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Executive Summary

The Islamic banking was introduced in 1960s by an Egyptian bank 'Myt Ghamr'. In early days Islamic banking faced many serious challenges ranging from general suspicions about their viability to a common mistrust about their intentions. But nowadays Islamic banking is growing steadily to a remarkable level stage. More than 70 countries use Islamic banking. In late seventies Pakistan started Islamic banking. Pakistan was among the three countries in the world that has been trying to implement Islamic banking at national level. MCB Bank limited was incorporated on 9 July 1947. The bank has journeyed remarkable tenure of more than half a century. Islamic Banking Division was formed with effect from 1st January 2003, which in a short span of time, has developed sufficient expertise, necessary infrastructure, information technology, and manpower to run Islamic Banking Operations and offer Islamic Banking Products. Their products are: Namat, Hifazat, Salamat, Maeeshat, Rafaqat, Aanat. Islamic banking is for all individuals regardless of their religious beliefs. Conventional banks offering Islamic banking windows have the opportunity to expand into new markets by offering Islamic banking solutions.In Islamic banking there is no interest.They generates their profits through investments and services to their customers.Islamic banks accept the deposits either on profit and loss sharing basis or on Qard basis. Shariaah compliance is hence a serious matter for an Islamic bank. Islamic banks have over 60 % excess liquid funds which cannot be properly utilized due to non-availability of Shariaah Compliant products and instruments. Islamic banking and financial contracts do not exist in many countries. In Quran it is said: Those who consume interest shall not rise, except as he rises whom Satan by his touch prostrates [i.e. one who is misled]; Allah [God] has permitted trading but forbidden interest.; Whosoever receives a warning from his/her Lord, he shall have his past gains, and his affair is committed to Allah; but whosoever reverts (to devouring interest) those, they are the inhabitants of the fire, therein dwelling forever.

HISTORY OF ISLAMIC BANKING


INTRODUCTION AND HISTORY OF ISLAMIC BANKING:
The Islamic banking was introduced in 1960s by an Egyptian bank 'Myt Ghamr'. The earliest Islamic banks faced serious challenges ranging from general suspicions about their viability to a common mistrust about their intentions. Since then, the Islamic banks have been steadily

growing to a remarkable level at this stage. During the last decades, financial instruments used by Islamic banks have developed significantly, both on assets and liability sides. Many instruments have been developed to mobilize financial surpluses. A number of Islamic banks have launched investment instruments in the form of certificates with short-term maturities or have established funds earmarked for certain investments. Many banks, both in the Muslim world and outside, are offering Islamic financial products and take active part in capital market transactions. Some conventional financial institutions of international standing have established Islamic banking subsidiaries and windows. Liquid instruments are emerging through Securitization by way of Islamic finance like equity/mutual funds. There is also Dow Jones Islamic Market Index. Accordingly, at present, there are around 70 countries in which the Islamic financial institutions are operating in full-fledged or in part. Recently six countries including Bahrain, Saudi Arabia, Malaysia, Indonesia, Brunei and Sudan have signed a memorandum of understanding (MOU) for establishment of the first International Islamic Financial Market (IIFM) in co-operation of Islamic Development Bank (IDB). IIFM is designed to provide a co-operative framework among around 200 Islamic banks and financial institutions all over the world.

ORIGIN OF ISLAMIC BANKING IN PAKISTAN


The process of islamization the financial system of Pakistan is coincided with the globally resurgence of Islamic banking in the late seventies. Pakistan was among the three countries in the world that has been trying to implement Islamic banking at national level. This process started with presidential order to the local Council of Islamic Ideology (CII) on September 29, 1977. The council was asked to prepare the blueprint of interest free economic system. The council included panelists of bankers and economists who submitted their report in February 1980, highlighting various ways and sufficient details for eliminating the interest from the financial system of Pakistan. This report was a landmark in the efforts for Islamizing the banking system in Pakistan. From 1st July, 1985 all the commercial banking operations were made 'interest free'. Recently, State Bank of Pakistan has allowed the formation of full-fledged Islamic banks in the private sector. The existing scheduled commercial banks were also authorized to open subsidiaries for Islamic banking operations. Such subsidiaries shall be considered as the Islamic. Banking Subsidiaries and shall have a separate body of governance. Islamic financial institutions are diverse and becoming increasingly innovative.

MODES OF ISLAMIC BANKING


Shariah Compliant Modes of Banking and Finance: Islamic Banking Institutions in Pakistan may offer the following Shariah-compliant modes of banking and finance and products based on these modes. They can be broadly categorized into three areas: Participatory (investment), Trading and Debt Based (lending). A. Participatory Modes:

i) Mudaraba ii) Musharakah iii) Diminishing Musharakah iv) Equity Participation in the form of shares in a corporate entity B. Trading Modes: v) Ijarah or Ijarah wa Iqtina vi) Murabaha vii) Musawamah viii) Salam ix) Istisna x) Tawarruq may also be used in exceptional cases requiring specific prior approval of Islamic Banking Department of SBP. C. Debt Based Modes: xi) Qard D. Other Modes: xii) Wakalah

xiii) Assignment of Debt

xiv) Kafalah

Some basic modes or financing and banking are defined as follow. MUDARABAH: A form of partnership where one partner provides the funds for investing and the other partner provides expertise and management to run the commercial enterprise. The investment comes from the first partner called "Rabb-ul-Maal" while the management and work is an exclusive responsibility of the other called "Mudarib". The profits generated are shared between the two parties on a pre-agreed basis, while loss is borne only by the "Rabb-ul-Maal". There are 2 types of Mudaraba namely.1) Al Mudaraba Al Muqayyadah(restricted Mudaraba): Rabb-ul-Maal may specify a particular business or a particular place for the mudarib.2)Al Mudaraba Al Mutlaqah (unrestricted Mudarabah): Rabb-ul-Maal gives full freedom to Mudarib to undertake whatever business he deems fit.the following quranic verses directly imply the permisability of of mudaribah. According to Quran And when the Prayer is finished, then may ye disperse through the land, and seek of the Bounty of Allah; and celebrate the Praises of Allah often(and without stint): that ye may prosper. (AlJumu`ah:10) In haidh rasullah (SAW) said There is blessing in three transactions: credit sales, silent partnership (i.e. muqradhah or mudhrabah), and mixing wheat and barley for home, not for trading (Narrated by Ibnu Majah) MUSHARAKAH: The literal meaning of Musharakah is sharing. The root of the word "Musharakah" in Arabic is Shirkah, which means being a partner. It is used in the same context as the term "shirk" meaning partner to Allah. The quranic verses and hadith generally indicates the validity of Musharakah. Musharakah means a relationship established under a contract by the mutual consent of the two or more partners for sharing of profits and losses in the joint enterprise. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is

distributed among the partners according to specific pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. It is an ideal alternative for the interest based financing with far reaching effects on both production and distribution. There are types of musharikah namely.1) Shirkat-ul-milk (Partnership by joint ownership):It means joint ownership of two or more persons in a particular property. This kind of "Shirkah" may come into existence in two different ways: I). Optional (Ikhtiari):At the option of the parties. 2) Compulsory (Ghair Ikhtiari): This comes into operation automatically without any effort/action. 2) Shirkat-ul-aqd: this kind of shariaah or relationship established by the parties through a mutual contract. There are three types of Shirkat-ul-aqd namely.i)Shirkat-ul-ammal (partner ship in services), ii)Shirkat-ul-wujoooh(partner ship in good will),iii) Shirkat-ul-amwal(partner ship in trade). According to Quran ``Verily many are the partners(in business) who wrong each other except those who believe and work deeds of righteousness and how few of them (al sad:24)`` Hardees-e-Qudsi Allah Subhan-o-Tallah has declared that He will become a partner in a business between two Mushariks until they indulge in cheating or breach of trust (Khayanah). MUSAMAWAH: The most common type of trade seen in Islamic commerce is Musawamah that offers the customer the convenience of acquiring assets when needed and paying the purchase price plus profit in installments over a period of time. It involves a transaction where the selling price of a good or service is a process of a negotiation between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. It should not be used in order to gain excess profit from an item. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah is usually provided to finance local purchases including vehicles, real estate, home appliances, machinery and equipmen Wadiah (safekeeping): Wadiah means custody or safekeeping. In Wadiah a bank is deemed as a keeper and trustee of funds. A person deposits funds or other assets in the bank for safekeeping and the bank guarantees safety to refund the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah as a form of appreciation for the use of funds by the bank. This is normally used in deposit taking activities, custodial services and safe deposit boxes. KAFALAH (GUARANTEE) A contract where a person guarantees any claims, debts or obligations that should be fulfilled by a debtor, supplier, or contractor. In the event that the debtor, supplier or contractor fails to fulfill his obligations, the guarantor is responsible to fulfill such obligations. There are two types of kafalah.1) Kaflah-bal-dain: it relates to debts e.g. the issuance of personal/ corporate guarantee in favour of the Bank to secure the payment of financing given to an individual or a company.2) Kaflah-bal-aen relates to properties3) Kaflah-bal-tasleem it relates to the delivery

of an object of contract e.g. performance guarantee.Quranic verse indicates permissibility of the kafalah contract. Abdullah bin Abbas RA states that zaim is another word for kfil i.e. guarantor. According to quran They said: We have lost the (golden) bowl of the king and for him who produces it is (the rewardof) a camel load and I will be bound by it (zaim).(Surah Yusuf: Verse 72) In hadith Al-Bukhari narrated that Salamah bin al-Akwa said: We were with the Rasulullah SAW when a deceased person was brought. They said: Ya Rasulullah, perform prayers on him? He said: Has the deceased left anything? They said: No.He said: Is he in debt? They said: Three dinars. He said: Perform prayer on him (whileRasulullah SAW did not perform the prayer). Abu Qutadah said: Perform prayers on him YaRasulullah and I guarantee for his debt. Then Rasulullah SAW performed prayers on him.

INTRODUCTION TO MCB ISLAMIC BANKING


MCB bank limited, with more than 60 years of experience as one of the leading banks in Pakistan, was incorporated on July 9 in 1947. The bank has journeyed remarkable tenure of more than half a century of competitively edged and well positioned heights of success by developing quality banking, heads of technological development, professionally leading management and

prudent and ethical work methodologies.MCB was nationalized along with other private banks in 1974 as part of Government of Pakistans economic reform movement and was later privatized to Nishat Group lead consortium in 1991. MCB in one of the largest foreign banks in Sri Lanka, the first bank in Pakistan to launch Global Depository Receipts (GDR) in 2006, has strategic foreign partnership with May bank of Malaysia which holds 20% shares in MCB through its wholly owned subsidiary May bank International Trust (Labuan) Berhad since 2008, and serving through a domestic network of over 1,130 branches and 600 ATMs across Pakistan with a customer base of 4.5 million (apex.). Islamic Banking Division was formed with effect from 1st January 2003, which in a short span of time, has developed sufficient expertise, necessary infrastructure, information technology, and manpower to run Islamic Banking Operations and offer Islamic Banking Products. Mission Statement To play a dynamic role in promotion of Islamic Banking and win customers trust by providing Shariaah compliant financial services. Vision Statement To become a leader among Islamic Banks of the country in the coming years capturing major share of the domestic Islamic financial market. The bank is versed as one of the oldest and most responsible banks in Pakistan and has played pivotal role in representing the country on global platforms and traded in the international market. The bank has also been acknowledged though prestigious recognition and awards by Euro money FROM 2001 TILL 2008, MMT, Asia Money in 2005and 2004, SAFA (SAARC), The Asset and The Asian Banker. Shariah Advisor Dr. Muhammad Zubair Usmani, working as Sharia Advisor in our bank since July 2000 is aprominent scholar having Ph.D. degree in Islamic Finance as well as Fazil Takhassus from JamiaDarul Uloom Karachi, (i.e. specialist of Islamic Fiqh and Fatawa). He has attended and addressedseveral international and local seminars / conferences as guest speaker in Pakistan as well asabroad. He has also worked as Research Scholar and member of various forums and committeesformed for promoting the cause of Islamic Banking in Pakistan and abroad. All products areapproved by our Sharia Advisor Dr. Muhammad Zubair Usmani and these are further approvedand vetted by Dar ul Ifta, Jamia Dar ul Uloom Korangi Karachi. Majority of the products aresigned by Maulana Muhammad Taqi Usmani. Legal Advisor M/s Mohsin Tayebaly & Co., Advocates & Legal Consultants, has vetted all documentation. TheCo. for this purpose not only have expertise in legal and corporate affairs but also havecompetent lawyers possessing knowledge of Sharia.

MODES OF FINANCING IN MCB


There are many modes of financing in which some of them are as follows: Namat Hifazat Salamat

Maeeshat Rafaqat Aanat

NAMAT:
Based on Mudarabah concept of shariah. MCB Islamic banking offers Naamat fixed maturity deposits to individuals and entities who desire to receive profit on their fixed maturity deposits in a shariah compliant manner. Additional Features: Phone Banking Online Banking Smart card (ATM) Utility bills payment facility through ATM, internet & call center No minimum account balance is required 24/7 call center

HIFAZAT:
Based on Mudarabah concept of shaiah, MCB Islamic Banking now offers more lucrative slabs in its compliant Hifazat plus saving account for individuals and entities offering expected profit rate of 7%, paid on monthly basis. Additional Features: Free online transfer of funds within IBBs and to CBBG branches Free issuance of 10 instruments (DDs/Pos) per month. First free of cost/charges ATM/Debit card issuance. Subsequent annual costs/charges will be recovered. Free intercity clearing Free of cost small lockers, subject to their availability at respective IBB Minimum average monthly Maximum average balance monthly balance PKR 1000000 PKR 3000000 PKR 3000001 PKR 10000000 PKR 10000001 PKR 25000000 Expected profit rate 7.00% 7.15% 7.30%

On maintaining minimum average monthly balance of PKR 1 M during a month you will quality for the above mentioned free of cost services and expected profit rates in the next month.

SALAMAT:
Salamat car ijarah facility is offered by MCB Islamic Banking to individuals, Corporate and SMEs to fulfill their needs for non-commercial and semi-commercial Vehicles. No rentals before delivery of vehicle No upfront takful/insurance premium No upfront registration charges

Competitive profit rates and security deposit

MAEESHAT:
Maeeshat Murabaha is based on shariah principles of Murabaha. MCB Islamic Banking offers financing facilities for the procurement of raw materials and finished goods to enable the customers to fulfill their working capital requirements. Following are the different applications of MCB Islamic Banking Murabaha financing. Murabaha for local goods purchase Murabaha for imported goods purchased in local currency Murabaha for imported goods purchased in foreign currency Murabaha for purchased of goods against pledge/hypo/ TR Murabaha for non-serviceable ship purchase for ship breaking industry

RAFAQAT:
Rafaqat diminishing Musharakah for equipment is based on shariah concept of undivided joint ownership over a tangible asset. MCB Islamic Banking offers financing for equipment/ machinery required by industrial / manufacturing / commercial concerns. The joint share of the bank in the asset would be further sub divided into a number of units, which will be purchased by the customer gradually, till the time Banks joint share in the asset is completely purchased by the customer. During the period bank retains joint share in the asset, the bank receives consideration from the customers for utilizing the banks share in the asset.

AANAT:
Based on shariah concept of Qard, MCB Islamic Banking offers Janat current account product to individuals and entities who desire to maintain their accounts in a Shariaah complaint manner. Additional Features: Free online transfer of funds within IBBs and to CBBg branches. Free issuance of 10 instruments (DDs/Pos) per month. First free of cost/charges ATM/Debit card issuance. Subsequent annual costs/charges will be recovered. Free intercity clearing. Free of cost small lockers, subject to their availability at respective IBB. On maintaining minimum average balance of PKR 1 M during a month you will quality for the above mentioned free of cost services in the next month.

FURTHER DETAILES BASED ON INTERVIEW


(QUESSIONNAIRE ADDED IN APPENDIX) ISLAMIC BANKING IS ONLY FOR MUSLIMS?

Islamic banking is for all individuals regardless of their religious beliefs; this kind of banking is for all religions, whether it is Christianity or Judaism. The teachings of Islam are not confined to Muslims; rather these equally address the non-Muslims due to their universal nature. The basis of Islamic banks is laid down on ethical values and socially responsible system. The values like justice, mutual help, fee consent and honesty on the part of the parties to a contract, avoiding fraud, misrepresentation and misstatement of facts and negation of injustice or exploitation form the basic principles of Islamic banking. Therefore, the principles of Islamic banking lead the economic system to achieve the common good and economic prosperity. On this premise, Islamic banking becomes a viable option for everyone irrespective of their religion. CONVENTIONAL BANKING IS OFFERING ISLAMIC BANKING WINDOWS Islamic banking has transformed into a global financial ecosystem that is experiencing tremendous growth. Islamic banking institutions must be able to offer a wide range of Shariah compliant products encompassing deposits, loans, and trade and treasury services. In addition, conventional banks offering Islamic banking windows have the opportunity to expand into new markets by offering Islamic banking solutions that provide customers with an attractive alternative to conventional interest-based products. Islamic Banks therefore need to provide a full range of Shariah compliant financial products, but they also need to be able to deploy these on a modern, scalable and customer-centric banking platform. Not all core banking systems in use offer this combination of appropriate banking functionality coupled with scalability and efficiency. There is no such coordination between MCB Bank and MCB Islamic Bank in anyway. Islamic banks don't do business with interest-based banks and financial institutions. REASON OF SELECTING ISLAMIC BANKS There may be different reasons while choosing islamic banking it may be because they are strictly religious or because of economies (profit and loss) or Both. Most of the customers value product features and quality of service as major factors for making selection of Islamic banks, and give lesser importance to religious belief as influential factor in selecting an Islamic bank. Findings suggest that there is a lack of awareness about basic conventions of Islamic financing options among respondents and customers of both the pure Islamic banks and conventional banks. HOW GENERATES PROFIT TO PAY TO CUSTOMERS The Islamic bank uses its funds in various trades; investment and service related Shariah compliant activities and earns profit there upon. The profit earned from such activities is passed on to the depositors according to the agreed terms. ISLAMIC BANKS JUST PAYING INTEREST DRESSING IT AS PROFITS Islamic banks accept the deposits either on profit and loss sharing basis or on Qard basis. These deposits are deployed in financing, trading or investment activities by using the Shariah compliant modes of finance. The profit so earned by the bank is passed on to the depositors according to the pre-agreed ratio which, therefore, cannot be termed as interest. MANAGEMENT OF DEPOSIT Deposits shall be managed under the Mudaraba arrangement, under which customer is the Rabbul-Maal and bank is the Mudarib. Bank, being the Mudarib, shall be responsible for placing the funds in secured as-well-as profitable Islamic ventures on the basis of Ijarah, Murabaha,

Mudaraba, etc and shall share a portion of profits as a compensation for its efforts. The profit sharing ratio shall be announced at the beginning of month. Rabb-ul-Maal, on the other hand, shall earn the net profit after all deductions, and this total earning of the Rabb-ul-Maal shall be shared by the individual depositors on the basis of weight ages, which shall be announced at the beginning of the month. In the event of loss, Mudarib would lose its profit share which otherwise would have been paid to it in the cases of profit, and Rabb-ul-Maal shall bear the net loss. IS THE RETURN HALAL Care would be taken in ensuring that both the arrangements of accepting deposits from customers, and investing that amount in Islamic Modes of Financing, are done in a strictly Shariah-compliant manner. On the basis of approval from reputed Shariah scholars, who belong to internationally renowned university for Islamic education, products have been designed to not only suit the needs of depositors/ borrowers but also remain strictly in compliance with Islamic Shariah. Moreover, our Shariah Advisor, Dr. Maulana Muhammad Zubair Usmani would also monitor our transactions on a daily basis. Elements of Riba have been eliminated completely from the contracts so that income earned through investments in assets is completely halal and is shared by the depositors in a Shariahcompliant manner. A transparent system of weightages is used to calculate the profit rates on the basis of which profits are disbursed to each customer. These weightages are announced by the bank at the beginning of each month/ term and posted on the Notice Boards of Islamic Banking Branch as well as on our website. WHAT TYPE OF DEPOSIT SCHEMES YOU OFFER All that shall be required to do to deposit funds with us is to fill in the form, and pay us through any more convenient to the customer i.e. Cash, Cheque, or Pay Order in favor of MCB Bank, Islamic Banking Branch. Funds may be deposited at Islamic Banking Divisions branch, or at any of the authorized MCB branches. CUSTOMERS OF COMMERCIAL BANK SWITCH TO THE ISLAMIC BANK Yes, mainly because of religious reasons people often switch to Islamic banking as it is interest free, investing in businesses that provide goods or services considered contrary to Islamic principles is also haraam (forbidden). In Quran it is said: Those who consume interest shall not rise, except as he rises whom Satan by his touch prostrates [i.e. one who is misled]; Allah [God] has permitted trading but forbidden interest.; Whosoever receives a warning from his/her Lord, he shall have his past gains, and his affair is committed to Allah; but whosoever reverts (to devouring interest) those, they are the inhabitants of the fire, therein dwelling forever.

ISLAMIC BANKING ISSUES


Human resource for sharia'h compliance

Users of Islamic financial services assign primary importance to Sharia'h compliance of the services they use. It is understandable that Sharia'h noncompliance entails a serious operational risk and can result in withdrawal of funds from and instability of an Islamic bank, irrespective of its initial financial soundness. Sharia'h compliance is hence a serious matter for an Islamic bank, in addition to its compliance with other regulatory requirements. Unresolved fiqh issues Lack of standard financial contracts and products can be a cause of ambiguity and a source of dispute and cost. In addition, without a common understanding of certain basic foundations, further development of banking products is hindered. Legal framework An appropriate legal, institutional and tax framework is a basic requirement for establishing sound financial institutions and markets. Islamic jurisprudence offers its own framework for the implementation of commercial and financial contracts and transactions. Nevertheless, commercial, banking and company laws appropriate for the enforcement of Islamic banking and financial contracts do not exist in many countries. Excess liquidity Islamic banks have over 60 % excess liquid funds which cannot be properly utilized due to nonavailability of Sharia'h Compliant products and instruments. The competitiveness and soundness of financial institutions depend on the availability of efficient financial products. Islamic banks urgently need Sharia'h compliant products to meet a number of pressing needs.

Motivating Factors for Islamic Banking


Motivation and renewed interest in Islamic finance industry stems from its strong economic, financial and social considerations, backed by its unique features. Most significant is its appeal to add to financial diversity and innovation being skewed towards:
(i)Asset backed and equity based transactions, which promote entrepreneur friendliness and consideration of project viability (ii)Equitable distribution of risks and rewards among the stakeholders (iii)inculcating market discipline and higher ethical standards given its emphasis on nonexploitation and social welfare.

In the wake of high Asian domestic savings rates and build up of the regions foreign exchange reserves as well as oil surpluses of Middle East in the last few years, Islamic finance is now also emerging as away to wealth management, both of richer nations and high net worth individuals.

POTENTIAL OF ISLAMIC BANKING IN PAKISTAN The potential of Islamic banking is immense in future with tremendous expansion and success of the industry will continue to serve customers and business in Pakistan. Islamic banking has been

emerging overwhelmingly on the surface of earth because of its nature, modes of services and products offered by different banks. The industry is in the emerging face with a significant potential to be explored with the passage of time as Islamic banks are designing new products and services for different requirements of different segments of customers. There are a number of investors and account holders shifting speedily towards Islamic banks from conventional banks, which is an encouraging sign for the industry. ROLE OF ISLAMIC BANKING IN THE ECONOMY Islamic banking is playing a vital role in the economy as it is attracting a number of unbanked populations towards the banking system. The financial inclusion has multiple advantages for any economy as the saving habits will improve in the country whereas businessmen will expand their work through interest free loans. The widening base of customers and investors will surely expand the industry that will ultimately give impetus to business and banking system of the country along with employment and revenues. DO YOU SEE THE FAST DEVELOPMENT OF ISLAMIC BANKING WORLDWIDE? Bankers, economists and investors are looking on Islamic economic system as an alternative because they have realised that the emerging system can be an alternative after capitalism system has disappointed masses. Auditing and Accounting for Islamic Financial Institutions (AAOIFI) is the global platform for economist, bankers and business tycoons. They are developing products and modes as per Shariah standards for promoting Islamic banking system in the country. Islamic banking has been expanding all over the world with its emerging products and concept without interest. HOW DIFFERENT IS ISLAMIC BANKING FROM CONVENTIONAL BANKING Islamic banking is entirely different from conventional banking. It is purely interest-free banking system and based on the concept of Shariah laws of Islam. Islamic banking is 'Halal' whereas conventional banking is 'Haram'. The Islamic banks are regulated by separate banks of State Bank of Pakistan, which not only audit banks' accounts but also conduct Shariah audits in accordance with teaching of Islam. They don't invest in T-bills and PIBs and they don't work with companies' trade or manufacturer products, which are declared 'Haram' by the religion. Islamic banks deal and trade with each other. They make their investment in sectors, which have nothing to do with interest-based business or 'Haram' products. Islamic bank products are also different because they offer investments through different certificates and mutual funds. Similarly, there are different modes of loans for exporters, house and car financing. The banks do not deal in credit cards and prize bonds. Whereas services such as cash transactions, draft order and cheque clearance are the same as conventional banks'.

MISCONCEPTIONS SPREAD AGAINST ISLAMIC BANKING Misconceptions are at large in Pakistani society against Islamic banking because of confusion, ignorance and unawareness. The Islamic banking expanded in momentum growth in its early emerging years since 2002. In these years, three banks were established in the country and many

in the stage of launch, but there were lots of changes to the nascent industry, which was lacking professional human resource. There were bankers who knew little about Islamic banking but came in the industry with their skills of conventional banking, hence they were very much confused in the beginning and failed to convince their client about Islamic banking. The trend continued for a couple of periods as non-professional bankers had been marketing products of Islamic banking in a way they used to do in the conventional banking system. Similarly, there was an emerging competition between Islamic banking and conventional banking in the country and most of the professional bankers, who are against interest-free financial system, spread negative propaganda about Islamic banking. Therefore, the misconception has been widespread about the concept of riba-free banking system and laymen continued to be confused about Islamic banking at large. There were some religious scholars who did not study properly the modes and principles of Islamic banking but unfortunately did not extend their support. Instead, they ridiculed the emerging financial system and discouraged people to use alternative available facility. AWARENESS PROGRAMMERS ORGANIZED TO PROMOTE ISLAMIC BANKING The State Bank of Pakistan (SBP) and different banks organised training courses for bankers aimed at educating them in a way that they can explain customers rightly without keeping anything hidden about the concept of Shariah-based banking and its products. There are prominent Shariah scholars in the country who continue to convince the masses about the Islamic banking and its advantages. These scholars are brand ambassadors for Islamic banks and the entire banking system as they are creating awareness about the emerging financial systems among the people and forbidding them from conventional banking system. The scholars specially hold sittings in the banks and are available for customers for discussion on various products of Islamic banking. Besides banks are also actively creating awareness among the potential customers. Like MCB Islamic Bank that has organised several seminars on Shariahbased banking system in the big chambers particularly for businessmen. MCB Islamic Bank's professionals are well-versed to enlighten customers about Islamic banking, responding rightly with confidence to the concerns of people about Shariah compliance. CURRENT SITUATION OF THE ISLAMIC BANKING INDUSTRY The situation has been improved currently but is slightly stable, not perfect. The non-performing loans have been controlled by the banks but its products are not seen to recover as much. The banks are very much involved in lending loans to exporters but on the customers' side banking is at a standstill because of high inflationary pressure on the middle class' affordability. The government policy is not favourable for the industry for business and exporters and it failed to control energy crisis in the country. In this situation, the business will never flourish but it is forced to survive. So businessmen do stay away from banks and do not expand their business. But the industry will grow despite all of these economic hurdles because of their emerging products to facilitate business and customers.

ARE RATES OF RETURNS HIGHER IN ISLAMIC BANKING The rates of returns may be high but it is necessary to maintain banking business, which is indeed highly risky. The investors' stakes should be protected at any cost because they invest for earning and not for charity. Similarly with banks, that are facilitating business but do not face

losses. The policy rates were cut by the banking regulator that affected KIBOR, resulting decline in the profit of investors however the banks remain unaffected because their advances increased. FUTURE GOALS FOR MCB ISLAMIC BANKING We have a plan to expand branch network from 25 in different cities. Besides, we are developing different products for different sections therefore people at large will benefit from the interestfree banking system. The Islamic system is not complete without Takaful, therefore, there is a need to promote this service with big companies, which should expand their operations along with banks. MCB Islamic Banking is working for providing Takaful to its customers at minimum premium rates and it has decided to give protection to maximum customers with the Islamic financial system.

Appendix
Questionnaire
Is Islamic banking is only for Muslims? Now a days conventional banking are starting to offer Islamic banking windows do you think is as good as are Islamic bank? According to you the main reason why people selected Islamic banking? Even if Islamic banking initially is unable to give profit on deposit investment people would continue with shariah banking? If Islamic banks do not invest in interest based activities then how do they generates profit to pay to their customers? Are not Islamic banks just paying interest dressing it as profits or trades and investments? How deposits managed? How is the return halal? What type of deposit schemes do you offer? Are the customers of commercial bank switch to the Islamic bank? What are the issues involved in Islamic finance? What are the motivational factors in Islamic banking? How do you see the potential of Islamic banking in Pakistan? How do you see the role of Islamic banking in the economy? How do you see the fast development of Islamic banking worldwide? Explain how different is Islamic banking from conventional banking? Why are misconceptions spread against Islamic banking? What are the awareness programmes organised to promote Islamic banking? What is the current situation of the Islamic banking industry? Why are rates of returns higher in Islamic banking? What are your future goals for MCB Islamic Banking?

REFERENCE

BIBLIOGRAPHY
WWW.GOOGLE.COM http://www.mcb.com.pk/islamic_banking/introduction.asp