Islamic banks weather global financial turmoil
LAHORE: Islamic banks have withstood the recent turmoil in the global banking industry triggered by the subprime mortgage crisis because their rules do not allow dealings in products like derivatives, options or papers that caused the meltdown.
While financial institutions in the developed world lined up for huge state assistance, the few Islamic banking institutions in these countries like the European Islamic Bank in the United Kingdom emerged unscathed from the crisis.
“The recent financial crisis exposed the flaws in the western banking system and proved that Islamic banks are safe which do not offer any risky product in line with the injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He said the French president had appreciated the modes of financing offered by Islamic banks and expressed willingness to allow the setting up of these banks in France.
Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the Islamic financial laws. “These banks do give profit to their depositors but it is based on the true principle of profit and loss. This is the reason that profits on savings in Islamic banks are not pre-determined.” However, “Islamic banks generally distribute more profit to their depositors than conventional banks.”
An Islamic Shariah expert said majority of the credit provided by Islamic banks was under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic bank purchases an item, for instance cotton, on behalf of the client (in fact the client selects the quality and quantity of cotton and the bank makes the payment) and the client agrees to the date when the amount will be returned. The Islamic bank charges certain profit on the purchased cotton that the client has to pay along with the principal amount.”
When reminded that conventional banks almost did the same and instead of profit they called it mark-up, the Shariah expert said “the difference is that even if the client fails to make payment on time the bank does not charge any additional amount while conventional banks levy punitive interest and net payable amount increases with time.”
Shafqat said normally Islamic banks did not penalise the debtor if the payment was not unduly delayed. However, he pointed out that in view of the prevailing culture in Pakistan some people took undue advantage of that and deliberately delayed the payment.
He said banks were then forced to impose a penalty on unduly late payments. However, the penalty was not added to the income of the bank and was set aside by Shariah experts to be given as charity.
Islamic banking in Pakistan registered the most robust growth last fiscal year at a time when the global financial crisis hit the peak. The number of Islamic bank branches doubled during the period to 524. There are six dedicated Islamic banks in the country while 13 conventional banks have opened Islamic banking windows which operate on the same laws that govern dedicated Islamic banks.
The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9 per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001 to Rs206 billion in 2009.
LAHORE: Islamic banks have withstood the recent turmoil in the global banking industry triggered by the subprime mortgage crisis because their rules do not allow dealings in products like derivatives, options or papers that caused the meltdown.
While financial institutions in the developed world lined up for huge state assistance, the few Islamic banking institutions in these countries like the European Islamic Bank in the United Kingdom emerged unscathed from the crisis.
“The recent financial crisis exposed the flaws in the western banking system and proved that Islamic banks are safe which do not offer any risky product in line with the injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He said the French president had appreciated the modes of financing offered by Islamic banks and expressed willingness to allow the setting up of these banks in France.
Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the Islamic financial laws. “These banks do give profit to their depositors but it is based on the true principle of profit and loss. This is the reason that profits on savings in Islamic banks are not pre-determined.” However, “Islamic banks generally distribute more profit to their depositors than conventional banks.”
An Islamic Shariah expert said majority of the credit provided by Islamic banks was under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic bank purchases an item, for instance cotton, on behalf of the client (in fact the client selects the quality and quantity of cotton and the bank makes the payment) and the client agrees to the date when the amount will be returned. The Islamic bank charges certain profit on the purchased cotton that the client has to pay along with the principal amount.”
When reminded that conventional banks almost did the same and instead of profit they called it mark-up, the Shariah expert said “the difference is that even if the client fails to make payment on time the bank does not charge any additional amount while conventional banks levy punitive interest and net payable amount increases with time.”
Shafqat said normally Islamic banks did not penalise the debtor if the payment was not unduly delayed. However, he pointed out that in view of the prevailing culture in Pakistan some people took undue advantage of that and deliberately delayed the payment.
He said banks were then forced to impose a penalty on unduly late payments. However, the penalty was not added to the income of the bank and was set aside by Shariah experts to be given as charity.
Islamic banking in Pakistan registered the most robust growth last fiscal year at a time when the global financial crisis hit the peak. The number of Islamic bank branches doubled during the period to 524. There are six dedicated Islamic banks in the country while 13 conventional banks have opened Islamic banking windows which operate on the same laws that govern dedicated Islamic banks.
The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9 per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001 to Rs206 billion in 2009.
LAHORE: Islamic banks have withstood the recent turmoil in the global banking industry triggered by the subprime mortgage crisis because their rules do not allow dealings in products like derivatives, options or papers that caused the meltdown.
While financial institutions in the developed world lined up for huge state assistance, the few Islamic banking institutions in these countries like the European Islamic Bank in the United Kingdom emerged unscathed from the crisis.
“The recent financial crisis exposed the flaws in the western banking system and proved that Islamic banks are safe which do not offer any risky product in line with the injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He said the French president had appreciated the modes of financing offered by Islamic banks and expressed willingness to allow the setting up of these banks in France.
Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the Islamic financial laws. “These banks do give profit to their depositors but it is based on the true principle of profit and loss. This is the reason that profits on savings in Islamic banks are not pre-determined.” However, “Islamic banks generally distribute more profit to their depositors than conventional banks.”
An Islamic Shariah expert said majority of the credit provided by Islamic banks was under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic bank purchases an item, for instance cotton, on behalf of the client (in fact the client selects the quality and quantity of cotton and the bank makes the payment) and the client agrees to the date when the amount will be returned. The Islamic bank charges certain profit on the purchased cotton that the client has to pay along with the principal amount.”
When reminded that conventional banks almost did the same and instead of profit they called it mark-up, the Shariah expert said “the difference is that even if the client fails to make payment on time the bank does not charge any additional amount while conventional banks levy punitive interest and net payable amount increases with time.”
Shafqat said normally Islamic banks did not penalise the debtor if the payment was not unduly delayed. However, he pointed out that in view of the prevailing culture in Pakistan some people took undue advantage of that and deliberately delayed the payment.
He said banks were then forced to impose a penalty on unduly late payments. However, the penalty was not added to the income of the bank and was set aside by Shariah experts to be given as charity.
Islamic banking in Pakistan registered the most robust growth last fiscal year at a time when the global financial crisis hit the peak. The number of Islamic bank branches doubled during the period to 524. There are six dedicated Islamic banks in the country while 13 conventional banks have opened Islamic banking windows which operate on the same laws that govern dedicated Islamic banks.
The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9 per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001 to Rs206 billion in 2009.
