Islamic Banking

The prohibition of interest in Islam caused many writings to come forward with an idea

to establish banks that do not work on interest basis. So the basic difference between

Islamic banks and conventional banks is that Islamic banks are interest free banks

whereas conventional banks are interest based banks. (Kahf 2006) Although interest and

profit are very clear concepts but they are misunderstood by many people. Basic

difference between interest and profit is that interest is the reward to money and profit is

the reward to capital investment. In other words money produces interest and capital

investment produces profits. (Toutounchian 2004)

Islamic finance has gripped the world with a strong commitment and passion. It has been

depicted that interest in this segment has grown rapidly in almost 60 countries, not only

in Islamic countries but in the leading global financial centers. Even United Kingdom has

adopted an open door policy and provided a level playing field to Islamic finance and

now Singapore is following its lead.  (Dr.Shamshad 2007)

Islamic banking has shown tremendous growth in the past 20 years, with estimated

deposits surpassing $80 billion in more than 45 countries. Annual turnover is currently

estimated at $70 billion and is projected to pass $100 billion by 2000. (O’Sullivan 1994,

p. 7) For the last 60 years, the mode of banking in Pakistan was totally of interest based

but now there is a shift from western banking to Islamic banking in number of banks in

Pakistan and also there are some new banks like Meezan bank which is totally based on

Islamic banking. In 2007 Meezan Bank creates a significant milestone in the history of

Islamic Banking by opening its 100th branch in the city of Karachi. With 100 branches in

31 cities clearly positions the Bank as the leading Islamic Bank in Pakistan. Two new

dedicated Islamic Banks start operations in Pakistan, namely Emirates Islamic Bank and

Dawood Islamic Bank. (Meezan Bank 2007)