1. • Islam is not a new religion; it is the same truth that God revealed throughall His prophets. All religions are the same in essence, whether given, forexample, to Noah, Abraham, Moses, or Jesus, or to the holy Prophet ofIslam. For a fifth of the world’s population, Islam is both a religion and acomplete code of life.

• Economic growth is the main transmission channel fordevelopment. Islam does not contradict growth; it promotes sustainabledevelopment and growth.
• Socio-economic (distributive) justice: The ultimate objective of anIslamic economy. Achieving development, based on socio-economic justice,care and compassion for all, in terms of complete human personality.
• The economic policies that facilitate unhindered flows ofinternational trade, capital and participation in labour flows like reducedtariff and removal of non-tariff barriers, removal of price distortions,flexible regulations and legislation of labour, healthy and sound financialsector and capital markets, investment in skill development andtechnological assimilation and macroeconomic stability are quite accordingto the eco0nomic principles of Islam.
• transmission channels for globalization to development and povertyreduction are international trade and capital flows, international labourflows and technological change particularly in information technology (IT)and telecommunications. International and regional institutions andarrangements such as WTO and the policies of developed countries and

governments can facilitate or hamper these flows.
• High economic growth may not automatically result in povertyreduction. Complementary domestic policies, good governance andinstitutions delivering public services to make a big difference.
• Tools prescribed to achieve the socio-economic objectives of theIslamic economic system are the system of Zakat, prohibition of Riba andthe Islamic Law of Inheritance.
• Zakat redistributes wealth among the existing generation everyyear.
• Prohibition of Riba is the cornerstone of Islamic financialtransactions; the basis of cooperation between capital and enterprise inIslam is sharing of the risks and gains between the two.
• The Holy Quran has specifically prescribed a long list of inheritorsin accordance with the degrees of relationship and, as a result, theinherited wealth gets widely distributed among the inheritors includingwomen.
• The Islamic Law of Inheritance has been in vogue in Pakistan sincethe pre-partition days and has been instrumental in achieving the inter-generational redistribution of wealth.
Measures taken for Islamisation in Pakistan:

  1. • As per Article 2 of the Constitution, Islam is the State Religion of Pakistan.The Objectives Resolution was adopted by the first Constituent Assembly in1949; it was the preamble of the 1956, 1962 and 1973 Constitutions. Itprovided that no law should be enacted that is repugnant to the injunctionsof Islam. It was made substantive part of the Constitution in 1985.

• The Eighth Amendment of the 1973 Constitution, adopted by theNational Assembly in 1985, also made room for creation of the FederalShariat Court (FSC).
• Creation of the Council of Islamic Ideology (CII) in 1962. Thereport of the CII on Elimination of Interest (June, 1980) is genuinelyconsidered to be first major comprehensive work in the world undertakenon Islamic banking and finance.
• Practically, measures taken included the introduction of Zakat(June, 1980) and Ushr (tithe) (March, 1983) and elimination of interestfrom the operations of Specialized Financial Institutions (July, 1979 to July,1985) and the commercial banks (January, 1981 to July, 1985).

  1. • Commercial banks transformed their nomenclature during January 1981 toJune 1985 based on the 12 modes. From July 1, 1985 all commercialbanking in Pak Rupees was made interest-free. However, foreign currency

  1. deposits in Pakistan and on lending of foreign loans continued as before.

• However, procedure adopted by banks was declared un-Islamic bythe Federal Shariat Court (FSC) in November 1991. The Government andsome banks/DFIs preferred appeals to the Shariat Appellate Bench (SAB) ofthe Supreme Court of Pakistan.
• SAB delivered its judgment of December 23, 1999 rejecting theappeals and directing that laws involving interest would cease to haveeffect finally by June 30, 2001. However, SAB gave exemption for dealingwith foreign parties on the basis of interest.
• The Government, in line with directives of SAB, constituted a highlevel Commission and a number of tasks forces and Committees to studythe prospects of transformation of Pakistan’s financial system for interestbased to Shariah compliant and to chalk out the transformation plan.However, the Government came to the conclusion that transformation ofthe financial system as whole was not possible in short term due to avariety of factors/reasons. Developing a viable and complete model ofIslamic finance and putting it into practice was complex and difficult tasksand it would not be wise to under-estimate those difficulties and risks.Therefore, it was decided to promote Islamic banking on parallel basis withconventional system.

  1. • State Bank has issued the criteria for establishment of Islamic banks inprivate sector and subsidiaries and stand-alone branches by existingcommercial banks to conduct Islamic banking in the country.

• A Musharaka-based Export Refinance Scheme has been designedby the State Bank in order to provide export finance to eligible exporters onthe basis of Islamic modes of financing. Efforts are underway to developIslamic money market instruments like Ijarah Sukuk to facilitate the banksin respect of liquidity and SLR management.

  1. • In addition to Meezan Bank as a full-fledged Islamic bank operatingexclusively on Shariah compliant basis, three banks are operating sevenIBBs (MCB, BoK, Bank Alfalah). Habib Bank Limited has also been given inprinciple approval for one stand-alone branch. State Bank has receivedapplications for 24 IBBs to be opened in 2004.

• A full-fledged Islamic Banking Department has been created in theState Bank that would serve as a focal point for all matters relating toIslamic banking and finance in the country.
• A Shariah Board comprising two Shariah scholars and three expertsin the areas of banking accounting and legal framework has beenestablished in the State Bank of Pakistan to advise it one modes,procedures, laws and regulations for Islamic banking ensuring Shariahcompliance and smooth operations of Islamic banks.
• Anti Money Laundering Measures: The ease with which huge sums

can be transferred across the globe with a single push of a button hasfacilitated international trade and settlements, but the capability itself hasgiven nightmares to the managers of developing economies trying tocompete in an increasingly market based competitive environment, as alsofor developed economies by facilitating money laundering and terrorism.
• Islamic banks, by their nature, are less likely to engage in moneylaundering and other illegal activities such as financing of terrorism thanthe conventional banks. Their disclosure standards are stringent becausethey require the customers to divulge the origins of their funds in order toensure that they are not derived from illegal means. Islamic financingmodes are used to finance specific physical assets like machinery,inventory, and equipment.
• Further, the role of Islamic banks is not limited to a passivefinancier concerned only with timely interest payments and loan recovery.Islamic bank is a partner in trade and has to concern itself with the natureof business and profitability position of its clients.
• A stringer ‘Know Your Customer’ (KYC) policy is an inbuiltrequirement for an Islamic bank. Before entering into a contract Islamicbanks are expected to have:- Knowledge of business of the client- Knowledge of the individual or collective management and their bonafides- An internal code of ethics in negation of a singular profit objective- Awareness of the spirit and basis of governing laws and regulations.
• Pakistan has adopted a strategy by adopting uniform internationalstandards to ensure fairplay by all kinds of banks and financial institutionsalso including Islamic banks. It has also put in place stringent regulationsin order to effectively curb money laundering. An Anti Money Launderinglaw has been developed and is in the stage of finalization.
Introduction of Zakat and Ushr:
• Zakat and Ushr Ordinance, 1980; Applied to Muslim citizens ofPakistan only; assets subject to Zakat were divided into two categories viz;subject to compulsory levy of Zakat and those at which payable voluntarilyat discretion of the owner. @2-1/2% of the asset value on the ValuationDate; As against the rate of 2.5% in the case of Zakat, the rate of Ushr, aform of Zakat levied on land produce, is 5% in the case of irrigated land,10% for rain-fed land. The rate is 20% for the produce of forests andmines. The difference in the rates is in inverse proportion to the humanlabour and cost involved in the production of the various items.

  1. • According to the Ordinance, Zakat receipts are to be used for providingassistance to the needy, the indigent and the poor, particularly orphansand widows, the handicapped and the disabled, eligible to receive Zakatunder the Shariah, for subsistence or rehabilitation.

• Today, over Rs. 20 billions of Zakat funds are lying idle for lack ofan efficient distribution system. The program has come under a great deal

of criticism for the uneven manner in which funds are disbursed.
• The Government enacted the “Enforcement of Shariah Act, 1991″under which the State is required to “take steps to ensure that theeconomic system of Pakistan is constructed on the basis of Islamiceconomic objectives, principles, and priorities”.
Protection granted to foreign Commitments: Section 18 of the Shariah Act,1991 provides that notwithstanding any other provision of this Act or any decisionof any Court, financial obligations incurred and contracts made between a NationalInstitution (which includes the government, a statutory corporation, a company,or any person in Pakistan), and a Foreign Agency (which includes a foreignGovernment, a foreign financial institution, foreign capital market, including abank and any lending agency and individuals, as well as suppliers of goods andservices) shall continue to remain, and be valid, binding and operative.
1. Future depends upon innovative instruments to enhance liquidity,develop secondary money and capital markets and introduce public financeinstruments.
2. We need appropriate institutional arrangements, legal framework,taxation issues and human resource development need to be taken care of.

  1. • Enforcement of contracts is not effective.

• Inefficient system for early recovery.
• Ineffective code of conduct for professionals.
• Development of Shariah compliant government securities.
• Research and development in the field of Islamic finance andeconomies.
• HR development and training to the banks staff on Islamic Bankingand Finance.
• Education and public awareness about Islamic financial system.



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