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Factors Affecting Growth of IslamicBanking in Pakistan

A Comparison with Conventional Banks

Submitted to:

Mr. Ahmed Arif

By:

Zain ul Abidin

Zahid Khan

M. Abdullah Tariq

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Factors Affecting Growth of Islamic Banking in Pakistan

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Table of Contents

INTRODUCTION ..................................................................................................................................................... 3

PROBLEMSTATEMENT ........................................................................................................................................... 4

RESEARCH QUESTIONS........................................................................................................................................... 4

RESEARCH OBJECTIVES .......................................................................................................................................... 5

FRAMEWORK ......................................................................................................................................................... 5

REASEARCH DESIGN AND METHODOLOGY ............................................................................................................ 5

BIBLIOGRAPHY....................................................................................................................................................... 7

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1. INTRODUCTIONIslamic financing has shown tremendous growth in the past few years and is continuously

flourishing. This phenomenon, as the world has witnessed, is becoming interesting for financial

institutions all over the world. Islamic banking has laid a number of milestones in a very short

time period as compared to the conventional banks. There are about 300 Islamic financial

institutions across 75 countries. Islamic banking is basically a system that has zero-based

interest, equity participation, joint ventures, mutual funds, leasing, innovation and a promising

rate of return. Islamic banking replaces interest-based system with profit and loss sharing (PLS)

and interest-free banking (M. Mansoor Khan, 2008)

The basic ideology of Islamic finance is socio-economic justice andbenevolence (Al-Adle Wal-

ihsan) (Warsame, 2009). The thrust for Islamic Banking is founded on the desire to submit to the

Divine Instructions on all transactions, particularly those involving exchange of money for

money. However, it would be quite unfair to limit Islamic Banking to elimination of Riba only

(Bank Alfalah Limited, 2006-2007).

The Islamic banks conduct their affairs within the limit of the laws of Shariah and to comply

with its overall objectives. (kahf, 2004)

Pakistan is a country with more than 188 million residents and among them more than 95% are

Muslims (CIA, 2012), so thrive for shariah compliant services are very natural for them.

Pakistan economic activities are being very slow paced in past few years but shariah compliant

financial services have shown notable growth rate even higher than conventional financial

institutions. The establishment of a full-fledged Islamic Banking Department at SBP to focus on

all Islamic Banking issues provided the industry with necessary tools to grow and emerge as a

preferred choice of the customers. SBPs contribution to promote Islamic banking as a parallel

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system, operating at a level playing field with commercial banking, is aimed at building a broad

based financial system in the country to enable all segments of the population to access financial

services and play their role in the overall economic development. The total assets of the Islamic

banking industry in Pakistan were over Rs. 225 billion as of 30th June, 2008 which accounted for

a market share of 4.5% of total banking industry assets. The market share of deposits was 4.2%.

Total branch network of the industry comprised of more than 3581 branches with presence in

over 50 cities & towns covering all the four provinces of the country and AJK (Pervaiz Said,

2008). Currently, total assets of the Islamic banking industry in Pakistan have increased to Rs

568 billion and total deposits worth Rs 463 billion. According to SBP, Islamic banking sector is

enormously growing at the rate of 30 percent in Pakistan. At present five full-fledged Islamic

banks are operating in the country there are 841 bank branches in 70 districts across the country.

(Raza, 2012)

2. PROBLEM STATEMENT

The present world is facing a number of economic challenges including poverty, unemployment,

in equitable distribution of income, social and economic in justice, in stability in the real value of

money, inflation & accumulation of wealth in a few hands and all of these problems greatly

disturb the process of achieving and maintaining peace and happiness in the world (Loqman,

1999)

The research will focus on the major factors that are affecting the growth of Islamic banking

financial institutions in Pakistan as compared to the conventional banking institutions? 3. RESEARCH QUESTIONS

Which banking system is growing in Pakistan? Is it Islamic or conventional banking system?

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What are the major factors that affect the growth of Islamic banks in Pakistan?

What are the major factors because of which people and institutions are turning towards Islamic

financial methods?

4. RESEARCH OBJECTIVESThe research will try to compare the conventional and Islamic banks growth over the past few

years to find out which system has high growth rate and finally identifying the major factors that

are affecting the growth of Islamic banks.

5. FRAMEWORKIndependent variables Dependent variables

6. RESEARCH DESIGN AND METHODOLOGYThe Nature of this research is descriptive and in this research we will gather secondary data

of different Islamic and conventional banks. We will apply different tools to measure and

compare the performance and growth of the Islamic and conventional banks. The type of the

research is quantitative as we will apply different tools and analyze quantitative data.

Following sources will be used to collect data

GrowthShari'ah compliance

Govt. policies and

regulations

Global recession

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Websites of banks Financial statements of banks

The financial statements will be obtained from websites of banks and financial ratios will be

used to analyze data and measure the performance of banks. These ratios have been used by

number of researchers and an advantage of this technique is that it eliminates the disparities

among banks regardless of their size and volume (Waheed Akhter, 2011).

Profitability ratioso Return on Assets (ROA)= Net Profit/Total Assetso Return on Equity (ROE)= Net Profit/Equity.o Cost income Ratio (COSR)= Total cost/Total income

Liquidity ratioso Net Loans to Asset Ratio (NLAR)= Net loans/Asset Ratioo Liquid Assets to Customer Deposits and Short Term Funds Ratio (LaCDSF)=

Liquid Asset/Customer deposit and short term funds

o Net Loans to Deposits and Borrowing (NiTDB): Net Loans/Total Deposits andBorrowing

Credit risko Common Equity to Total Assets (CeTA)= Common Equity/Assetso Total Equity to Net Loans (TeNL) = Total Equity/Net Loanso Impaired Loans to Gross Loans (ImGL) = Impaired Loans/Gross Loans

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BibliographyAkhtar, D. (2007). Islamic Banking: Past, Present & Future Outlook. State Bank of Pakistan.

Akram, M., Rafique, M., & Alam, H. M. (2011, May). Prospects of Islamic Banking: Reflections From

Pakistan.Australian Journal of Business and Management Research , 125-134.

Bank Alfalah Limited. (2006-2007). Islamic Banking:Bank Alfalah Limited. Retrieved from Bank Alfalah

Limited Web site: http://bankalfalah.com/islamic/index.asp

CIA. (2012, february 8). The World Fact Book. Retrieved february 19, 2012, from CIA website:

https://www.cia.gov/library/publications/the-world-factbook/geos/pk.html

kahf, M. (2004). SUCCESS FACTORS OF ISLAMIC BANKS.

Loqman, M. (1999). A Brief Note on the Is lamic Fi nancial Sys tem. 52-60.

M. Mansoor Khan, M. I. (2008). Development in Islamic banking:a financial risk-allocation. The Journal of

Risk Finance , 40-51.

Pakistan, S. b. (2008, November 8). Departments of SBP. Retrieved Feb 22, 2012, from SBP.org:

http://www.sbp.org.pk/departments/ibd.html

Pervaiz Said. (2008). Pakistans Islamic Banking Sector Review. SBP.

Raza, A. (2012). Islamic Banking assets hit Rs568bn mark SBP official. (p. 3). Islamabad: Business

Recorder.

Shariah Fortune. (2010). History of Islamic Banking: Shariah Fortune. Retrieved from Shariah Fortune

Web site: http://shariah-fortune.com/history-of-islamic-banking

Sufian, F. (2007). The efficiency of Islamic banking. Humanomics, 23 (3), 174-192.

Waheed Akhter, A. R. (2011). Efficiency and Performance of Islamic Banking: The Case of Pakistan. Far

East Journal of Psychology and Business , 54-70.

Warsame, M. H. (2009). The role of Islamic finance in tackling financial. Durham E-Theses .

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