Page 41 - PakAccountantJan-Mar2017

slamic banking is a widely debated concept nowadays. The concept of Islamic banking in Pakistan can be traced back to 1978, AlBaraka, pioneers in Islamic banking in Pakistan 2010. During the last few decades, there is significant increase in terms of size and players Iparticipating in Islamic banking. Muslim countries such as Iran, Sudan, Malaysia, Indonesia, Bangladesh, Egypt and Pakistan are practicing Islamic banking, alongside with conventional banking. The list of countries, however, is not limited to the aforementioned countries, rather the list is exhaustive. Moreover, the western countries have also initiated the licensing of Islamic banking. In 2004, the Islamic Bank of Britain was licensed to engage in Islamic banking. Islamic Republic of Pakistan is the only country in the world which came into being in the name of Islam. Currently, many banks operating in Pakistan are practicing Islamic banking. MCB Islamic bank, The Bank of Punjab Taqwa Islamic banking, Soneri Bank Mustaqeem, National Bank of Pakistan Aietmad are a few to mention. The conventional banking systems are operating alongside the Islamic banking systems. With the increase in players plunging in Islamic bank financing, the query arises whether the Islamic banks are operating in the true spirit of Shariah or is just another backdoor for attracting the monetary capital of the targeted religious segment. In theory, Islamic economic system is different from the two major economic systems operating in the world namely, Capitalism and Socialism. Islamic economic system accepts the market forces of demand and supply whereas rejects the Laissez Faire concept of non- With the increase in involvement of government in the economic affairs of the country. Islamic economic system players plunging in is more concerned with the equitable distribution of wealth and discourages the hoarding of wealth in few hands. Islamic bank financing, the query arises The conventional banking systems offer a fixed rate of return on deposits and charge fixed rate of interest on loans. Interest (riba) is prohibited in Islam. The western financing systems whether the Islamic are concerned with their fixed interest income without any regard to the financial prospects of the project for which they are lending their money. The uncertainty in the project may result banks are operating either in profit or loss. In either case, the bank is concerned with the interest income on the in the true spirit of loans advanced even if the projects of the borrowers result in a complete failure. The essence of the western banking system is the coverage of risk factor involved in the uncertainty of Shariah or is just project outcomes. Islamic economic system introduces the concept of social welfare. The another backdoor unique feature of Islamic bank financing lies in the profit and loss sharing paradigm which is based on the mudarabah and musyarakah concepts of Islamic financing. for attracting the monetary capital of Musyarakah contracts involve joint ventures whereby an entrepreneur and the bank jointly contribute capital for a business project scheme and both the parties are responsible for the targeted religious managing the project. Accordingly, the profit and loss arising from the venture is shared between both parties in a predetermined profit sharing ratio. segment. Mudarabah contracts differ from musyarakah contracts in the sense that the entire capital for a business project is provided by a bank and the expertise necessary for the project is provided by an entrepreneur. Both parties share the gains and losses in a predetermined profit sharing ratio. However, in case of a loss, all the loss is to be borne by the bank. There are also other concepts of Islamic contracting including Bai muajjal, Ijarah (leasing), Murabaha, Istisna. Islamic financing contracts thus cater for the wellbeing of an individual entrepreneur. Any shock of loss is appropriately shared by borrower, bank and depositor. Moreover, the general principle of investment states that higher the uncertainty risk, higher the return. In theory, therefore, profits arising from the successful ventures in Islamic economic 39