Islamic Banking Critical Review

TERM REPORT

TOPIC 5- Critical Review of the State of Islamic Banking in Pakistan? How it is effecting the economy?

SUBMITTED TO:

SIR MUHAMMAD ALI JANGDA

SUBMITTED BY:

Aroosa Amin 1318145

Maheen Khoso 1411223

Shafaf A.Kayani 1411298

Syeda Shifa Faitma Naqvi 1411240

INTRODUCTION:

The term “Islamic banking” refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law. Investment in businesses that provide goods or services considered contrary to Islamic

The market for Islamic banking has been experiencing double digit growth for several years. According to Ernst & Young, although Islamic Banking still makes up only a fraction of the banking assets of Muslims, it has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013, and is projected to grow by an average of 19.7% a year to 2018.

Some of the Islamic banking finance products are:

• Ijara: ownership of the right to the benefit of using an asset for a period in return for a consideration.

• Mudarabah: An Islamic contract in which one party supplies the money and the other provides management expertise to undertake a specific trade.

• Musharakah: A joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans

Pakistan, being the Islamic country with Muslim majority encourages and promotes Islamic banking as it’s according to the Sharia law. The rules governing Islamic Finance are derived from the Sharia’s. The Sharia is a framework of Islamic Jurisprudence derived from the primary

Therefore, modern banking institutions, which gradually became essential to the commercial activity of the entire world, were totally antithetical to the guidance revealed to humankind through the Qur'an and the Sunnah of the Prophet Muhammad (PBUH).

Many Muslims, believing in the prohibition of interest, remained aloof from this modern system of banking, and those who did enter the field restricted themselves to the routine work necessary for their employment. This was done because they had reservations about interest-based transactions and also because, owing to their political decline, they were unable to control the wheel of international commercial transactions.

RULES OF ISLAMIC FINANCE:

The rules of Islamic finance adhere to the broad principles of avoiding Maysir and Qimar which are gambling and speculation along with Gharar which is uncertainty coupled with exploitation and unfairness. This closes the door to the concept of interest and precludes the use of conventional debt-based