Islam-ization of the banking system in Pakistan was not a onetime process. It was done in phases spread over an elongated period of time. The first measure was taken initiated in the Zia regime to introduce interest free banking system in 1979 when Pakistan was included among the three countries in the world that had been trying to implement interest free banking.
The Federal Shariat Court (FSC) in 1991 criticized the ‘mark-up’ technique with or without ‘buy-back arrangement’, the basis of all banks in Pakistan since 1985. It was declared un-Islamic and appeals were made in the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan. The SAB gave its verdict on December 23, 1999 rejecting the appeals and declaring that laws involving interest would cease finally by June 30, 2001. In the judgment, the Court ultimately concluded that the present financial system needs radical changes to be in conformity with the Shariah.
In lieu of that The Commission for Transformation of Financial System (CTFS) and two task forces were constituted in 2000 under the Chairmanship of Mr. I.A. Hanfi, a former Governor State Bank of Pakistan for transformation of the financial system and implementation of the process of the transformation.
Under the detailed criteria for establishment of full-fledged Islamic commercial banks in the private sector issued by SBP in January 2002, Al Meezan Investment Bank received the first Islamic commercial banking license and by June, 2002 it had a network of 5 branches all over the country, three in Karachi, one in Islamabad and one in Lahore. Currently, there are 1200 branches of different banks working in compliance with the shariah across Pakistan.
Started as a minor project today Islamic Banking has grown to the competitive levels of conventional banks. Running in parallel to the conventional banking system it has made a major contribution in the GDPs of Pakistan and all the countries where it is being carried out.
Islamic banking has the longest history in Egypt and Pakistan. Yet these countries still lack the ability to avail the full potential of Islamic banks and the benefits that could be achieved from it in relation to the country’s GDP. Iran and Pakistan, almost started the concept of Islamic banking at the same time, where Iran has been highly successful in setting up a pure shariah compliant banking with a full fledge support from Islamic banking structure to the country’s economy Pakistan on the other hand has been unable to provide the required support needed to set up the true shariah compliant banking structure.
The government runs in competition to the banks to fetch money from the general public on much higher rates then the Islamic banks could offer that leads to reduced money flow from depositors to the bank, which is substantially needed to support the growth and establishment of a strong shariah complaint banking system in the country. Similarly, the absence of any formal legal and regulatory provision for Islamic banking and modes of Islamic financing, created significant problems. Despite of having over three decades of Islamic banking experience, the laws governing Islamic banking of Pakistan remain unsatisfactory. The most recent version of banking Laws has no provision for Islamic finance. Most of the articles are unhelpful, like article 40 governing interest rates.
Moreover, the presence of central bank itself being in compliance with the shariah law as in Iran and Saudi Arab can better regularize the banking functions of Islamic banks. Similarly, in Malaysia separate bodies has been created to formalize and streamline the process of Islamic banks to the shariah principles, where else, Egypt and Pakistan has allowed the central bank itself working on conventional banking procedures to regularize the processes of the Islamic banks as well. Thus, Islamic banks in Pakistan despite of having a long history in this country had not been availed to its full potential as it is being done in countries like Malaysia, Iran and Saudi Arab.
Therefore, it is of immense need that the real cause of these problems be indentified so that Islamic banking can perform substantially well while working in the same environment and obliging to the same rules, laws and regulations.