Islamic Banking

 History of Islamic Banking in Pakistan:

Pakistan got independence in 1947 and the Quaid-e-Azam Muhammad Ali Jinnah, in his speech on the occasion of inauguration of State Bank of Pakistan on 1st July 1948, aspired to build the economic and financial system of country in line with injunctions of Islam. He said,

  “I shall watch with keenness the work of your Research Organization in evolving banking practices compatible with Islamic ideas of social and economic life…. The adoption of Western economic theory and practice will not help us in achieving our goal of creating a happy and contented people. We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice. We will thereby be fulfilling our mission as Muslims and giving to humanity the message of peace which alone can save and secure the welfare, happiness and prosperity of mankind. ”

Initially, the research on Islamic finance was undertaken by the eminent Shariah scholars both from abroad and Pakistan. An Islamic Economic Division was created in the Research Department of SBP in 1950s and was entrusted to undertake research on Islamic economic system and it also as a secretariat to Council of Islamic Ideology (CII). Efforts for economy wide elimination of Riba started in late 1970s and several noteworthy and practical steps were taken in 1980s. Numerous laws were amended and new laws were enacted to facilitate Islamization of economy during this period in which State Bank played a major role. In a technical sense it was the most advanced model compared to any other model being practiced anywhere in the world at that time.

However, the financing procedure based on ‘mark-up’ practiced by banks was declared un-Islamic by the Federal Shariat Court (FSC) in November 1991 but on appeal to the Shariat Appellate Bench of Supreme Court the 1991 FSC ruling was suspended till orders of the court. The Supreme Court’s Shariat Appellate Bench delivered its judgment in December 1999 with the directions that laws involving interest would cease to have effect by June 30, 2001 and later the date was extended to June 30, 2002. However, on a review petition filed by a bank, Shariat Bench of the Supreme Court set aside the previous verdicts on Riba in June 2002 and remanded back the case to Federal Shariat Court for hearing afresh.

In the mean time, the government decided to promote Islamic banking in a gradual manner as a parallel and compatible system. The initiative to re-introduce Islamic Banking in Pakistan was launched in early 2000 to shift to interest free economy through a market driven and flexible approach, in a phased manner without causing any disruptions. Furthermore it aims at building a broad based financial system in the country to enable all segments of the population to access financial services. In this context SBP adopted a three pronged strategy for promotion of Islamic Banking i.e.

• Permission to establish new full fledged Islamic banks in the private sector,

• Permission to the conventional banks to set up Islamic banking subsidiaries, and

• Permission to the existing conventional banks to open Stand-alone Islamic banking branches.

A comprehensive regulatory framework including Shariah Governance framework has been introduced for the development of Islamic banking industry on sound footings. SBP has also been collaborating with local and international financial regulators and infrastructure development institutions to promote standardization and harmonization in regulatory framework in line with international best practices, to facilitate the development of Islamic financial services industry locally and globally.

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