BANKING BANKING

IN FOCUS:IN FOCUS:
ISLAMIC
ISLAMIC
BANKING
BANKING
a case study of Meezan
a case study ofBank
Meezan Bank
By Ahmed Ali Siddiqui
By&Ahmed
Obaid Ali
Usmani
Siddiqui & Obaid Usmani

The Shariah compliance The Shariah

functioncompliance
is the core function is the core
differentiating factordifferentiating
between an Islamic factor between
Bank and an a Islamic Bank and a
conventional Bank. Overconventional
the years, Bank.
the Over
globaltheIslamic
years, the global Islamic
Banking industry hasBanking
witnessed
industry
rapid hasgrowth
witnessed
with par-
rapid growth with par-
ticular focus on improvement
ticular focusof on
theimprovement
Shariah compliance of the Shariah compliance
mechanisms currently mechanisms
in place. With currently
focusinonplace.
the With focus on the
awareness of the Islamic
awareness
Finance of consumers,
the Islamic Finance
the Islamicconsumers, the Islamic
Finance industry is rigorously
Finance industry
workingisto rigorously
provide more
working to provide more
authentic and reliable authentic
mechanisms and reliable
of Shariah
mechanisms
compli- of Shariah compli-
ance so that the systemanceissopreferred
that the by system
its customers
is preferred to by its customers to
ISLAMIC BANKING IN PAKISTAN
ISLAMIC BANKING IN PA
fulfill their banking needs.fulfill their banking needs.
Pakistan, in recent years hasPakistan,
showedin recent years
strong inclination towards strongIslamicinclination towa
Islamic banks are playingIslamicanbanks
activearerole
playingBanking.
an active roleCommercial
The first Banking.
Islamic The first Comme
Bank in the country was established
Bank in the in country was e
in this aspect by putting
in thiscomprehensive
aspect by putting Shariah
comprehensive
con- Shariah con-
2002 and within 12 years, the2002Islamic
and within 12 years
trols and mechanisms trols
in place.
and mechanisms
The Pakistani in place.
IslamicThe Pakistani Islamic
Banking share became moreBanking
than 12% share became mo
of the entire banking industry.
of theOver entire banking in
Banking industry, particularly,
Banking industry,
Meezanparticularly,
Bank has made Meezan Bank has made
the last decade, Islamic Banks
the last have decade, Islamic
notable efforts and notable
progressefforts
in this and
area.progress
beenin this area.
successful in providingbeen
end to successful
end in providin
Shariah compliant alternatives
Shariah to compliant
all altern
In the year 2013, Meezan
In theBank
yearwas
2013,recognized
Meezan Bank as the
was recognized as the
conventional banking products.
conventional
The banking pr
‘Best Research & Development’
‘Best Research institution
& Development’
by institution
robust regulatorybyframeworkrobust
of Islam-
regulatory framewo
ic Banks in the country is one
ic Banks
of the in the country is
the Global Islamic Finance
the Global
Awards.
Islamic
ThisFinance
achievement
Awards. Thismajor
achievement
success factors whichmajor have success factors
goes onto show thegoes support
ontoofshow
the central
the supportbank which
of the central bank which
supported this rapid growth.
supportedWith this rapid gr
more than 1300+ Islamicmore Banking
than 1300+ Islam
has led Meezan Bank hasasled
being
Meezan
referred
Bank to,asa being
benchmark
referred to,branches
a benchmark
and more than 30% branches
annualand more than
of Shariah Compliance of Shariah
in bothCompliance
local & in bothinlocal
growth & assets,growth
deposits, financingin deposits, asse
and investments, the Pakistani
and Islamic
investments, the Paki
global Islamic Finance global
industry.
Islamic Finance
Bankingindustry.
industry is set to become
Bankingthe industry is set to
hub of Islamic Banking of thehubregion.
of Islamic Banking of

12 Journal of The Institute of 12

BankersJournal
Pakistan
of The Institute of Bankers Pakistan
 Meezan House

HOLARS SHARIAH SCHOLARS

GROWTH OF MARKET SHARE FOR ISLAMIC BANKS
and guidance The
of Shariah
presencescholars
and guidance
is of Shariah scholars is 15
12
% of Total Banking

for any Islamic

the Bank.
backbone Pakistan
for any
is Islamic Bank. Pakistan is 10
most resourcefulone countries
of the most in this
resourceful countries in this 10
7.2
8.4
presence of eminent
regard. Thescholars,
presence
like of eminent scholars, like 5.9
4.8
mmad Taqi Usmani,
Sheikh world’s
MuhammadleadingTaqi Usmani, world’s leading 5 3.8
pected scholarandonmost
Islamicrespected
financescholar on Islamic finance
r boost to the givescause
a major
of Islamic
boost to the cause of Islamic 0
its global acceptability.
banking and There
its global
are acceptability. There are 2007 2008 2009 2010 2011 2012 2013
Pakistani Shariah
many scholars
other Pakistani
who are Shariah scholars who are
ah boards acrosspart the
of globe.
ShariahFortu-
boards across the globe. Fortu-
kistani Islamic nately,
Banking theindustry
Pakistani
hasIslamic Banking industry has Market Share of IB Industry (%)
under the supervision
been working of world’s
under the supervision of world’s 14
holars which renowned
have madescholarsIslamicwhich have made Islamic 12 12.1
sound and reliable.
Banking very sound and reliable. 10
9.5 11.2 9.7
10.1

8.6 9.1 9.8

8.1
8 12-Dec
Training
6 13-Sep
13-Dec
n resource is aQuality
key component
human resource
of a is a key component of a 4

nture. When successful

it comes toventure.
IslamicWhen it comes to Islamic 2
rs the same importance,
banking it bears
in factthe
thesame importance, in fact the 0
industry demands
nature
highly
of the
skilled
industry
and demands highly skilled and Total Assets Deposits Net Financing & Investment

Journal of The Institute of BankersJournal

Pakistan
of The13
Institute of Bankers Pakistan 13
 Shariah
Supervisory
Board

Shariah
Advisor

Head of
PDSC

Retail Product Shariah

Product Structuring Compliance Shariah Charity SSB
Shariah Audit Training Management Coordinatior
Development and Research Function

technically sound employees to carry the comprehensive Shariah governance Commercial, SME Clients and develop-
prestigious label of Islamic banking. The framework for Islamic Banks. ment of Liquidity management and
Pakistani Islamic Banking industry, over treasury related products are highlights
the years has developed technical exper- Besides working on the Shariah of the PSR function.
tise with the ability to conduct training compliance framework, the State Bank
sessions at various forums. In order to has also taken a major initiative by bring- Customized Shariah compliant finan-
help establish Islamic banking in other ing all stake-holders on a single platform cial needs for all segments of business
countries, training and development of for launching a joint media campaign to are done by analyzing the following:
human resources is a necessity. Pakistan promote the Islamic Banking Industry in
can play a vital role in fulfilling the need the country. • Customer’s business cycle
of quality human resource. There are • Tenure (short term or long term)
many distinguished speakers who The Shariah Compliance Framework • Existing alternatives present in the
market
regularly participate in national and at Meezan Bank
• Rate of financing (fixed or variable)
international conferences, seminars,
• Payment flexibility (possibility of early
workshops and other platforms. Meezan Bank has a separate department
repayment)
Eminent scholars conduct Islamic Bank- for Shariah compliance known as the • Tax concerns
ing courses at various academic institutes Product Development and Shariah • Accounting treatment
and provide services for course structur- Compliance (PDSC) department, with • Regulatory aspect
ing, curriculum development and testing the mandate to ensure Shariah compli- • Risk mitigation measures
services. ance, conduct Shariah Audit of the Bank, • Mode and nature of the Assets
Research for new product development • Basic Shariah Principles
Development Of Regulatory Frame- through innovative ideas, Charity
work And Initiatives From The Management and Shariah Training. Once the idea and the structure of a
Central Bank PDSC Department has more than 35 new product are finalized, they are
professionals which is a large team for presented before the Shariah Advisor
The regulatory framework of banking Shariah compliance across the globe. who may either approve, decline or
industry must be technically sound and suggest modification in the product.
Pakistan is one of those few countries, Product Structuring & Research (PSR)
where central bank has devised a robust In cases where the Shariah advisor
regulatory framework with the support The Product Structuring and Research is may not approve or decline the product
of Islamic banks. The State Bank of the origination point of innovation of but rather give instructions for the
Pakistan has also established a separate new products and services as per Shariah presentation of the same in the next
department to support and monitor guidelines. Various financial products Shariah Supervisory Board (SSB)
Islamic Banking in the country. and services have been developed to meeting, the SSB will then take the final
Although, the Islamic banking industry is fulfill previously addressed financial decision on the product.
just a decade old, its regulatory frame- needs of the customers. Besides develop-
Shariah Compliance Function (SCF)
work is quite comprehensive which ing new products, the PSR function also
covers almost all aspects of Islamic conducts research in order to refine,
The Shariah compliance function has a
Banking. Specific regulations for Shariah modify and redefine existing financial broad scope in terms of its involvement
compliance are one of the major products. Providing customized Shariah with all departmental functions in the
highlights of SBP along with a separate compliant financial solutions to Corporate, bank. The basic purpose of SCF is to

14 Journal of The Institute of Bankers Pakistan

Meezan Bank’s Shariah Advisor report
is considered as the most informative
and comprehensive report in the
global Islamic banking industry and
also referred as a benchmark.

Journal of The Institute of Bankers Pakistan 15

ensure and monitor Shariahensure
related to:
compliance
and monitor
related to:
the Shariah compliance
Supervisory Board
includes planning the meetings
the Shariah
includes of planning
the
“
which Supervisory Board which
THE OBJECTIVE OF
the meetings of the
Shariah board, preparing agenda Shariahitemsboard, SHARIAH
to preparing agendaAUDITitems to IS TO
• Corporate, Commercial• and SME be presented in the meeting, berolling
presented
out in the meeting, rolling out
financing (assets of MBL) the decisions taken in the Shariah the decisions
ENSURE PROPER EXECU-
board taken in the Shariah board
For each customer a separate process meeting across the bank as well meeting
as ensur- TION
across the bank asOF wellTRANSACTIONS
as ensur-
flow is devised. Hence, Murabaha ing proper implementation ing of proper
the implementation of the
Process Flow for a textile concern will rulings. rulings.
AS PER THE GUIDELINES
be different from that designed for a LAID OUT BY PRODUCT
sugar mill, leather tannery, fiber Shariah training also falls in Shariah
the ambit training also falls in the ambit
producer, power station etc. of SCF which conducts ofall SCF Shariah
DEVELOPMENT AND
which conducts all Shariah
• Investment banking • transactions related trainings within the related and SHARIAH
bank trainings within the bank COMPLIANCE
and
related to Sukuk and syndicated among the customers, covering
financings.
among
of Islamic finance, productof training
concepts
“
the customers, covering concepts
TEAM.
Islamic infinance, product training in
light of Shariah rulings and of Shariahtions
lightrefresher of a and
rulings particular
refreshercustomer andofif aitparticular
tions is custom
• Funding, financing, • investment, courses to reinforce the courses conceptstoofreinforceof seriousthe nature
concepts withofrespect
of to Shariah
serious nature with respe
foreign exchange related as well as Islamic Finance along withIslamic Finance compliance
any further along with then any charity
furthermaycompliance
be imposed.then charity may
other activities conducted by the updates regarding the development in Based
updates regarding the on the seriousness
development in of Based the on
auditthe seriousness
department of the bank. the Islamic finance industry. the Different
Islamic financeobservations,
industry. Shariah
Different audit may refer the Shariah audit
observations,
modules of trainings are modules case to are
designed ofin trainings Shariah compliance
designed in caseteamtoforShariah
the compliance
• Pool Management and profit • distribu- order to cater to different orderkindsto ofcater revision
to differentof thekinds process
of flow. Until of
revision thethe process flo
tion of deposit products. audiences. The period of audiences.training may process offlow
The period trainingis mayrevised process
no future flow is revised
vary from one day to as longvary as 4from
monthsone daydisbursement
to as long asmay be made.disbursement
4 months The Shariah may be made
• Development of bank wide • policies, based on the complexity ofbased the course. Audit team
on the complexity of thealsocourse.
ensures proper
Audit team fresh also ensures
procedures and guidelines for ensur- Trainings may be focused Trainings on a single may behiring throughout
focused on a singlethe bank by taking
hiring throughout the ban
ing Shariah compliance and vetting product or may cover the entire product
ambit orof interviews
may cover of the
the entire ambitcandidates
of by testing
interviews of the candidat
policies of other departmental Islamic Finance. Islamic Finance. their basic Shariah knowledge. their basic Shariah knowled
functions such as HR, marketing,
admin etc. Shariah Audit Shariah Audit The Shariah Audit team works Theclosely
Shariah Audit team
with the Shariah Advisor in preparing the Advisor in
with the Shariah
The importance of SCF canThe be judged
importance Theof objective
SCF can beofjudged Shariah Theauditobjective
is to of Shariah
ShariahAdvisor
audit isreport each year.
to Shariah Advisor report
from the fact that the bank’sfrommanage-
the fact that the proper
ensure bank’s execution
manage- of ensuretransactions Meezan Bank’s
proper execution Shariah Advisor
of transactions Meezan report is Shariah Adv
Bank’s
ment has designated the ment authority
has todesignated authority laid
as per the guidelines to outasby perproduct considered
the guidelines laid outasbythe most informative
product considered andas the most inf
approve or disapprove any approve
financingor disapprove
development any andfinancing
Shariah development
compliance and comprehensive
Shariah compliance report in comprehensive
the global report in
proposal so that nothing is compromised
proposal so that nothing
team. The is compromised
Shariah audit team team. reports
The ShariahIslamicaudit banking
team reports industryIslamic
and also banking industry
on Shariah principles. For example,
on Shariah uponprinciples. Fortoexample,
directly upon
the Shariah Supervisory
directlyBoard referred
to the Shariah as a benchmark.
Supervisory Board referredThe report as a benchmark.
review if SCF holds the review
opinion ifthatSCF andholdsworks
the opinion
under thethat supervision
and worksof the underentails all activities
the supervision of theof theentails
bank allandactivities of th
facilities proposed in the facilities
financing proposed in the
in-house Shariahfinancing
Advisor. in-house
The Shariah Shariahprovides
Advisor.information
The Shariahof provides the Shariah information of
proposal are not practical asproposal
per Shariahare notaudit
practical
of as per Shariah audit of isa activities,
a branch/department new productisdevelopment
branch/department activities, and
new product deve
then SCF will not approve then
the limit
SCFand will not approve by
conducted thealimit and team
particular conducted
assigned, areas of team
by a particular improvement
assigned, as areas well inof theimprovement as
will propose a different solution/product
will propose a different
based onsolution/product
which the Shariahbased audit on which banking
report the Shariah activities, if required.
audit report banking activities, if require
to the business unit. In 2012to alone,
the business
the unit. In 2012and
is prepared alone, the a israting
assigned prepared
takingand assigned a rating taking
SCF function reviewed more SCFthanfunction
1300 reviewed more than the
into consideration 1300 audit into
observations
consideration the auditServices
Advisory observations Advisory Services
financing proposals. financing proposals. raised. In 2012, more than 250 raised.
branches
In 2012, more than 250 branches
were audited and reports issued. were audited andMeezanreports Bankissued.has developedMeezan alternatives
Bank has develope
Besides reviewing all Besides financing reviewing all financing of all types of assets of and allliability
types of assets
transactions and bank policies,
transactions
the SCFand bank policies,
In case the SCF branches,
of financing In caseif an productsbranches,
of financing which any if anconventional
productsbank which any conve
also serves as the coordination
alsounit
serveswith
as theaudit
coordination
observation unit iswith
raisedaudit
on transac-
observation may offer. on
is raised Having
transac-a wellmay established
offer. Having a wel

No-of
Number of
Number of Employees
Year Seminars Attendance
Year training sessions Trained

2010 76 1750 2009 24 1955

2011 100 2786 2010 38 4370

2012 109 3314

2011 39 4540

16 Journal of The Institute of 16

BankersJournal
Pakistan
of The Institute of Bankers Pakistan
 “The importance of SCF can be judged from the
fact that the bank’s management has designat-
ed the authority to approve or disapprove any
financing proposal so that nothing is compro-
mised on Shariah principles”

ogue, Meezanproduct bank offers catalogue, by Meezan

providing bankmedical
offers equipment
by providing to medical equipment to
ts assistance initsdeveloping
counterparts assistance
hospitals and in developing
by providing hospitals
interest-freeand by providing interest-free
ezan bank has products.
provided Meezan loansbank has providedto students
(Qarz-e-Hasn) loans (Qarz-e-Hasn)
who to students who
services to consultancy
international services to international
lack financial lack financial
resources to continue their resources to continue their
Amanah Banks banks
which such
is in as Amanah
higher Banks whichTill
educations. is innow,higher
Ihsan educations.
Trust Till now, Ihsan Trust
of formation, the ensuring
process ofhasformation,
helped more ensuring
than 1000has helpedtomore than 1000 students to
students
liance not only Shariah compliance
at startup pursuenot onlyhigherat startup
education pursuein leadinghigher education in leading
but there
ng it certain that also making it certain thatlike
are universities thereIBA,are LUMS,
universities
NUST,like IBA, LUMS, NUST,
which may pull no loopholes
the bank which GIKImay andpull the bank GIKI and others.
others.
non-Shariah towards
compliant beingin non-Shariah compliant in
her important future.
function Another important
to Shariah function Board
Supervisory to Shariah Supervisory Board
provide
ltancy is Shariah auditconsultancy
and Coordinator is Shariah audit and Coordinator
Shariah compliance as well strengthening
iance as well strengthening
ing the internal andoperations
streamliningThe the internal
Productoperations
DevelopmentThe & Product
Shariah Development & Shariah
ganizations from of itstheclient
Shari-organizations
compliance fromdepartment
the Shari- plays compliance
another department plays another
e perspective. ah Compliance perspective. important role in the bank important by acting role as in the bank by acting as
the coordinator with the Shariah the coordinator
Super- with the Shariah Super-
ct Development visory board. Coordination
Retail Product Development visory board. Coordination including
including
arranging meetings, follow up arranging
and imple- meetings, follow up and imple-
t developmentRetail product development
is another mentation of istheanother directives ofmentation
the SSBof is the directives of the SSB is
on of the ProductvibrantDevel-function also of thetheProduct Devel- of also
responsibility this the responsibility of this depart-
depart-
hariah compliance opment & Shariah
depart- ment. compliance depart- ment.
it functions inment. The unit functions in developing
developing
posit products, innovative
consumer deposit The
products,Shariah consumer
compliance The Shariah compliance functions
functions
ducts and is also financing
involvedproductsin hasand is also involved
become a critical indrivinghasfactor
become for a critical driving factor for
ribution and poolthe profit
manage- distribution
not only and performing
pool manage- not also
well but only asperforming
a well but also as a
of the bank. This ment system
unit plays of the bank. mean
survival This unit in plays survival
the Islamic mean in the Islamic Finance
Finance
in re-vamping a vital role inindustry.
existing re-vamping Meezanexisting industry.
Bank, in this regard Meezan
has Bank, in this regard has
products and
tain existing customers to retainemerged
existing as customers
a role model and foremerged
other banksas a role model for other banks
ct new customers also toto attractthe new both customers
locally and to the which
globally, both locally
can be and globally, which can be
y, Meezan Kafalah,bank.aRecently,
saving Meezan proved Kafalah, a saving success
by its unmatched provedwhich by its unmatched success which
ful benefits wasplan with takafulhas
developed benefits
led Meezanwas developed
Bank to win has the led Meezan
award of Bank to win the award of
by this anunit the
it which received which
best Islamicreceived Bankan of thethe best Islamic
country on Bank of the country on
response from overwhelming
the market. response regular from basisthe on market. regular
different basis on different forums.
forums.
Recently, Meezan Bank was named Recently, as Meezan
the Bank was named as the
agement Charity Management ‘Best Research & Development ‘BestinResearch
Islam- & Development in Islam-
ic Finance 2013’ by Global ic Finance
Islamic 2013’ by Global Islamic
At Meezan isbank,Finance
nk, charity management charity Awards.
management is Finance Awards.
h Ihsan Trustdone which through
was Ihsan Trust which was
anuary 2010. foundedIhsan Trust in JanuaryThe 2010.entire Ihsanbanking
Trust industry The entire of banking industry of
f, made through Fund is a Waqf, made
a separate Pakistanthrough a separate
is currently facingPakistan
challengingis currently facing challenging
There are two Waqf sources Deed. There times due are to twothe sources times due
declining discount to the declining discount rates
rates
h Ihsan Trustthroughraises fundswhich IhsanwhichTrust raises funds
has squeezed which
the banks’ has squeezed
margin of the banks’ margin of
charities fromwhich include charities
customers profits from and in customers profitsIslamic
this situation, and in this situation, Islamic
and donations
from other Islamic Banks from Banks other
faceIslamic
furtherBankschallengesBanks
of not face
onlyfurther challenges of not only
Asset Management and Islamic
compa-Asset Management
maintaining theircompa-
performance maintaining
in termstheir performance in terms
nies. of profitability but also ofmaintain profitability
it but also maintain it
without any compromise without on Shariah any compromise on Shariah
has been focusing Ihsan trust hascompliance.
particu- been focusing particu- compliance.
as of health andlarlyeducation
in the areas of health and education

Journal of The Institute of BankersJournal

Pakistan
of The17
Institute of Bankers Pakistan 17