The thrust for Islamic Banking is founded on the desire to submit to the Divine Instructions on all transactions, particularly those involving exchange of money for money. However, it would be quite unfair to limit Islamic Banking to elimination of Riba only.
Riba is but one of the major undesirable elements of an economic transaction, the others beingGharar (uncertainty) and Qimar (speculation). While elimination of these objectionable aspects in a transaction is indeed a critical aim of Islamic banking system, it is by no means its ultimate objective.
At the heart of Islamic Banking is a system of commercial transactions that not only providesHalal modes of commercial transactions by avoiding that which is obnoxious and objectionable, but also fosters ethical, fair and just practices.
A key element of Islamic economics is distribution of equitable rewards to the different factors of production. Islamic economic system seeks system of Redistributive justice where concentration of wealth in a few hands is countered and flow of money into economy is fluent. Islamic Banking is, therefore, seen as a lynchpin to achieving the economic and social goals of the Islamic economic system.

Riba
It has been argued in vain for long in some circles that the prohibition in Islam is that of excessive interest only. Or that it is the interest on consumptive loans that has been forbidden and as such loans extended for commercial purposes are entitled to an excess over the principal amount lent. Such tendentious arguing fails to give due understanding to verses 278 and 279 of Surah Al-Baqarah (quoted below).
“O ye who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from now onwards) if you are (really) believers! 2:278
And if you do not do it, take notice of war from Allah and His Messenger! But if you repent, you shall have your capital sums 2:279
However, this does not mean that Islam prohibits any gain on principal sums. In Islam, profit is the recognised reward for capital. When capital employed in permissible business yields profit that “excess over capital” becomes the rightful and just claim of the owner of the capital. As a corollary, the risk of loss also rests exclusively with the capital and no other factor of production is expected to incur it.
Another important element of Islamic finance is that profit or reward can only be claimed in the instance where either risk of loss has been assumed or effort has been expended. Profit is therefore received by the provider of capital and wages/remuneration by labour/manager.
A depositor in an Islamic bank can therefore make earnings on his or her deposit in several ways. Through return on his capital when that capital is employed in a business venture; through sharing of profit when his capital is part of the capital that is employed in a partnership, and finally through rental earnings on an asset that has been partially financed by his capital.

Islamic financing: Asset-based financing
A key feature of Islamic banking is that unlike conventional banks which deal primarily in money and financial securities, Islamic financing is related to an asset that is a feature of the transaction, and quite often the principal feature itself. From this springs an important distinguishing feature of Islam wherein Islamic financing is always based on illiquid assets that have intrinsic value. Profit to Islamic financing is generated through bonafide sale of these assets.
Conventional banking, on the other hand, is free of such limitations. It lends money and makes its earnings through this act of lending. Its earnings are unconcerned with the economic fate of its lending.
A Perspective:
The history of Islamic banking from its recorded inception is less than 40 years old. From a humble beginning in a small village in Egypt in the late 60’s, it has spread to the four corners of the world. By normal standards in a time span that is less than half a century it could have hardly been expected to establish foothold in Muslim world, let alone make its presence felt in Muslim-minority countries. Yet such has been its phenomenal rate of growth that not only is it taking firm roots in its homestead, but is also attracting genuine interest among the standard bearers of conventional banking and in swathes of land where Muslims are a small minority only.
Still there is much ground left to cover. In Pakistan, Islamic Banking is less than 3% of the Banking sector. Even in the Gulf states, where it has a larger footprint, in no single country is the volume of Islamic banking more than a third of the entire sector.
Many blame Islamic Banking’s small share against conventional banking to a smaller portfolio of products. A standard complaint against Islamic banks is that they do not have the same variety of financial instruments as found in conventional banking. Though valid to an extent, this popular jeremiad needs to be seen in the perspective of Islamic Banking’s brief history against more than two centuries of conventional banking adopted in full force across the globe, its competition against an entrenched system of banking and the constraints within which it must operate.
Notwithstanding, Islamic banking is still growing at more than twice the growth rate of conventional banking worldwide, and while it may not have the latter’s plethora of financial products, its repertoire of Islamic financial products is steadily increasing.
In the following space, principal Islamic instruments are briefly described to acquaint the reader with their fundamental aspects. Following that, Islamic Products in BAL-IBD’s portfolio are illustrated in terms of their features.




Musharakah:
Musharakah is one of the two ideal modes of Islamic financing. The other one being Mudarabah. Musharakah is a contractual relationship formed through mutual consent of the parties for sharing of profits and losses in a joint venture. Assets in the venture are jointly owned in proportion to each partner’s contribution. The profits are shared in a pre-agreed ratio. Losses, however, are incurred in proportion to each partner’s investment. Islamic Bank representing share of its depositors invests funds in the joint venture alongside other investor(s).

Mudarabah:
Like Musharakah, Mudarabah is also a form of partnership. Whereas all partners in Musharakah contribute capital, under Mudarabah partnership is formed between provider of capital and provider of expertise or human resource. Proportions for sharing profit are decided upfront. Losses are incurred solely by the partner contributing capital.

Murabaha:
Murabaha is a non-participatory mode of Islamic financing where the bank sells the asset required by its client to the client on cost-plus basis. The asset is first purchased by the bank and the bank incurs the risk of any loss or damage to the asset as long as the asset remains under its ownership. Upon sale of the asset, the Islamic bank is obligated to inform the client of the exact cost incurred in the purchase of the asset and the margin of profit incorporated in the sale price. Payment by the client of the sale price may be deferred in which case it would become Muajjal. The selling price once agreed cannot be changed even when the client fails to pay on the agreed date.

Ijara:
Under this facility a client may take on rent, property, vehicle or any other real asset belonging to the bank. The bank transfers the right of use of the asset to the client, while retaining the ownership of the asset. The client pays periodic rent to the bank for the use of the asset. Basis for rentals can be fixed as well as floating. Any change is rental may be made through mutual consent.
Salam:
Salam is a contract of advanced payment against deferred delivery of goods. Goods paid for in advance by the buyer are delivered by the seller after an interval of time. The Seller receives in advance fully paid price of the goods at the time of contract undertaking to deliver the goods specified by the buyer at a future date.

Istisna:
Manufacture of a specific product against precise specifications by a manufacturer for delivery to buyer. It is necessary that the price of the product and product specifications are fully agreed upon by the manufacturer and the buyer, and that the material required for manufacture is arranged by the manufacturer.




MISSION STATEMENT:
To practice Islamic banking in its desired spirit that unfolds its true economic potential resulting in prosperity to our customers and commercial rewards to our sponsors and our employees.

COMPANY INFORMATION:
Great journeys begin with but a single step and mighty oaks are born out of humble seedlings. Bank Alfalah – Islamic Banking Division (BAL-IBD) – presently a division of Bank Alfalah Limited – is gearing up to become a separate, full-fledged Islamic Banking entity. BAL-IBD offers to its customers a broad range of Islamic products under personal, consumer and corporate banking modes. The array of Islamic instruments at the disposal of BAL-IBD is equipped to provide efficient and satisfying solutions to our customers’ needs. Our Islamic products are Shariah-compliant carrying the seal of approval of the Centre of Islamic Economics, an institution vested with powers to attest authenticity and legitimacy of Islamic banking products in Pakistan.
BAL-IBD has entered into a Shariah Consultancy agreement with the Centre of Islamic Economics, Karachi, which is a noted and well-known seat of learning for Shariah scholars and a prominent institution dealing in Shariah Advisory services. Besides assisting in advancement of the Division’s product portfolio, the Centre also stamps approval of the Division’s conduct of business following periodic audits. These audits are in addition to those carried out by the State Bank of Pakistan and the internal audits undertaken by the Division itself.

PERFORMANCE:
Bank Alfalah’s Islamic Banking Division (BAL-IBD) started operations in 2003 and at its yearend reflected a modest capital base of Rs 100 million and deposits totalling Rs 113.7m. By following yearend, BAL-IBD’s equity had risen more than 4 times to Rs 569m and the balance sheet footing had swelled to Rs 7,799 million. Deposit size had grown from less than Rs 114m to over Rs 7,229 million.
The pace of frenetic, triple digit growth was continued over the next twelve months as equity more than doubled to Rs 1,278 million from Rs 569m. Assets also recorded a more than 100% growth, climbing to Rs 15,634 million from Rs 7,799 million. Deposits alone failed to double – rising to Rs 12,476m from Rs 6,548 million – yet managing a healthy 90% increase.
Financial results as of June 30, 2006, reflect growth but at more modest pace. Total balance sheet size fell shy of Rs 18 billion – Rs 17,970m vs Rs 15,634m – and deposits climbed to Rs 14,111 million, rising Rs 1,635 million in six month’s period. Income for the 6-month period was Rs 111.23 million.