Introduced in 1960′s in Pakistan but get its momentum in last decade Islamic banking now hold a consider assets in financial market. Before proceeding further, some basic introduction about islamic finance is necessary. It is based on profits and risk sharing in bussiness as opposed to intrest provision in amount invested. The bank pool up depositor money to invest it in commercially viable bussiness / venteves. the calculation of profit is simple.
From sale proceed subtract (purchase cost + other expenses + bank management fee) to obtain distributable profit. Thus profit then distribute among depositors in respective capital ratio the various modes in islamic banking for financing are modarba, murhaba, mushariba, ijara etc.
Now coming to the topic scope of islamic banking scope means maket area operations, customers etc. The following are identified on basis of untapped area by conventional banking.
Since large population are practicing muslims belonging increasingly aware of prohibition of intrest in Islam. In addition to that they have witness through media about debt crises and hardships the intrest / debt bring about life of people of west. They hear of people once proponent of conventional banking are now talling about alternative systems. They have witnessed and sead stories about bank hardships through wistle blowers bank employees. Therefore these population not use saving account in which intrest is embodied. Instead they use current account which is interest free or use private sources of borrowing example commitee and “B.C” which are borrowing based on rental paymentss without interest this indicate that this segment of population is not covered by conventional banking and it is the area which is availabel to Islamic banking. If it is intapped this money will go towards inhealthy activities of economy such as investment in gold and real estate which is now being witness because people are unaware of and lack confidence in Islamic banking in pakistan as it is truly interest free or not.
The scope of islamic banking in area of agriculture and diary. since Pakistan is agricultural country. The agriculture produce is the main component of GDP. In dairy also it is the fifth largest producer in the world. since the farmers are in rural areas, uneducated and out of reach of conventional banking, they are not able to get capital for prousion of pesticides and storage facility their agricultural and daily products huge chunk get spoiled and out reach market. Since Islamic banking is risk taking venture entity based on profit not collateral they have huge scope in this area to setup storage areas and plants to obtain powder milk and preserve it. Another trend in agriculture market is rising price of agriculture products causing customer to lower its purchases and lose to farmer. This is because farmers who manage to get loan on interest from conevlotional banks due to poor farm-to-market transport infrastructure and law and order situation the goods get delay in reading which causes interest to accumulate so much that it become more that basci cost of product. Therefore former are less and less locling to go on interest loan because cost increase manifold and their product demand goes down. Here is the potential for islamic banking to play role and no matter how long goods remain in godown or storage its capital lost not accumalate and prices of agricultural products will remain down.
The scope of islamic banking is huge in new bussiness and startings. There are two options available to bussiness startups. first to obtain loan from bank. But since bussiness startups initially are loss making models as we see in the case of Makro Pakistan and GEO Television Network for years. Therefore they are not able to pay back loans / rentals and interest. Therefore conventional banks hesitate to provide loans to etartys. Second, the stock market, but since it is new startup no one knows about its historical results so no projection of future possible . Stock market option is also not avialable.
Now heair Islamic banking have a role to play since it is the only option available. Keeping in view of prospects of bussiness and enterprenuer stil it invest in it and harvest profit after some time.