Islamic Banking

 

The financial system that adheres to Islamic essentials or defined principles is called Islamic Banking. It prohibits interest-based financial operations and operates on the principle of profit and loss sharing and risk-sharing. Further, it also forbids the system of exploitation and emphasis socially responsible banking practices to bring profit to both parties. 

 

The recent consideration of the Bank

 

Recent news discloses that the management of the Bank of Punjab has decided to transform conventional banking practices to Islamic banking principles. It has further decided to look for a consultant to guide the management throughout the transformation project. This decision of the bank seems aligned with the ruling of the Federal Shariat Court and the government’s decision to promote Islamic injunctions and discourage a riba-based banking structure.

 

The ruling of the Federal Shariat Court

 

In April 2022, the Federal Shariat Court of the country comes with an important ruling. The court order states that riba, also known as interest, is forbidden in Islam and goes against Islamic financial values. Based on this argument, the court ordered the government to adhere to Sharia-compliant financial model and incorporate Islamic practices. In addition to the ruling, the Shariat Court has also bound the government to implement this order in 5 years. It means the government has to develop an interest-free and risk-sharing economy by 2027.

 

It is pertinent to mention that the Bank of Punjab has already developed its capacity in Islamic Banking. Almost 10% of the Bank’s profit comes from its Islamic Banking Division. Now, it seems to convert the entire structure of the bank. State Bank of Pakistan announced that it would facilitate banks remodeling their structures to fulfill the demand for Shariat-compliant banking.  

 

Islamic Banking vs Conventional Banking

 

Both differ in their principles, risk-sharing approach and economic structures. Islamic banking prohibits interest-based practices, emphasizing risk-sharing and Sharia-compliant products. While conventional banking is based on the interest-based lending principle that exploits lenders and also the bank has to bear most of the risk in conventional banking. 

 

Conclusion

 

Pakistan is an Islamic country that has been created to practice Islamic rules and regulations in full essence. Unfortunately, we could not establish the required banking system. But this decision of the Federal Shariat Court to abide by Islamic financial practices is a step towards that objective. The Bank of Punjab has announced its transformation from the conventional financial system to the Islamic financial system.

 

Q. What are Shariah-compliant products?

 

Murabaha (cost-plus financing), Musharaka (Partnership financing), and Sukuk (Islamic bonds) are some Shariah-compliant products. These products adhere to Islamic financial principles and comply with Islamic law. 

 

Q. Why Shariah-compliant banking?

 

The financial system that Islam provides pursues an interest-free banking structure. Interest-based banking is viewed as unethical and exploitative which brings inequality.