The Premise of Islamic Banking, Disclosures, Transparency, and Investors’ Confidence

Ahmed Ali Siddiqui, Esha tir Razia
Published Online: December 2020
Abstract

The Islamic Banking industry in Pakistan has experienced rapid growth since 2002- when the State Bank of Pakistan issued the first ever Islamic Banking license to Meezan Bank. Ever since, Meezan Bank has steadily been leading the way for the industry. According to a recent study conducted on the Islamic Banking Industry in Pakistan by rating agency Moody’s, Islamic deposits have grown 21 percent on a compound annual basis for the six-year period through June 2019, outpacing the 11 percent compound annual growth rate of all other deposit types. The study further highlighted the better performance of Islamic banks whereby return on assets for Islamic banking institutions was 2.3 percent at the end of June 2019 versus an average of 1.6 percent for all banks in the system. As of the latest data (end of September 2020), the IBI assets stand at Rs 3.81 trillion (16.0 percent) and Rs 3.03 trillion 17.3 percent, of overall banking industry. The objective of Islamic finance is the well-being of the common men by avoiding exploitation and promoting fair distribution of wealth in the society. The central philosophy emerges from the divine guidelines allowing trade as an alternative of interest or usury. And Allah has permitted trade and prohibited interest. (Al-Baqarah,275) In light of the guiding principle of Islamic finance it is clear that Islamic Banks are inherently different from the conventional banks. Following the basic premise of promoting real trade, risk-sharing, profit sharing and nurturing partnerships Islamic Banking institutions participate in the real economic sector rather than treating money as a commodity, lending on interest without any contribution in the real economy.


Keywords

Islamic Banking, Disclosures, Transparency, Investors’ Confidence