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Papers > Foreign > FAYSAL BANK S ROLE IN ISLAMIC BANKING IN PAKISTAN HIGH STANDARDS YET NEW CHALLENGES
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FAYSAL BANK S ROLE IN ISLAMIC BANKING IN PAKISTAN HIGH STANDARDS YET NEW CHALLENGES |
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FAYSAL BANK’S ROLE IN ISLAMIC BANKING IN PAKISTAN –-- HIGH STANDARDS YET NEW CHALLENGES. FINAL CASE STUDY AND RESEARCH REPORT As the senior executives of Faysal Bank met in Karachi in late 2003 to discuss the bank’s future strategy, they were keenly aware of the major macro-level changes that the Pakistani market had undergone in recent times which they were determined to capitalize on in order to grow generate significant growth for the bank. Being the pioneer of Islamic banking in Pakistan starting from as far back as the year 1987 and a 2003 turnover of Rs. 306,702,000 and 26 branches in all 4 provinces of Pakistan, Faysal bank Limited had become Pakistan’s largest Islamic bank providing the widest range of Islamic products to its customers. However, as the bank approached the next year, its managers faced a number of major challenges…. Changes in the banking industry were causing some to question Faysal Banks historical product line policy. Others wondered if the bank was even able to maintain its leadership position in the Islamic banking arena or that should it start offering non Islamic financial products also to target the mainstream consumers. History of Islamic Banking Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at a low ebb, in the late 19th century. ... The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system. ... Borrowing from the banks and depositing their savings with the bank were strictly avoided in order to keep away from dealing in interest which is prohibited by religion. ... Local banks were established on the same lines as the interest-based foreign banks for want of another system and they began to expand within the country bringing the banking system to more local people. As countries became independent the need to engage in banking activities became unavoidable and urgent. ... The story of interest-free or Islamic banking begins here. ... Historical Development It seems that the history of interest-free banking could be divided into two parts. ... The last decade has seen a marked decline in the establishment of new Islamic banks and the established banks seem to have failed to live up to the expectations. Interest Fee Banking As an Idea In the next two decades interest-free banking attracted more attention, partly because of the political interest it created in Pakistan and partly because of the emergence of young Muslim economists. ... Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, First International Conference on Islamic Economics in Mecca in 1976, International Economic Conference in London in 1977 were the result of such involvement. ... The Islamic Development Bank, an inter-governmental bank established in 1975, was born of this process. The coming into being of interest-fee banking In Pakistan, effective 1 January 1981 all domestic commercial banks were permitted to accept deposits on the basis of profit-and-loss sharing (PLS). New steps were introduced on 1 January 1985 to formally transform the banking system over the next six months to one based on no interest. ... These differences are due to several reasons including the laws of the country, objectives of the different banks, individual bank’s circumstances and experiences, the need to interact with other interest-based banks, etc. Deposit Accounts All the Islamic banks have three kinds of deposit accounts: current, savings and investment. ... In some banks, the depositors allow the banks to use their money but they obtain a guarantee of getting the full amount back from the bank. ... As such lower profit rates are expected and that too only on a portion of the average minimum balance on the ground that a high level of reserves needs to be kept at all times to meet withdrawal demands. Investment Accounts: Investment deposits are accepted for a fixed or unlimited period of time and the investors agree in advance to share the profit (or loss) in a given proportion with the bank. ... Shortcomings in current practices: There seems to be no problems as far as banking services are concerned. Islamic banks are able to provide nearly all the services that are available in the conventional banks. ... However some solutions have been found for this problem -- mainly by having excess liquidity with the foreign bank. ... ISLAMIC MODES OF FINANCING 1. ... The agreement is made between the Bank and a Customer, whereby Bank purchases a commodity and sells the same to Customer on a deferred payment basis. ... Bank sells the commodity/asset to the Customer. ... Bank and the client sign a Morabaha Agreement. ... Bank appoints an agent under an Agency Agreement (who could be the client) to purchase the asset/commodity on behalf of the bank. ... The Agent purchases the commodity under a Purchase Order from third party after obtaining disbursement from the bank through Receipt and submits a Declaration to this effect. ... Bank sells the commodity/asset to the Client on a cost plus profit basis and the parties agree on a Purchase Price and Due date. ... Bank and Client sign a Morabaha Agreement. ... In terms of the Morabaha Agreement, the Bank appoints the Client as its Agent through an Agency Agreement to import commodities from time to time. ... Client submits an application to establish letter of credit and the Bank opens it. ... Upon negotiation, the Bank creates an advance in the name of the Client, value payment of funds to the beneficiary. ... Upon receipt of documents and arrival of goods, the Bank and the Client enter into a Morabaha through a declaration submitted by the client. ... In case of deferred payment, the Client signs a promissory note for the purchase price agreed and the Bank releases the documents. ... If assets subject to lease are to be freshly acquired, Bank may appoint an agent (could be the client) to do so on its behalf. If Client has already acquired the equipment, Bank will purchase it from Client and lease it back. i) Bank and Client sign a Lease Finance Agreement whereby Client agrees to take on lease from the Bank for specified assets for an agreed tenor. ii) Bank appoints an Agent for acquisition of assets, if not already in possession of Client. iii) Bank intimates Client of acquisition of assets and delivers to place specified by Client. ... v) Client pays a monthly, or quarterly rental to the Bank for the use of the assets and by virtue of the agreement, becomes owner of asset only after paying a nominal lease end value. ... Musharakah: Under Islamic jurisprudence, Musharakah means a joint enterprise formed for conducting some business in which all partners contribute financially and share the profit as per pre agreed upon ratios, while the loss is shared according to the ratios of financial contribution of each partner. ... The risk of loss inherent in this mode of financing, ensures that the Bank fully satisfy itself as to the profitability and feasibility of the business venture as well as to the integrity of its Musharakah partners. ... AN OVERVIEW ON THE BANKING INDUSTRY IN PAKISTAN The banking industry turned in an exceptional performance for the second successive year in FY03, leveraging on a spectacular growth in deposits, aggressive marketing and investments, and increased efficiency, to counteract the impact of a sharp decline in interest rates. ... In addition, the industry took important strides in improving governance, the furtherance of Islamic banking, and towards the privatization of government owned-banks. ... 1: Changes in Selected Banking Sector Indicators Billion Rupees 2001 2002 2003 Deposit mobilization 112. ... BANKING SECTOR DEVELOPMENTS DURING 2003. ... 1 Deposits of the Banking Sector Despite offering negative real rate of returns on deposits, the banking sector recorded double-digit deposit growth for third year in a row, primarily on the back of a continuing improvement in the country’s external account. ... In fact, the bank-wise distribution of workers’ remittances showed that around 80 percent of remittances were remitted through 10 banks, which also accounted for 70 percent of the aggregate deposit growth of the banking sector. ... Interestingly, it appears that increasing e-banking activities, use of ATM in particular, may have significantly affected the cash preferences of the public, as the cash holding in the economy has declined during FY03 This is also evident from the fact that the rise in currency in circulation was substantially lower despite a substantial growth in reserve money. |
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Title: FAYSAL BANK S ROLE IN ISLAMIC BANKING IN PAKISTAN HIGH STANDARDS YET NEW CHALLENGES
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