History And Analysis Of Meezan Bank Limited

Meezan Bank Limited ( in the past known as Al-Meezan Investment Bank Ltd. ) is a public listed company came into being in January 27, 1997.In August 1997 Investment banking licence has been issued to Meezan Bank under SRO 585- ( 1 ) /87, and started concern in September 1997. In January, 2003 Meezan Bank was granted a fully fledged commercial banking licence merely committed to Islamic Banking.

Head office of the bank is situated in Karachi and the remainder of the subdivisions are sited across the state i.e. Karachi, Lahore, Faisalabad, and Islamabad. The bank has 37 subdivisions all over the universe and entire employees working in the bank is 986. In the Accounting and Audit Organization for Islamic Financial Institutions ( AAOIFI ) the Meezan bank was the first fiscal establishment in Pakistan to obtain rank.

The Bank has a entire paid-up capital of Rs. 2037 out of an authorised capital of Rs. 3000 million. The Bank is publically listed and its portions are traded on the Karachi Stock Exchange. Meezan bank Limited ( MBL ) is sponsored by taking fiscal establishments based in Pakistan, Kuwait, Bahrain and Saudi Arabia and offers advanced Shari’a compatible merchandises structured to run into client demands.

The bank has entire paid-up capital of Rs. 2037 from an equity capital of Rs. 3 billion. The bank is publically traded and portions traded on the Karachi Stock Exchange. Meezan Bank Limited ( MBL ) is sponsored by taking fiscal establishments based in Pakistan, Kuwait, Bahrain and Saudi Arabia, offering advanced sharia law compliant merchandises designed to run into client demand

The chief patron stockholders of Meezan Bank are:

Shareholding Structure Rs. In Million

Pakistan Kuwait Investment Company ( Pvt. ) Limited 790

Shami Bank of Bahrain E.C. 527

Islamic Development Bank, Jeddah 190

Noor Financial Investment Co 134

Others 396

Paid up Capital as at Dec 31, 2009 2037

Beginning: Annual Report 2008-09 of the bank.

The Bank strives to supply efficient commercial banking, services and merchandises that can besides be bespoke to accommodate client demands. With a extremely professional squad dedicated to the cause of Islamic finance, the Bank has established itself as one of the taking Muslim Banks in the state.

4.1.1 Mission Statement:

To be a premier Islamic bank, offering a one-stop store for advanced value added merchandises and services to our clients within the bounds of Shariah, while optimising the stakeholders ‘ value through an organisational civilization based on acquisition, equity, regard for single endeavor and public presentation.

4.1.2 Recognition Evaluation:

The JCR-VIS Credit Rating Co. Ltd. ( JCR ) , an affiliate of Japan Credit Rating Agency, Ltd, Japan has graded the Bank ‘s long-run entity evaluation at A+ with A+ with stable out looked, while the short term evaluation has been graded at Al+ , which is the highest possible in this class.

4.2 Beginnings of Fundss

4.2.1 Current History

All Islamic Bankss run current histories in support of their clients: persons and corporations. These histories are managed for the safe maintaining of sedimentations and for the easiness of clients. The difference between conventional Bankss and Muslim Bankss is infinitesimal to the extent the operation of current histories is involved. However, the foremost characteristics of these histories, as operated by Islamic Bankss, are mentioned below:

Current histories pull off what is by and large known as call sedimentations or demand sedimentations. These sedimentations can be opened both by persons or companies, in domestic or in foreign currency if the bank is authorized to run in the foreign exchange market and keeping of current balances in foreign currency is legal under the jurisprudence.

The depositor is non entitled to acquire any portion of net income or any other return in any signifier and the full return of these sedimentations on demand are guaranteed by bank.

The Bankss are allowed to utilize depositors fund at the bank ‘s ain hazard. Therefore, if there is any net income resulting from the use of these financess, it accumulates to the bank and if originating any loss it is besides borne by the bank.

There are no conditions with regard to sedimentations and backdowns.

Account holders have right to pull check on their histories.

Minimal sum required to open current history is Rs. 10,000.

Meezan bank dainties demand deposits/ current histories as Qard Hasan. Harmonizing to this position, money deposited in these histories is a benevolent ( or involvement free ) loan ( Qard Hasan ) from the depositor to the bank. The bank is free to use these financess at its ain hazard without any return to the depositor and without necessitating any mandate because in the instance of Qard Hasan, the debitor does non necessitate the specific permission of the creditor to utilize the borrowed financess. The debitor owes the creditor merely the chief sum borrowed. This status is fulfilled as the sum deposited in these histories is to the full underwritten by the bank. The conventional Bankss do non pay involvement to current history holders. Therefore there is no demand to change over the operation of current history into any Islamic manner of funding.

4.2.2 Salvaging Deposits

Meezan bank operates nest eggs sedimentations on the footing of Mudarabah, where client is investor ( Rab-ul-maal ) and bank is the director ( mudarib ) of the financess deposited by the clients. The financess received by the bank from client are allocated to a sedimentation pool. The bank use the financess from the pool to supply funding to the clients under Islamic manners that includes, but are non restricted to, Murabaha and Ijara.

Salvaging history can be opened with a minimal sum of Rs. 10,000. The net income on this history is calculated and paid on the monthly footing. Net income is distributed at the gross income degree. Bank calculates gross income after subtracting direct costs and disbursals incurred in bring forthing that income.

Gross Income of the sedimentation pool is shared between the Bank and clients on the footing of a pre-determined net income sharing ratio announced at the beginning of the period. The Banks net income sharing ratio is 80 % of Gross Income and Depositors profit sharing ratio is 20 % of Gross Income. The net income distributed among the history holders is based on the preset weightings, announced at the beginning of the each month. If during the month the mean sedimentation falls below Rs. 10,000, the depositors are non eligible for any profit/loss on the history. In instance of loss, harmonizing to the Mudarabah regulations the depositor pool shall bear the loss in the ratios of investing of depositors.

Meezan bank operates different sorts of salvaging histories for the different types of clients, for case Riba-free dollar salvaging history and Karobari Munafa Account ( concern net income history ) .MBL offered Riba-free dollar salvaging history for the clients who are interested in a foreign currency based investing chance. It can be opened with the minimal sum of $ 100 under a Mudaraba understanding.

Karobari Munafa Account is specially designed for the big corporate and entities controlled by the Government of Pakistan. It enables clients to gain high net income on excess hard currency balances. It has no predetermined dealing bounds and comes with a assortment of free packaged benefits. It can be opened with the minimal balance of Rs. 1 million. There is no limitation on sedimentations and backdowns. The net income on such history is calculated on the day-to-day merchandise footing.

4.2.3 Investing Deposits:

Investing sedimentations operated by Islamic Bankss are parallel to the term deposits or clip sedimentations in the conventional Bankss. Investings sedimentations besides known as participatory history or Net income and Loss Sharing ( PLS ) histories. Conventional Bankss operate fixed term sedimentations on the footing of involvement, whereas Islamic Bankss operate investings histories on the footing of net income sharing. Muslim Bankss unwrap the net income sharing ratio to the depositors instead than the preset fixed rate of return on depositors ‘ investings. How much net income each depositor makes depends on the concluding result of the bank ‘s ain investing. MBL operates investing sedimentations on the footing of Murabaha ( discussed before in this chapter ) .

MBL offers four types of investings certifications for its clients which can be distinguished on the footing of term of office. These investing certifications include Meezan Aamdan ( Income ) Certificate ( MAC ) , Meezan Providence Certificate ( MPC ) , Monthly Murabaha Certificate ( MMC ) and Dollar Murabaha Certificate ( DMC ) .

MAC is a long-run sedimentation certification with a high monthly net income designed for those persons and corporations seeking regular watercourse of monthly income. The lower limit required investing sum is Rs. 100,000. However, senior citizen and widows can open such history with the minimal investing sum of Rs. 50,000. These certifications are available in 51/2 old ages and 7 old ages term of office. Senior citizens and widows can open such history with minimal investing of Rs. 50,000. Depositors have the option to retreat sum before the adulthood of the certification. This option is non available in term sedimentations offered by the conventional Bankss.

MPC is a long term investing certification customized to run into the demands of corporate and concern concerns for intents of puting their Provident, Pension and Gratuity financess. The minimal investing required for MPC is Rs. 1,000,000 and available in term of office of 2, 3, 5 and 7 old ages. Similar to the MAC, Depositors have the option to retreat sum before the adulthood of MPC. To eligible for such investing requires, holding a registered or unregistered Employee Provident/Gratuity/Pension Fund, and holding operation based in Pakistan.

Mechanism of net income computation

It will be of involvement to observe here that the Council of Islamic Ideology in Pakistan in its Report on the Elimination of Interest from the Economy approved in rule the thought of presenting a system of weights for allocating net incomes to assorted suppliers of capital based on whether the capital is redeemable or non-redeemable and within redeemable capital between capital which is redeemed in a short period and that which is redeemed after a longer period. The thought has already been put into pattern, and net net incomes ; of bank in Pakistan are allocated to the remunerable liabilities in different proportions maintaining in position their comparative adulthoods. The smallest weight is accorded to particular notice sedimentations followed by salvaging histories and all sedimentations from other Bankss. The same rule of: distinction is followed within the class of clip sedimentations where highest ; weightage is accorded to sedimentations of five old ages: or more and smallest to sedimentations of three months. The highest weightage among all remunerable liabilities is assigned to equity. The logical effect of the weightage system adopted in Pakistan has been that, owing to the differences in the composing of.liabilities and net net incomes, different Bankss offer different rates of return on assorted classs ‘ of sedimentations even if the mean adulthood construction is the same. ( Ahmad, 2005 ) .

For the net income sharing computation, below is an illustration of MBL salvaging histories net income rates between the periods July 01, 2010 to July 31, 2010 and weightages for the month of August used by MBL.

Average Monthly Balance

Net income Ratess


( PKR )

( % per annum )

10,000 – 99,999

2.0 %


100,000 – 999,999

2.3 %


1,000,000 – 4,999,999

2.6 %


5,000,000 – 9,999,999

2.9 %


10,000,000 – 49,999,999

3.0 %


50,000,000 – 99,999,999

3.1 %


100,000,000 and above

3.3 %


4.3 Uses of financess

4.3.1 Diminishing Musharaka

MBL provides different sort of fundss to its clients. Decreasing Musharaka is one of them, harmonizing to this construct ; the bank and his client contribute either in a joint commercial undertaking or in the joint ownership of a belongings or equipment. The moneymans portion farther divided into a figure of units and these units will be purchased by the clients one by one from the bank sporadically, therefore increasing his ain portion till all the units of the bank are purchased by client.

MBL Diminishing Musharaka agreement is composed of the undermentioned minutess:

Creation of joint ownership in the belongings ( Shirkat-ul-Milk ) .

Giving the portion of the moneyman to the client on rent.

Promise from the client to buy the units of portion of the moneyman.

Actual purchase of the units at different phases.

Adjustment of the rental harmonizing to the staying portion of the moneyman in the belongings.

In the above mentioned agreement, MBL considers that following conditions must be fulfilled:

MBL uses decreasing Musharaka in following understandings

House funding

Fixed Assets funding

Undertaking Financing

Meezan Easy Home Finance

In this instance study merely, Meezan Easy Home Finance strategy will be discussed to explicate the regulations and ordinances of Diminishing Musharaka ; as it is largely popular strategy under decreasing Musharaka contract among the client. MBL provide easy place funding on the footing of decreasing Musharaka. In decreasing Musharaka, the bank and his client contribute either in a joint commercial undertaking or in the joint ownership of a belongings or equipment. The moneymans portion farther divided into a figure of units and these units will be purchased by the clients one by one from the bank sporadically, therefore increasing his ain portion till all the units of the bank are purchased by client.

Meezan easy place finance is a joint ownership of a belongings between the bank and client, where bank provides financing up to 85 % . On understanding of monthly payments to the Bank, one constituent is for the usage of the place ( rent ) , and another for the equity portion. The entire monthly payment is reallocated on a regular basis by the partnership to reflect the clients turning equity and to apportion increasing sums to his investing. When client has made the full investing, which had been agreed, he becomes the exclusive proprietor with a free and clear rubric to the belongings.

MBL offers four different sorts of fundss in place funding strategy which includes Easy Buyer, Easy Builder, Easy Renovate and Easy Replace. MBL Easy Buyer finance is available from Rs 300,000 to Rs 40 million. This finance is available in term of office of 3 to 20 old ages. Bank investing ratio varies from 70 % to 85 % depends on the group of clients, for case, fundss available to salaried individual is up to 85 % , concern individuals and self employed professionals can take funding up to 70 % and up to 75 % is available to Non-Resident Pakistanis ( NRP ) to purchase a house.

Easy Builder finance is available for the residential building, purchase of land or Enhancement of an already constructed residential cottage. Amount of finance and term of office available in MBL Easy builder is same as in MBL Easy Buyer. MBL provides the Easy Renovate and Easy Replace strategy on the same footing but the sum is different.

4.3.2 Ijara

Legally, the rental contract is non a sale of the object, but instead a sale of the usufruct ( the right to utilize the object ) for a specified period of clip. ( Amin El- Gamal, 2000 ) . The chief difference between convention rental and Islamic rental is that the leased plus must be owned by the leasing bureau during the lease period. Thus, while renting an car from traders or auto maker may in rule is permitted.

In most instances, Bankss play intermediary function between the auto manufacturers/ traders and clients, by supplying loans for the present value of rental payments and bear downing clients an involvement on this loan. This would represent out involvement. Muslim legal experts have provided an Islamic option to conventional lease-purchase understandings ( called in Arabic Ijara ) .

Car Ijara is Pakistan ‘s first “ Interest Free ” auto funding based on the Islamic funding manner of Ijara ( Islamic leasing ) . This merchandise is ideal for persons looking for auto funding while avoiding an interest-based dealing. There are some differences between the conventional auto leasing and Meezan Islamic auto leasing which are as follows:

Meezan Bank ‘s Car Ijara is a auto rental understanding, under which the Bank purchases the auto and rents it out to the client for a period of 3 to 5 old ages, agreed at the clip of the contract. All ownership-related hazards lie with the Bank while all usage related hazards lie with the user. Upon completion of the rental period the client gets ownership of the auto against his initial security sedimentation. Under Islamic Shari’a, all ownership related rights and liabilities should lie with the proprietor while all use related rights and liabilities should lie with the user. A conventional rental contracts does non separate between the natures of these liabilities and topographic points all liabilities on the user of the plus, contradictory to Islamic Shari’a.

Legally ( in conformity to Pakistan ‘s Law and Regulations ) , it is required for all leasing entities to see the leased assets. As such, Meezan Bank insures its chartered assets. However, Meezan Ijarah Agreement clearly states that the bank will utilize conventional Insurance merely every bit long as Takaful, which is Islamic merchandise for insurance is non available. Equally shortly as Takaful becomes available in Pakistan, Meezan Bank will change over to Takaful and stop utilizing conventional Insurance. Currently Meezan Bank Limited ( MBL ) is sing its vehicle through Takaful in Karachi and every bit shortly as Takaful is available in other metropoliss we will exchange to Takaful.

In most modern-day fiscal rentals, an excess pecuniary sum is charged, ‘in their income ‘ , if the rent is non paid on clip. This excess sum is considered as Riba and is Haram. Under Ijarah, the Lessee may be asked to set about, that if he fails to pay rent on its due day of the month, he will pay certain sum to a charity, which will be administered through the Islamic Bank. For this intent the bank maintains a charity fund where such sums may be credited and disbursed for charitable intents. Meezan Bank Ltd. Basic regulations of Ijara has been illustrated in Appendix A.

4.3.3 Istisna ‘

Istisna ‘ is a sale dealing where a trade good is transacted before it comes into being. It is an order to a maker to fabricate a specific trade good for the buyer. The maker uses his ain stuff to fabricate the needed goods.

In Istisna ‘ , monetary value must be fixed with consent of all parties involved. All other necessary specifications of the trade good must besides be to the full settled. Istisna ‘ may be used to supply funding for building of house. If the client owns a land and seeks funding for the building of a house, the moneyman may set about to build the house on the footing of an Istisna ‘ . If the client does non have the land and wants to buy that excessively, the moneyman can supply him with a constructed house on a specified piece of land.

Istisna ‘ may besides be used for similar undertakings like installing of an air conditioner works in the client ‘s mill, constructing a span or a main road. The modern BOT ( purchase, operate and transportation ) understandings may be formalized through an Istisna ‘ understanding as good. So, if the authorities wants to construct a main road, it may come in into an Istisna ‘ contract with the builder. The monetary value of Istisna ‘ can be the right of the builder to run the main road and collect tolls for a specific period.

4.3.4 Murabaha

Murabaha is one of the most normally used manners of funding by MBL. Murabaha is a peculiar sort of sale where the marketer expressly mentions the cost of the trade good purchased, and sells it to another individual by adding some net income thereon. Therefore, Murabaha is non a loan given on involvement ; it is a sale of a trade good for cash/deferred monetary value.

The Murabaha involves purchase of a trade good by a bank on behalf of a client and its resale to the latter on cost-plus-profit footing. Under this agreement, MBL discloses its cost and net income border to the client. In other words instead than progressing money to a borrower, MBL will purchase the goods from a 3rd party and sell those goods to the client at an in agreement monetary value. Meezan Bank Ltd. Rules for Mrabaha has been given as Appendix ‘B ‘ .

4.3.5 Salam

In Salam, the marketer undertakes to provide specific goods to the purchaser at a hereafter day of the month in exchange of an advanced monetary value to the full paid at topographic point. The monetary value is in hard currency but the supply of purchased goods is deferred.

MBL uses this manner of funding particularly to finance the agricultural sector.

Purpose of usage:

To run into the demand of little husbandmans who need money to turn their harvests and to feed their household up to the clip of crop. When Allah declared Riba haram, the husbandmans could non take exorbitant loans. Therefore Holy Prophet allowed them to sell their agricultural merchandises in progress.

To run into the demand of bargainers for import and export concern. Under Salam, it is allowed for bargainers to sell the goods in progress so that after having their hard currency monetary value, they can easy set about the aforesaid concern. Salam is good to the marketer because the monetary value is received in progress and it is besides good to the purchaser because the monetary value in Salam is lower than the monetary value in topographic point gross revenues.

The permissibility of Salam is an exclusion to the general regulation that prohibits frontward sale and therefore it is capable to rigorous conditions.

Chapter 5: Analysis AND DISCUSSION


( Meezan Bank Ltd. )

5.1 Institutional Aspects

5.1.1 Accounting Standards

Worldwide, Conventional Bankss have similar accounting criterions. Cardinal Bankss publish the amalgamate balance sheets of the Bankss. And besides oversee them on the regular footing without holding any trouble. In contrast, accounting policies between Islamic Bankss are dissimilar. As a consequence, comparing between Bankss balance sheets or net income and loss histories becomes really difficult. Furthermore the constructs used in the balance sheets and net income and loss histories are non good defined.

Some Muslim Bankss have established an organisation named Accounting and Auditing Organization for Islamic Financial Institutions ( AAOIFI ) , under the counsel of the Islamic Development Bank, in order to present standardisation in the accounting patterns of Islamic establishments. The AAOIFI is consist of a supervisory committee and a fiscal accounting criterions board, who prepare, issue and amend accounting criterions of Muslim Bankss and fiscal establishment who have agreed to use the criterion set up by the board. Meezan Bank Ltd. Is a member of AAOIFI that allow them to follow the same criterions which has been used in other Islamic Banking Organizations.

5.1.2 Proper Institutional Framework

Every system has its institutional demands. Muslim Bankss need a figure of back uping institutions/ agreements to execute assorted maps as they are of no exclusion. Across the universe Islamic Bankss are seeking to profit from the institutional model which fundamentally encourages conventional banking. However these Bankss need their ain institutional support harmonizing to their demands. Constructing a proper institutional apparatus is serious challenge for MBL.

5.1.3 Lack of Equity Institutions

Long term fundss are required in all concerns. In conventional banking, long term bonds and equities fulfil these demands. The securities markets and specialised equity establishments perform this map of supplying long term bonds and equities. Beside the general populace, these long term investings are besides provided by investing Bankss, common financess, insurance companies and pension financess. Since, Islamic Bankss do non cover with interest-bearing bonds. Therefore, their demand for equity markets is much higher. Unfortunately, security markets are non good established in most of the Muslim states, which are the natural sphere of Islamic banking.

5.1.4 Constitution of Organized Secondary Financial Markets

Banking succeeds on the being of secondary fiscal markets. The commercial Bankss invest in really short-run fiscal assets, as they can change over these fiscal assets into hard currency really rapidly at really low transition cost. There are some elements of a secondary fiscal market: fiscal instruments, traders and fiscal establishments.

The constitution of secondary markets can assist Islamic Bankss to derive a great trade ; this would do their assets more liquid and attractive to rescuers.

5.1.5 Need for Market for Short-term Placements of Fundss

Muslim Bankss largely exist as individual entities. The strength of commercial banking is derived from taking all Bankss together. In most states the inter bank minutess between Islamic Bankss are nominal due to the little figure of Islamic Bankss in those states.

Muslim Bankss require such short-run instruments where they can put for short periods productively. Conventional Bankss lent each other 1000000s of dollars even for a twenty-four hours. They can cipher involvement on per twenty-four hours a footing. Muslim Bankss are in a better place sing unexpected liquidness demands than conventional Bankss because the big Numberss of their sedimentations are fixed term of office. Even a important proportion of depositors prefer fixed term of office sedimentations holding the option to retreat any clip. As a consequence Islamic Bankss do necessitate short-run fiscal instruments and institutional constitution for their arrangement.

5.2 Operational Aspect:

5.2.1 Shari’a Issues

Islamic banking and finance regulations are made in the visible radiation of Islamic Shari’a ; hence new merchandise can non be adopted every bit long as it is cleared by the Shari’a bookmans. All Muslim Bankss have their ain Shari’a boards or Shari’a advisers. Those Shari’a boards are responsible to guarantee that the merchandises offered by Bankss are incompliance with the Islamic Shari’a. Hardly any of these bookmans have a formal preparation in modern finance ( ( Iqbal, Ahmed and khan, 1998 ) . There are no of ways used by Scholars to obtain the necessary background information before publishing a fatwa.

One manner is to analyze an issue in meetings and workshops attended by both Shari’a bookmans and fiscal experts. The meeting of Fiqh academies, the most outstanding among them is the OIC Fiqh Academy in Jeddah, drama of import function in that concern. The deficiency of required Shari’a bookmans ‘ expertness in the field of finance, this method of group ijtehad plays an of import function in safeguarding against serious errors in the acceptance of dubious instruments.

Furthermore, Shari’a boards in different Bankss could publish different opinions on similar patterns which may raise uncertainty in the heads of clients. Acceptable Shari’a criterions agreed by an independent organic structure will hold long permanent consequence in guaranting clients of Shari’a compatibility of those contracts every bit good as existent operations. These guidelines will play a critical function in aftermath of western Bankss come ining into Islamic banking.

5.2.2 Teaching, Training, Research and Development

Teaching, preparation and research are indispensable portion for the development of any subject. This fact becomes more of import in Islamic banking and finance as it is an emerging banking system all over the universe. There is still a deficit of bookmans and research workers who possess working cognition of Islamic Fiqh and modern economic sciences and finance. Chief executives and directors are non really good trained in utilizing Islamic manners of funding. Therefore demand for learning, preparation and research is really critical for the successful outgrowth of Islamic banking and its map in the society. So far really small has been done to run into these jobs.

There are some universities in Islamic states like Malaysia, Saudi Arabia, Egypt and Pakistan who have started certain classs to bring forth alumnuss with the double specialization. However their classs still lack the quality and expertness which can bring forth quality directors. Therefore barely any alumnuss were able to happen a topographic point in the Shari’a board of Islamic bank. Research and development in any sector needs fiscal backup, so far any Islamic bank neither separately nor as a group spend adequate money for this intent.

The hereafter of Islamic banking and finance crucially depends on instruction, preparation and research in the coveted specialization. There is besides a demand to set up short classs for Shari’a bookmans in economic sciences and finance and similar classs for economic experts in Shari’a. The attempts in this country demand to be enhanced to several times of current degrees.

5.2.3 Lack of Profit Sharing Finance

There are two types of Islamic fiscal minutess. One is based on net income sharing and other is based on fixed charges on capital. Both types provide finance through the purchase and sale of existent trade goods. In contrast, conventional fiscal minutess are based on loaning and adoption of money for a fixed charge ( involvement ) . However, profit-sharing based fundss have remained negligible in the operations of Islamic Bankss. From houses perspective those fiscal contracts which do non enforce limitation and promote reinvestment of net incomes in the house ‘s growing are more preferred. On the other manus, from bank ‘s position, the costs of puting financess on profit-sharing footing are significantly higher than that of fixed return arrangements.

Largely, the Bankss used the manners of funding is dominated by the fixed return manners such as Murabaha and Ijara ( renting ) . Such manners are clearly be differentiated from interest-based manners because the minutess are made through existent trade goods.

5.2.4 Defaulters and the Issue of Compensation and Punishments

The Islamic Bankss are able to put aside the issue of moral jeopardy and inauspicious choice by the usage of fixed return manners of funding. However the usage of debt alternatively of equity landed into a serious job. Murabaha trades generate debt duties against the purchasers. If the purchasers default on his payment, Bankss are non allowed to bear down anything excess because that would intend take riba. As a consequence, there is a built in inducement for immoral purchasers to default. Islamic bookmans have addressed this job and agreed that punishments can be imposed against defaulters, both physical and fiscal.

5.2.5 Illiquidity of Assetss

Islamic manner of funding is largely based on equity based funding and so far Ijara is the lone successful merchandise offered by Islamic Bankss and they still lack in development of other merchandises. Attempts have been made to develop negotiable instruments on the form of Ijara and Salam but still there is a demand for important betterment. The development of Islamic secondary market lies in wider equity based fiscal instruments and securitisation of some bing manners.

5.2.6 Short-run Asset Structure

Banks prefer to hold short-run investings because they work on the footing of little militias. They should hold the ability to neutralize their assets rapidly in instance they need to make so. In instance of Islamic Bankss short term plus construction becomes more of import because Murabaha which is the major manner of finance is a short term contract. Although it can be designed for longer period of footings but its chief intent is to put in short term undertakings. Since Murabaha is comprised of big per centum of in investings in Muslim Bankss so the construction of their assets is already short term.

5.2.7 Competition

In last few old ages Muslim Bankss have faced an increasing competition from the conventional Bankss who are now come ining in Islamic banking market. So far Muslim Bankss have attracted fundss from clients who have from strong spiritual belief. Lots of international banking giants are now practising Islamic banking techniques such as Chase Manhattan, Citibank, ANZ Grindlays, Klienwort Benson along with others such as Union Bank of Switzerland, Girozentale of Australia, the ABC International. In add-on to these, in many Muslim states, several commercial Bankss are offering Islamic banking services. Bank Misr in Egypt and National Commercial Bank in Saudi Arabia have opened Islamic Branches. In Malaysia, commercial Bankss have been permitted to open Islamic banking Windowss.

With additions in competition and outgrowth of transnational Bankss into Islamic banking market there is a concern that whether or non commercial Bankss will follow the regulations of Islamic banking codifications? This market is extremely moneymaking to commercial Bankss so it is really likely that conventional commercial Bankss may non follow right and dependably the regulations of Islamic banking. All Muslim Bankss have Shari’a board which is responsible for reexamining its operations and contracts and have to do certain that they meet demands of Shari’a, while conventional Bankss do non hold such sort of boards and there are besides frights that conventional Bankss may non be able to maintain histories divide for their Islamic banking operations. They might blend up the money from Islamic histories and allowable return may be obtained by riba.

There will ever be uncertainties over the public presentation of Islamic Bankss, even under competitory conditions there is a room for merchandise distinction. Muslim Bankss have attracted big figure of clients who have strong committedness to spiritual rules. There are still serious concerns over the Shari’a compatibility of certain patterns with Muslim Bankss. The entry of western Bankss will increase these concerns.