Operational Efficiency of Islamic and Conventional Banking in Pakistan and Malaysia

(Thesis statement is not proper, it must contain “colon” (:) in it. We discussed about
ijarah and murabaha model of financing, isn’t it? I have found data about these modes
of financing….)

Abstract (An abstract is a 150- to 250-word paragraph that provides readers with a quick

overview of your essay or report and its organization. It should express your thesis (or central

idea) and your key points; it should also suggest any implications or applications of the research

you discuss in the paper.)

A comparison of Islamic banking in Pakistan and Malaysia. Islamic banking system is

governed by the Shariah rulings which prohibits the paying of interest in financial transactions.

Primary objective of Islamic banking is to avoid interest. Islam does not only prohibit interest

but it also prohibits dealing with pork, liquor, gambling and many other things that are

considered haram as per the rulings of Shariah. Lack of awareness of Islamic banking in

Pakistan is more than in Malaysia. Both countries Pakistan and Malaysia begin their work on

Islamic banking in 1980s. In order to generate assets and liabilities conventional banks deals

with interest based transactions whereas according to rulings of Shariah interest is prohibited.

Pakistan comprises of both Conventional as well as Islamic banking system. In conventional

banking system they borrow money from depositors at low interest rates and then lend them to

the borrowers at low interest rates. Conventional banking system is based on man-made law

and this system is un-ethical. It is profit-oriented system. Islam prohibits interest but allows

profit. Dual banking system was first adopted by Malaysia the Islamic banking system in

Malaysia operated side by side with the conventional banking. The models (modes of financing

in Islamic Banking) of Islamic banking are murabaha, ijarah, musawamah, mudarabah,

musharakah etc. The role of Malaysia in the development of Islamic banking has gained

worldwide recognition. Pakistan and Malaysia both are Islamic counties so both the countries
follow the principles of Shariah. There are Islamic banks which only provides Islamic banking

services and there are conventional banks which only provides conventional banking services

but there is also dual banking system where the banks are providing both Islamic and

conventional banking services.

Introduction

Islamic banking is an interest free banking system and this system is governed by the principles

of Shariah. While executing any Islamic banking transaction the counter parties must ensure

that the transaction is halal according to Shariah. Shariah is basically a path which refers to the

laws or guidance given in the Holy Quran or Hadith. The end result does not decide whether

the transaction is valid or not but the process in reaching the end matters. At first the effort in

Islamic banking was made by Ahmad El Najjar in Egypt. In 1963 in an Egyptian town he

established a saving bank based on profit sharing and it was a successful experiment and there

were nine such banks until 1967. Bank Islam Malaysia Berhad (BIMB) was the first Islamic

bank which was established in Malaysia. Bank Islami was the first Pakistani Islamic bank. The

Interest-free banking Scheme or Skim Perbankan Tanpa Faedah (SPTF) it was the turning point

of Islamic banking in Malaysia and it allows conventional banks to offer Islamic banking

services. Pakistan started efforts to eliminate riba in 1970s but the most important efforts were

taken in 1980s. More than three decades ago Islamic banking started operating in Pakistan, a

commission in Pakistan was constituted by the State Bank for transformation of financial

system in order to promote Shariah based financing. A department of Islamic banking was also
developed by the State Bank of Pakistan on 15th December 2003 since then measures have been

taken to in order to increase the growth and development of Islamic banking in Pakistan.

In conventional banking system interest is charged even if the organization suffers loss which

means that there is no concept of sharing loss. Conventional banks earn money by way of

charging interest and fee for their services. Conventional banks are not according to the rules

of Shariah they are basically profit-making organizations. The two main functions of

conventional banks, one is to collect deposit and second is to issue loans. There is a huge

difference between the products offered by conventional and Islamic banks. The products

offered by conventional banks are credit cards, debit cards, loans on interest.
Significance of Study

The main purpose of this research is to introduce you to Islamic banking and conventional

banking as well as the relationship between these two. To know about the products offered by

both Islamic and conventional banks.

The benefit of this study is that after reading it one will gain knowledge about the both banking

systems and can differentiate which one is better and which one to be followed. As we are an

Islamic state so we should follow the rules and principles of Shariah.

As Pakistan is an Islamic country and as per the rules of Shariah interest is prohibited in Islam

so we should avoid it but conventional banking system is based on interest. Conventional

banking system is un-ethical as it is based on mam-made law and conventional banks are profit-

oriented organizations.
Literature Review

In the modern world Islamic banks are operating in all areas of the globe and are considered as

practical and feasible alternative system. Originally Islamic banking system was developed for

Muslims but at present It has achieved worldwide acceptance. The Quran prohibited riba which

means interest but it is followed by conventional banks and according to the rules of Shariah

all transactions which includes uncertainty (gharar), gambling (maysir) and all religiously

forbidden products (haram) are prohibited. (DA JIA QIAN, SIVAKUMAR VELAYUTHAM,

CONVENTIONAL BANKING AND ISLAMIC BANKING, June. 2017, at 4.) Islamic banking came

into existence on base of an experiment in 1963 initially it was on small scale in a small town

of Egypt. The was a successful experiment and it opened the doors for separate and distinct

market for Islamic banking and as a result of it Islamic banking came into existence in 1970s

at a moderate scale and a number of Islamic banks came into existence in Arabic and Asian

countries. In Pakistan as well as in Malaysia some banks are operating with an Islamic window

while others are operating with a Non-Islamic window knowns as conventional banking

system. Some banks are purely conventional and some banks are purely Islamic. (MUHAMMAD
SHEHZAD MOIN, PERFORMANCE OF ISLAMIC BANKING AND CONVENTIONAL BANKING IN

PAKISTAN A COMPERATIVE STUDY, Jan. 2008, at 16, 17.)

Riba is absolutely banned by the Holy Quran and it is also confirmed from the ahadith of Holy

Prophet (PBUH) which are the next authoritative source after Quran. Hazrat Muhammad

(PBUH) condemns the one who pays it, the one who takes it, the one who write the agreement

for it and also the one who witnesses the agreement. The models used by Islamic banks are

murabaha, musawamah, mudarabah, musharakah, ijarah, ijarah will be further explained. The

illegality of riba is proved by the Holy Quran so it there is no need for man to know about the

reasons why it is prohibited. We should discard riba as it is illegal although we are unaware of

the reasons. (M. KABIR HASSAN: HANDBOOK OF ISLAMIC BANKING, 44-46 (2007)

Literal meaning of ijarah is to give something on rent. Ijarah is used for two different things,

one is to employ the services of someone on consideration or wages and the second one relates

to the usufructs of assets and properties which means renting out usufruct of particular property

to someone. (DR. MUHAMMAD TAHIR MANSOORI: ISLAMIC LAW OF CONTRACTS AND

BUSINESS TRANSACTIONS, 229-230 (2015). Some people are of the view that Islamic banks

should not earn profit they should be non-profitable organizations. Islamic banks should do

banking on the basis of Qaraz-e-Hasan because if Islamic banks earns profit in the same way

as conventional banks do, then what is the difference between these two banking systems. In

order to know about the nature of transaction that whether the transaction is according to the

rules of Shariah or not every bank has its own Shariah advisor who advises the bank on their

product and operational procedures. (DR. MAULANA EIAZ AHMAD SAMADANI: DIFFERENCE

BETWEEN ISLAMIC AND CONVENTIONAL BANKING, 8-13 (2016)

According to the rules of Shariah conventional insurance is prohibited because it involves the

elements of gharar, maysir and riba in its implementation. Conventional insurance is replaced
by Takaful, it operates as per the rulings of Shariah. The contract of Takaful is based on the

concept of Tabarru, tabarru contracts are those the party initiates a contract and expect nothing

in return from the other party. Tabarru contracts are made voluntarily. (ASMAK AB RAHMAN,

SHAMSIAH MOHAMAD, ANALYSIS OF TABARRU PRINCIPLE IN TAKAFUL CONTRACT

MALAYSIAN EXPERIENCE, Feb. 28, at 2,4.)

Research Methodology

The method used in this research is ordinary least square method. Secondary sources are used

for interpretation and understanding which includes books, journal papers, articles and official

publications will be used right the way through this study.

Where are Research Questions?

Aims and Objectives.

Have you followed that template which is provided to you?