanced stage of setting up an Islamic banking department and SBP officials say that once the department starts working issues like development of Shariah-based liquidity management instruments would receive immediate attention. Few years back, a team of Islamic banking experts from Bank Negara (central bank of Malaysia) and other financial institutions conducted a fiveday orientation course on Islamic banking in Karachi. SBP officials as well as commercial bankers attended the course. Some of them told Dawn that the issue of setting up an Islamic inter-bank money market was discussed at length. The Malaysian experts were of the view that an urgent need exists for introducing such instruments in Pakistan after the SBP has allowed the commercial banks to start Islamic banking and one full-fledged Islamic bank has already been in operation. Under an agreement between the State Bank of Pakistan and the Bank Negara Malaysia, the two central banks offer technical assistance to each other. Some participants of the course told Dawn that one of the major instruments used in the Islamic inter-bank market in Malaysia is mudarabah inter-bank investment (MII) that can also be introduced in Pakistan. MII refers to a mechanism whereby a deficit Islamic banking institution can obtain investment from a surplus Islamic banking institution based on mudarabah or profit sharing. Regarding the impact of non-availability of Shariah compliant government securities and money market on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below.

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Table 5.4: Computation of Mean for Shariah Compliant Government Securities and Money Market Options a b c d e Total X -2 -1 0 1 2 f1 10 15 15 3 5 48 f2 7 10 9 3 1 30 f1 X -20 -15 0 3 10 -22 f2X -14 -10 0 3 2 -19 f1 = Frequency for Corporates f2 = Frequency for Bankers = -0.46 = -0.63

Following figure shows the summarized results, as shown in figure both groups have responded in almost a similar manner. Figure 5.4: Responses to Shariah Compliant Government Securities and Money Market

27

Corporates

Bankers

Results are somewhat similar here. Currently, government-owned financing instrument are not available. However, some instruments shall be launched shortly. All the companies that are interested in Islamic financing mode are eager to invest in such securities. Similarly, other companies that are not interested in Islamic mode of financing, might invest in such securities for other reasons, e.g., to diversify their investment portfolio, or, for a consistent and safe return, or just for experience, or to sniff how the Islamic banking looks like. Banks, on the other hand, are relatively more involved in this issue because investment tools and financing instruments are a routine activity for them. Many Islamic financing instruments are already out in the market but private institutions own them.

5.5

Products Offered by Other Banks

To compete in the market, Islamic banking system will have to provide counterparts of all the financing instruments that are offered by non-Islamic banks. Furthermore, these products have to have better, or equal at least, quality than those of competitors. After all, investors will deposit in these products and services. Unfortunately, Islamic banks do not have very diverse portfolio to offer, but serious efforts are underway. Some instruments are to be launched shortly. Efforts should be focused to combine Islamic financing instruments with latest technological advancements, and facilitate in global transactions. Islamic banks will have to counter the products, like, ATMs, credit cards, debit cards, and other plastic money products, on-line transactions via Internet as well as mobile. Islamic versions for Insurance, Leasing, mutual funds, brokerage houses, and investment banks need to be promoted on institutional level of reciprocating. Dr. Ishrat Hussain, Former Governor SBP, says that ribafree, and interest-based systems will run in parallel. However, he said the banks had been allowed to bring forward the Islamic products and Shariah compliant banking system to ensure the availability of Islamic banking products for the people. The Former SBP chief believed that Takaful or cooperative insurance is the right step forward towards the breakdown and removal of mental blocks and bottlenecks in the way of insurance in the Muslim culture. He said that any bank or financial institution that has some innovative product 28

to offer to the investors or general-public could seek State Bank's permission to open a window for Islamic banking or even a bank. "We are ready to give permission to such banks," he said. There is a large information deficit in the Islamic financial industry that hampers its further growth and development. The absence of rating agencies, especially agencies that would rate products and institutions on the basis of their Shariah compliance, is the best example of this deficit. The banks have to seriously examine the prevailing situation. They have to realize that what the Pakistani market genuinely lacks in product innovation. The banks have to now analyze the market to ascertain whether it is a saturated or a young market. If they find it to be young, then they have to concentrate on growth and product development. Markets are groomed on product innovation and financial engineering. The financial sector is faced with tough decisions. Either to compete in a cutthroat market, in which no one can survive, or compete through diversified products relying on product innovation and market expansion. In the end, the Islamic banking consumer will rely on them to ensure that he goes home with at least the same benefits and satisfaction that a conventional banking system provides and at times even better.

Regarding the impact of non-availability of products offered by other banks on Islamic Banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 5.5: Computation of Mean for Products Offered by Other Banks Options a b c d e Total X -2 -1 0 1 2 f1 7 18 16 6 3 50 f2 6 11 9 4 0 30 f1 X -14 -18 0 6 6 -20 f2X -12 -11 0 4 0 -19 f1 = Frequency for Corporates

29

f2 = Frequency for Bankers = -0.40 = -0.63 Following figure shows the summarized results, as shown in figure both have responded in a similar fashion. Figure 5.5: Responses to Products Offered By Other Banks

Corporates

Bankers

Results are the same as for the previous aspect (lack of government owned securities, and money market). Reasons are, largely, also the same as for previous one. Corporations are conscious about the nature and quality of Islamic financing tools. They want more options to invest in. Unless attractive Islamic instruments are available, they are not able to invest in Islamic system. Even the companies that do not want to be in Islamic banking system might want to invest in Islamic securities to diversify their investments, to get better understanding of Islamic financing, or any other reasons. Banks have the responsibility of creating the Islamic versions of financing instruments and to implement them successfully, so, they bear more responsibility than corporations. Banks are networked with SBP, government, and other financial institutions and some products are in pipeline for launching. More efforts are needed amidst all this.

5.6

Islamic Banking in Rural Areas

This is another understated point. More than 70% population of Pakistan lives in rural areas, villages, and other underdeveloped areas. Numbers of branches of bank are almost negligible in such areas, let alone the branches of Islamic banks.

30

Islamic banks have very limited branches in the urban areas and cities, and these are not so easily accessible by all people from all parts of the cities. So, Islamic banks should not only increase the number of branches in cities, where core business and trade occurs, but also open branches in rural areas. These areas are, in fact, tremendous business opportunity if handled sagaciously. Bankers argue that banking has two sides, one is liability and the other is asset. Liabilities cover deposits and their mobilization. The assets are generally generated and concentrated in the urban areas, whereas, rural areas are never able to generate enough business. They only provide deposits since they are more inclined towards Shariah compatible banking. Right now, deposits are not the biggest challenge, since there are faith and conviction driven. Assets on the other hand are commercial ventures. They are not easily generated, as most people are afraid of the information sharing involved in Islamic Banking, and believe, that Islamic Banking is more cumbersome, involving lot of documentation. Regarding the impact of concentration of Islamic banking in urban areas rather than rural areas, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 5.6: Computation of Mean for Islamic Banking in Rural Areas Options a b c d e Total X -2 -1 0 1 2 f1 3 19 12 6 10 50 f2 3 7 12 6 2 30 f1 X -6 -19 0 6 12 -7 f2X -6 -7 0 6 4 -3 f1 = Frequency for Corporates f2 = Frequency for Bankers = -0.14 = -0.10

Following figure shows the summarized results, as shown in figure both groups have shown less concern for this factor. Figure 5.6: Responses to Islamic Banking in Rural Areas

31

Corporates

Bankers

Bankers and corporations realize this fact, but they are not very much concerned about it. Results of survey are also same roughly. The reasons for not bothering the concentration of Islamic banks and/or branches in cities, and urban areas rather than in rural areas are numerous. Most important reason is that banks facilitate in economic activities, investments, trade, and earnings. Since most of the businesses are present in cities banks have opened most of their branches in cities. This reason is obvious, and simple, and single handedly can be rated as only compulsion. In fact, almost all of the banks and other financial institutions are headquartered in Karachi, including SBP, the Central Bank of Pakistan. Reason is that Karachi is the economic hub of Pakistan, and is the center of all financial infrastructures. Similarly, most of the corporations and other businesses are also headquartered in urban areas and cities. They are, like banks, not bothered by the lack of branches in rural areas, because it does not hamper their businesses. Therefore, banks and companies have given very little, or virtually no importance to this aspect, and the conditions do not seem to change in future.

5.7

Concluding Remarks

In conclusion, the chapter in a glance suggests that the Islamic banks should open more branches so that they become accessible by more customers, and people get better services. Research and development should be further emphasized and new solutions should come up to meet modern challenges. Customer services needs to be improved drastically. Clients are not getting enough information, so they are unaware of new proceeds in Islamic banking. On the other hand, staff of the banks is not trained about intricacies of Islamic financing. So, they need be trained. Although government is advocating Islamic financing system, but the efforts are in the way, and Islamic T-bills soon will come. Furthermore, Islamic banks should enhance the available products domain by adding

32

high-tech facilities, e.g., ATMs, credit and debit cards, smart cards, online and mobile banking, etc. Another major factor is that most of the banks and branches are in urban areas, while almost 80% population lives in rural areas, so they cannot access them. But banks say that all the economic and business dealings occur in cities, so no need of banks in rural areas. However, things should change.

Other Issues

What really are the reasons for the lack of progress at the practical level about the application of Islamic Banking? Different people may have 33

different perceptions on the issue. Proponents of the Islamic banking generally attribute it to the lack of will and commitment of the successive governments and of the government machinery at various levels. While this view carries weight one cannot ignore other dimensions of the issue. Most important being the impression at various levels that Islamic banking has not been in practice anywhere in the world in its real spirit and therefore in the absence of the tested alternative Islamic model there is little likelihood of a successful beginning, instead any new experiment may backfire. Though this impression may not hold ground, it does indicate towards a general lack of awareness about the Islamic banking alternatives that are already in practice.

6.1

Awareness

Awareness of something is always the first drop of rain. Lack of awareness as the foremost factor hampering the growth of Islamic banking in Pakistan. In Pakistan, public is unaware, or has distorted information of Islamic banking. Therefore, the first step to be taken is to create awareness in people as well as in bankers. Awareness is more, a sort of, problem of marketing campaign than any thing else. The foremost pre-requisite in this regard is mass awareness about the concept of Islamic banking among the general public and the education of bankers and the business community. Efforts are needed at changing the general perception about return on financial savings/assets and creating genuine demand for Islamic banking. Through a comprehensive campaign, people must be made to understand that Islamic banking does not mean free loaning to the business and industry and that the savers can justifiably take return on the basis of results of the business activity undertaken with the help of their funds. Similarly, industrialist and the business community need to be persuaded to raise more and more equity-based funds instead of loans. The depositors and investors who have been avoiding the banking channel so far due to involvement of Riba would approach Islamic Banks only when they are assured that their funds would be invested in Shariah compliant activities. Therefore, credibility of Islamic banks is the most important aspects and the key to success and development of the emerging discipline. The clients would need to be assured of Shariah compliance that funds are kept separate from their conventional deposits, and financing is provided purely on the basis of Islamic modes. Islamic banks would also need to ensure that their funds are not invested in Haram and indecent activities. Companies with excessive reliance on debt financing will also be excluded, and hence gearing ratios will need to be monitored.

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This also highlights the need for education and training of all the stakeholders. Training of banks personnel and creating awareness among the people about the true nature of Islamic banking is an aspect demanding concerted efforts on the level of war footing. Banks should conduct general awareness programs on Islamic banking to enable the ordinary Pakistani to understand its essence, e.g. through their respective web sites, workshops, seminars, short training courses, etc. The universities and other educational institutions are urged to produce people knowing Shariah as well as principles of finance. Further, Islamic banking and finance is a part of Islamic economic system the very basis of which revolves around justice and morality. All-out efforts need to be made by the Government, the religious and political leadership and intelligentsia in general for enhancing morality of the populace. For this purpose, foolproof documentation of transactions, amendment in tax and other relevant laws are essential requirements. Only a well thought out plan with committed and sustained efforts could lead to success and ultimately to transformation of the economy. Regarding the impact of awareness on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 6.1: Computation of Mean for Awareness Options a b c d e Total X -2 -1 0 1 2 f1 31 12 6 0 1 50 f2 12 12 6 0 0 30 f1 X -62 -12 0 0 2 -72 f2X -24 -12 0 0 0 -36 f1 = Frequency for Corporates f2 = Frequency for Bankers = -1.44 = -1.20

Following figure shows the summarized results, as shown in figure both the groups have rated this factor quite highly. Figure 6.1: Responses to Awareness

35

Corporates

Bankers

Lack of awareness is rated as very significant reason by bankers as well as by corporate. Both realize the importance of it, and feel the need to improve the level of knowledge about Islamic mode of financing. For corporate and common people, enough literature should be available in printed form e.g. books, papers, newspapers, magazines etc. and electronic media e.g. Internet, TV, radio etc., and regular workshops, seminars, symposiums, training courses etc. should be available for bankers and for interested corporate. Although the steps are, and being, taken in this direction. But more impetus and more effectiveness is required. Government can play a significant role here in collaboration with banks, SBP, and other financial institutions. Additionally, Islamic scholars, educational institutions, learned people etc could play pivotal role within their domain. In short, awareness is the main problem, at every level, and should be improved by using all the resources.

6.2

Government Support

Government can play the most important role for upbringing Islamic banking system in Pakistan. It owns the largest resources, and authenticity than any other body. Government realizes these facts and is serious to take the bull by the horns. Former World Bank officer Shahid Javed Burki, who also served as Pakistan's finance minister for a brief time in the 1990s, says that in Pakistan pragmatism has usually prevailed over piety and efforts to Islamize the banking system have been largely cosmetic, rather than replace conventional institutions, he says, Pakistan is likely to move towards a system of parallel banking and financial institutions that provide greater choice to the Muslim consumer. The 'central issue' in Pakistani politics over the years, argues Vali Nasr of the Naval Postgraduate School, Monterey, has been the expansion of state power and the resistance these efforts have provoked. In Pakistan, he argues, successive governments have manipulated Islamic symbols not only to shore up state legitimacy, but also to cast their redistributive policies in a favorable political light. 36

Another author, Charles Kennedy, reviews the efforts of Islamic legal experts to secure a judicial ruling that riba is repugnant to Islam, and therefore, that all federal and provincial laws that provide for riba must be brought into conformity with Islamic law. His analysis underscores the essentially political rather than legal character of this question. Even Zia-ul-Haq, who professed to want to govern Pakistan according to Islamic precepts, and who in 1979 publicly pledged to eliminate riba from Pakistan within three years, nonetheless opted for 'prudential, incremental' changes that did not seriously challenge the operations or the corporate interests of domestic banks or Pakistanbased affiliates of multinational banks, argues Mr. Kennedy. Dr Ishrat said that the government's strategy was to move gradually towards transformation of Islamic financial system without disrupting the system. The Former SBP chief said the government and the central bank had sent experts to different countries to study the Islamic banking system and found that there was not a single country where the Islamic banking system was in practice 'completely'. However, he asserted that there was no pressure from any side, including the IMF and World Bank, on the issue of switching of the system. Former Prime Minister of Pakistan Shoukat Aziz said the modern financial system had not been constructed overnight rather it had evolved over centuries, adding it has been thoroughly tested, applied and measured for its ability to meet the needs of fast expanding and increasingly complex economies of the world. It is widely recognized, accepted, voluntarily adopted and practiced simply for its efficiency, reliability and safety, he said, adding, however, this does not mean that "we cannot challenge the system, in fact given the system of beliefs that we subscribe to, we should never hesitate to challenge the conflicting practices." He said, undoubtedly, it was the responsibility of the government to create the necessary space and enabling environment so that such incremental steps could be adopted out of free choices made by private individuals and institutions. Some Islamic scholar agree upon that government has the most influential role, and can help in implementation of Islamic banking system. However, they agree that it should be a gradual process i.e. evolution, rather than revolution. But Islamic scholar says conventional banking should be eradicated rather than going on simultaneously.

37

Regarding the impact of government support on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 6.2: Computation of Mean for Government Support Options a b c d e Total X -2 -1 0 1 2 f1 14 20 10 4 2 50 f2 8 12 5 5 0 30 f1 X -28 -20 0 4 4 -40 f2X -16 -12 0 5 2 -23 f1 = Frequency for Corporates f2 = Frequency for Bankers = -0.80 = -0.77

Following figure shows the summarized results, as shown in figure both the groups have rated the impact in a similar manner. Figure 6.2: Responses to Government Support

38

Corporates

Bankers

While interpreting the above results, I find that bankers and corporate are equally concerned about the severity of role of government that it could impart over successful materialization of Islamic banking system in Pakistan. Both the sectors view the government as patron, who beckons the way for other sectors and institutions. Government is looked forward as to spearhead this entire campaign. Government also realizes its placement in the bigger picture, and is taking the decisions in a broader perspective that would impact the overall performance of Islamic banking system.

6.3

Religious Convictions

The counsel of federal government informed the Supreme Court that Pakistan's religious scholars were, in fact, main hurdle in the Islamization process in the country. According to the counsel, the religious scholars are hampering Islamization of Pakistan. The counsel stated that the so-called present-day Islamic banking was in fact un-Islamic due to high level of exploitation in these obsolete banking instruments that were being portrayed as Islamic. The present day Islamic banking was based on inefficient and obsolete instruments, being circumscribed to exploit the religious sentiments of innocent Muslims, the counsel stated. The counsel said that all the jurists of Fiqah Jaferia were unanimous in their view that the non-Muslim citizens of an Islamic state were not prohibited from dealing in Riba. He said that the Holy Quran was clear that it was applicable only to the Muslims as the Surah that prohibits dealing in Riba, addresses "Momineen". The counsel stated that Holy Quran permitted adjustment to the changing needs of the time, and referred to Allama Iqbal's essay titled "Reconstruction of Islamic Thought". He said that when Holy Quran enjoined on the Muslims to keep their horses ready, it did not mean that 39

Muslims should not use any other means to protect themselves from the enemy except horses. The present-day horses, he stated, were tanks and F-16 aeroplanes. Financial institutions undertaking leasing business are making greater use of financing lease than of operating leases. Experts in Shariah consider financing leases incompatible with Islamic teaching. Many 'development finance institutions' (DFIs) are mobilizing savings through schemes that give returns, which are hardly distinguishable from interest. Grey areas are developing even in the operation of institutions like National Investment Trust, which were previously thought of having eliminated interest. It seems that there is no agency to oversee the working of the various schemes being employed by DFIs to mobilize savings from the viewpoint of Shariah. The State Bank of Pakistan has laid down the minimum and maximum rates of profit a bank can share in the case of Musharaka or purchase of PTCs or Mudaraba certificates. Experts in Shariah consider such a stipulation incompatible with Islamic teachings. Due attention has not been paid to eliminate un-Islamic features characterizing the operations of several constituents of money and capital market in Pakistan other than banks and DFIs. Nothing has been done so far, for example, to reform the insurance business and the stock exchange operations in the light of Islamic teaching. The Muslim scholars and economists have miserably failed so far to provide a practical, simple, safe and workable substitute for interest. The interest-no doubt it has been prohibited by Islam (and also by Christianity and Judaism) and there are many moral and socio-economic justifications for this prohibition-provides a very simple and practical mechanism to establish and govern the relationship between the lender and the borrower. It is brought to the notice of the common reader that the Quran and the Sunnah have abolished interest but have not recommended any substitute. Modaraba and Musharika have not been referred to anywhere in the Quran or the Hadith. These are actually forms of business organizations whose rules and regulations were laid down by classical Muslim jurists of middle ages. Even those classical jurists did not introduce these concepts of Modaraba and Musharika as substitutes of interest. The scholars of recent period are excessively fanaticized by Modaraba and Musharika and have set them up as Islamic substitutes of interest. But these scholars have not yet been able to modify these concepts to the changed socioeconomic circumstances of modern age and the needs of modern complex economies. Regarding the impact of religious factors on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 6.3: Computation of Mean for Religious Factors

40

Options X f1 f2 f1 X f2X a -2 17 5 -34 -10 f1 = Frequency for Corporates b -1 11 10 -11 -10 f2 = Frequency for Bankers c 0 9 7 0 0 = -0.57 d 1 7 7 7 7 = -0.37 e 2 5 1 10 2 Total 49 30 -28 -11 Following figure shows the summarized results, as shown in figure corporates have rated this factor more critical than bankers but overall results are quite similar. Figure 6.3: Responses to Religious Factors

Corporates

Bankers

Results of survey reveal that bankers and corporate share almost similar views about the religious aspects to bother Islamic banking negatively. Islamic scholars are looked upon as experts in Islamic affairs and their opinions are taken as dictums. Bankers, corporate, and common people are not so expert in these things, so they heavily depend upon scholars. So, they feel that Islamic-scholars should play vital role in shaping up solutions to the modern challenges, especially in economic and financial. Since after the provision of SBP that all banks that intend to do Islamic banking will have to have at least one Shariah advisor, the bankers and corporate realize the importance of religious aspects more than before. They are nonplussed when different schools of thoughts propound thwarting justifications. So, the need of the hour is that Islamic scholars maintain unison amongst themselves as much as possible.

6.4

Social, Ethical and Cultural Values

The Islamic economic system in Pakistan is still underdeveloped and will remain that way for a long time to come.' Long time Pakistani civil servant and World Bank official Parvez Hasan looks at issues of poverty and social 41

justice in Pakistan, arguing that ethics cannot be separated from economics. Pakistan has done a very poor job for poverty alleviation, Mr. Hasan maintains. The Council on Foreign Relations' Isobel Coleman examines the impact of Islamization on women. This is not merely an ideological question of inequality, she argues. Gender discrimination retards development and exacts a large toll on both present and future generations, she says. Experience proves that our financial institutions that have entered into profit sharing agreements with business houses have generally suffered most adversely. Sadly, we have a plethora of companies that maintain false, or inaccurate, books of accounts to ensure that the banks are denied their fair share of profits. Some mechanism will have to be evolved whereby companies will not be able to maintain false accounts and claim that they have suffered losses when in fact they are operating profitably. Thus, is it that it is now the lenders and not the borrowers who require protection? Is it right that the borrowers should receive interest-free loans that they may or may not repay? Should the rich grow richer and the poor poorer? This is far from being in conformity with the spirit of Islam. Justice Munir A. Sheikh, senior member of the Supreme Court Shariah Appellate Bench, says that Pakistani society was not ready for the Islamic systems as the level of honesty in the country was low. He made the observation when the federal government counsel argued that under the Islamic mode of banking, the investors would get nothing if the other partner made a statement that no profit had been earned, Justice Munir A. Sheikh agreed that the level of honesty in our society was low and the apprehension that the investor would get nothing was not misplaced. Federal government counsel, Dr Riazul Hasan Gillani, stated the impression that the Riba judgment was a step towards Islamization was erroneous. The counsel contended that what the Holy Quran and Sunnah prohibited was the element of exploitation (Zulm), and the so-called Islamic modes contained this element in abundance, much more than the conventional banking. In other context, Dr Ishrat said that many of those who have defaulted on payment of their banks' loans have become champion of the Islamic financial system. He warned that such elements have no place in the Islamic financial system, and those who think they would be able to escape the wrath of law by taking shelter under Islamic system are sadly mistaken. Islamic financial system, he declared, is based on ethical values where loan defaulters have no place. It is argued that in modern times when the level of individual morals is deplorable, what is the guarantee that the businesses financed by banks will show the correct level of profits?

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Moreover, certain institutional arrangements will need to be made to protect the banks and to facilitate their task. As a matter of fact, it is an irony of circumstances that in the Islamic state of Pakistan very little has been borrowed from the Islamic concept of economics. Instead of enacting new legislation based on Islamic spirit in various field of activities for remodeling the society, the National Islamic Council (NIC) has also not lived up to its expectations in suggesting changes in accordance with Islamic standpoint. The majority of Muslims in a state/country does not make it an Islamic state in the real sense. Perhaps the people as well as rulers of Pakistan have not cared to study in depth the Islamic economic concept, given by the holy Prophet (PBUH) and the pious caliphs. We have only succeeded in making cosmetic changes here and there and that too in very few sectors of economy. The only success achieved by us so far is the change of name of interest to profit, dividend, mark-up, service charges, commission, fee, and use of Islamic terminology like Modarabah, Shirkah, profit-loss sharing, etc. Banks are paying interest to their depositors and charging interest from their borrowers under various names. Given the moral standards and business ethics prevailing in the society, no person or institution is prepared to take risk and provide finance on profit-loss basis. It is, therefore, rightly said that efforts made in the Islamic lands so far tantamount to protecting the institution of interest rather than abolishing it. The causes for this historic failure of the Muslim world in eliminating Riba from economy are many. Firstly, the socio-economic changes brought in Islamic lands by political domination of the West and industrial revolutions have weakened religious and moral values of the people. The leaders, who in fact have mostly their own problem of legitimacy, have failed to offer themselves as role models before the citizens. Merely lip service is paid to Islamic values such as honesty, truthfulness, trustworthiness, fair dealing, fellow-feeling, justice and equity, fraternity and brotherhood, moderation in consumption and standard of living, austerity and simplicity, etc. Strict observance of these values is, however, a condition precedent for Islamization of economy. But the same is unfortunately conspicuous by its absence in the Islamic society of today. People are living beyond their means. Everybody is after maximizing his material comforts that can only be achieved through money. So earning of wealth through fair or foul means has become religion of today. Consequently, no moral values and code of business ethics exist these days. Nobody trusts any other person at least in money matters and business dealings. In business partnerships, brother cheats brother, son deceives father, friend commits fraud with a friend. Therefore, every person and institution is, justifiably, reluctant to participate on profit-loss sharing basis. And to eliminate interest, profit-loss basis is

43

the only way for providing capital to business and other economic development projects. Regarding the impact of social and cultural factors on Islamic banking, questions were asked from 50 corporates and 30 bankers. The results are shown in the table given below. Table 6.4: Computation of Mean for Social and Cultural Factors Options a b c d e Total X -2 -1 0 1 2 f1 5 9 21 14 1 50 f2 2 8 12 6 1 30 f1 X -10 -9 0 14 2 -3 f2X -4 -8 0 6 2 -4 f1 = Frequency for Corporates f2 = Frequency for Bankers = -0.06 = -0.14

Following figure shows the summarized results, as shown in figure both groups have shown little concern for this factor. Figure 6.4: Responses to Social and Cultural Factors

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Corporates

Bankers

Results reveal that bankers and corporate have almost same perception about ethical, moral, social, and other similar aspects of society. They have taken these factors just as normal, like in any other industry. They view it in broader perspective, not just for banking and financing one. They say that these factors are very important but should be adopted for the entire society. All the businesses and transactions should abide by the high values and norms, and banking and financial institutions should not stigmatized to be lacking it because it is the problem for the entire economy and all the society is affected by them. So, in general, a neutral impression prevails for banking industry by including it in broader perspective of the whole society, all of its people, its government, its businesses, etc.

6.5

Concluding Remarks

While concluding this chapter, let us review the impact of all the factors we discussed in it, and try to crystallize a broader and better picture. The most important factor, among all the three chapters we discussed, is the lack of awareness. As the results of survey tell, it is the most quoted reason for hampered growth of Islamic financing modes. This factor has surged as more related to promotional campaign, as sited by our interviewees. For bankers, it is reshaped as training and workshops, and for corporate and general publics, it is about media, including Internet, electronic, and print. The second most reason crystallized is the role of government. Government is supposed to be the most authentic agent, and every organization and individuals expect it to spearhead the affairs like an astute patron. Our government realizes its importance and commendable efforts are underway. Next come, the religious sects. They have to bridge the Islamic views with economic affairs, to help in keeping the harmony in overall economic activities, and educate the people about these things.

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Several other aspects also affect the implementation of Islamic financing system, but they are not peculiar to banking industry only, instead, they impact in a broader perspective by affecting the society and the economic system as a whole. These factors are social, societal, ethical, psychological, and behavioral to name a few. But their impact can never be understated, although it is done.

Conclusion

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After canvassing the responses, I found that not all the factors mentioned in hypothesis (Section 2.3) impact significantly on the implementation of Islamic banking system in Pakistan. Lack of awareness is found to be the most important agent. Low Returns on Deposits and Investments, is found to be less significant when compared to other factors, People do not see returns a hurdle if there investments are dealt in Islamic way. Differences about Islamic banking exist but they are less critical when considering the success of Islamic banking in other Islamic countries. Also, this is more or less related to awareness. Educating masses and classes about the true spirit of Islamic banking will improve the situation. Shortage of experts and government support were found out to be the most critical factors after awareness. To conclude, the hypothesis developed for this research study stays partially accepted.

Recommendations

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After the evaluation of the results of this research, I find that several factors are very crucial to the successful implementation of Islamic banking system in Pakistan. By and large, awareness is the biggest problem obstructing the Islamic banking system in Pakistan. The leading economists endorse this claim. This is a very serious issue. Responsibility is mainly vested with banks, government, and Islamic scholars. It is suggested that banks arrange workshops, seminars, and training courses for their staff about Islamic banking. Islamic scholars and government should focus the public by educating them via literature, papers, books, magazines, TV, and Internet. This will help in better understanding of Islamic financing, and in eradication of distorted views that prevail in the society. Secondly, government should play a more effective role. It should patronize this by taking initiatives in all necessary directions, by issuing its own versions of Islamic instruments, by leveraging the potential Islamic banks, and by developing Confidence Building Measures (CBMs) among all the major players of the game. Islamic scholars are requested to develop mutual consensus amongst them, and to persuade people towards Islam and its economic system. They should bridge the people, Islamic views, and economists. It shall engender harmony, and facilitate the implementation of Islamic banking. People also need to be educated in terms of moral, ethical, social, and societal values. These factors are significant in broader perspective and will create a peaceful and genteel society by and large. Some other factors, which I find very important in the long run, are lack of standards for Accounting, Audit, Taxation, and transactions with foreign financial institutions. Adequate efforts need to be paid in order to bolster the very foundations of this industry.

Appendix A
Name:

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Designation: Organization:

Questionnaire for Corporate Customers

I, the students of BBA, Last Semester, Pakistan Air Force - Karachi Institute Of Economics & Technology, is conducting research on the Implementation of Islamic Banking System in Pakistan. In this connection, I have developed the following questionnaire. You are kindly requested to help us by filling out this questionnaire. Thank you. To what extent do you think that following factors affect on the implementation of Islamic Banking System in Pakistan? Q.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Factors Lack of Awareness Lack of Banks and Branches Lack of Security on Deposits and Investments Lack of Research and Development Social and Cultural Factors Religious Factors Low Rate of Return on Deposits and Investments Shortage of Experts in Islamic Banking Customer Services Taxation Policies Non-Availability of Products Offered by Other Banks Non-Availability of Shariah Compliant Government Securities and Money Market Concentration of Islamic Banking in Urban Areas Rather than Rural Areas Difficulties in International Dealings Absence of Accounting & Auditing Standards Government Support Very High High Aver -age Low Very Low

Comments:

Appendix B

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Name: Designation: Organization:

Questionnaire for Bankers

I, the students of BBA, Last Semester, Pakistan Air Force - Karachi Institute Of Economics & Technology, is conducting research on the Implementation of Islamic Banking System in Pakistan. In this connection, I have developed the following questionnaire. You are kindly requested to help us by filling out this questionnaire. Thank you. To what extent do you think that following factors affect on the implementation of Islamic Banking System in Pakistan? Q.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Factors Lack of Awareness Lack of Banks and Branches Lack of Security on Deposits and Investments Lack of Research and Development Social and Cultural Factors Religious Factors Low Rate of Return on Deposits and Investments Shortage of Experts in Islamic Banking Customer Services Taxation Policies Non-Availability of Products Offered by Other Banks Non-Availability of Shariah Compliant Government Securities and Money Market Concentration of Islamic Banking in Urban Areas Rather than Rural Areas Difficulties in International Dealings Absence of Accounting and Auditing Standards Government Support Very High High Aver -age Low Very Low

Comments:

Appendix C
50

Table A-1: Frequency Distribution Table for Corporate Customers Q.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Very High 31 10 8 10 5 17 6 15 14 7 7 10 3 20 6 14 High 12 21 13 19 9 11 16 14 12 10 18 15 19 7 10 20 Average 6 14 13 11 21 9 15 12 18 18 16 15 12 5 15 10 Low 0 3 11 8 14 7 6 4 3 8 6 3 6 12 11 4 Very Low 1 2 5 2 1 5 6 4 3 6 3 5 10 6 8 2 Total 50 50 50 50 50 49 49 49 50 49 50 48 50 50 50 50

Appendix D
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Table A-2: Frequency Distribution Table for Bankers Q.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Very High 12 6 2 6 2 5 6 9 4 1 6 7 3 9 2 8 High 12 13 6 8 8 10 6 13 5 4 11 10 7 9 10 12 Average 6 4 12 6 12 7 11 6 12 10 9 9 12 4 12 5 Low 0 6 7 7 6 7 4 2 7 12 4 3 6 4 5 5 Very Low 0 1 3 3 1 1 3 0 2 3 0 1 2 4 1 0 Total 30 30 30 30 30 29 30 30 30 30 30 30 30 30 30 30

Appendix E
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Table A-3: Means Calculated for Corporates and Bankers

Q.No

Factors Lack of Awareness Lack of Banks and Branches Lack of Security on Deposits and Investments Lack of Research and Development Social and Cultural Factors Religious Factors Low Rate of Return on Deposits and Investments Shortage of Experts in Islamic Banking Customer Services Taxation Policies Non-Availability of Products Offered by Other Banks Non-Availability of Shariah Compliant Government Securities & Money Market Concentration of Islamic Banking in Urban Areas Rather than Rural Areas Difficulties in International Dealings Absence of Accounting & Auditing Standards Government Support

Corporates

Bankers

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

-1.44 -0.68 -0.16 -0.54 -0.06 -0.57 -0.20 -0.65 -0.62 -0.08 -0.40 -0.46 -0.14 -0.46 0.10 -0.80

-1.20 -0.57 0.10 -0.13 -0.14 -0.37 -0.27 -0.97 -0.07 0.37 -0.63 -0.63 -0.10 -0.50 -0.23 -0.77

Bibliography
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Following are some of the links that helped in the materialization of this research report. All the references, quotations, and arguments propounded in this report can be validated from these links. http://www.axcessnews.com/business_083004b.shtml http://www.sbp.org.pk/publications/islamic/book1/prelude.pdf http://www.dawn.com http://www.geocities.com/deenibooks/b16/b16_18.htm http://jang.com.pk http://www.international.ucla.edu/article.asp?parentid=15056 http://www.meezanbank.com/newsdetails.asp?nid=36 http://www.erf.org.eg http://www.pakistaneconomist.com/page/issue22/f&m2.htm http://www.garp.com http://interactive.wsj.com http://www.international.ucla.edu/article.asp?parentid=15056 http://www.pakistaneconomist.com http://islamic-finance.net/islamic-ethics/article-12/article12-7.html http://www.dailytimes.com.pk

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