Question

Question # 05 (05 + 05 Marks)

The most important element of Islamic economic society is the prohibition of interest. Synonymous terms are used such as Usury and Riba for Interest. All covers the meaning to load additional money on funds lent to borrower. As such it is fundamental to understand the Islamic economics to have fair idea about Islamic banking. If we try to focus countries like Pakistan, Iran, and UAE we will come to know that these countries are practicing Islamic banking based on Islamic Financial laws, whereas, other countries like Malaysia, Indonesia, Bangladesh, Egypt, and Jordan are working on Islamic banking side by side with conventional banking. Foreign countries are also experiencing the taste of Islamic banking. Some countries like USA, UK, and Australia are taking lead and exploring new avenues in Islamic banking. If we see to the crux of Islamic banking it is based on Islamic Sharia Laws that are helpful in identifying solutions to various financial and nonfinancial problems. Islam has clearly stipulated that Interest (Riba) is unlawful (Haram) since it causes lot of bad impact on the society such as poverty, concentration and unequal distribution of wealth, unethical practices and disparity in purchasing power of consumer. In conventional banking, utilization of money advanced is not important; they are concerned with return on money advanced. On the contrary, Islamic banks take risk while venturing with their business customers. Islamic banks neither take interest nor give it to their clients. All activities are sharia based and in line with ethical standards of life. Islamic banking is although a new area to explore in our country and particularly for Muslims, but non-Muslims are also contributing to it and taking full advantage of Islamic banking. Challenges although, are in the way of Islamic banking but emerging opportunities in this filed cannot be ruled out.

Required:

i)- In accordance with Islamic law (Sharia) how risk management is different for Islamic financial firms as compare to conventional financial Institutions?

ii)- Do you feel that Islamic Banking in Pakistan is working on Islamic Ideology?

Answer 1

I. In accordance with the Islamic law, the risk management is different for Islamic Firm as compared to conventional firm because-

A .Islamic firms will never be accepting any kind of interest and interest is the majority of concern of the financial conventional firm so there would be a difference in their approaches

B. in case of the Islamic Firm's, the risk will be shared by both the parties where are you in case of financial conventional forms that is could be shared by majorly the institution and not the depositor

C. Risk management techniques are adopted externally by conventional Financial institutions whereas Islamic finance is already based upon the principle of risk management.

D. There is a high level of risk exposure in conventional financial Firm's where as these Islamic Firm's will be taking adequate risk because the risk would be mostly counterparty risk.

II. Islamic banking in Pakistan is trying to adopt the Islamic ideology because the Islamic Bank in Pakistan was earlier using the the fundamental banking concepts of acceptance of the interest but when there is an emergence of Islamic banking throughout the Islamic countries the Pakistani country is also trying to adopt with the similar trends and the banks in Pakistan are also trying to go the Islamic way and they are also focusing on no interest policies and they are also majorly focused on risk sharing techniques between the depositors and the institutions so this is the fundamental of Islam.