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Pakistan Islamic Banking: Hypocrisy

By: Asad Ikram* in Collaboration with raazpakistan.org

Surat Al-Baqarah (The Cow)

Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein. (02-275)

Surat Al-‘A`r?f (The Heights)

Indeed, those who deny Our verses and are arrogant toward them – the gates of Heaven will not be opened for them, nor will they enter Paradise until a camel enters into the eye of a needle. And thus do We recompense the criminals. (07-40)

Allah’s Messenger Muhammad (??? ???? ???? ???? ) said:

[Transmitted by Sahih Bukhari]

Hadrat Umar mentioned the hadeeth of the Prophet Muhammad (Sal-allahu-alleihi-wasallam): “The thing from which I fear for you the most is the knowledgeable hypocrite.” Hadrat Umar was then asked: “How can a hypocrite be knowledgeable?” To which Hadrat Umar answered: “He speaks with wisdom but acts with injustice.”


Conventional commercial banks are opening their Islamic banking windows in Pakistan and in the past few years number of such Islamic Banking Divisions (IDBs) have swelled to 14, 5 full Islamic banks are also operating in our country along with IBDs. These Islamic banking divisions and Islamic banks are distributing interest (Riba) among their customers as Halal profit. Meanwhile top regulatory institutions, State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP), have turned a blind eye to this issue. Review reports of Islamic Banking Institutions (IBIs) issued by SBP have revealed the fact that IBIs are involved in interest based investment and financing1. Where as, IBIs disburse Riba returns among clients after keeping their spread. This is the reason IBIs, claiming to have investments and financing asset backed and in legitimate Shariah compliant businesses, have never shown a loss or a negative return. There are no separate records of deposits, investments and financing of so-called Islamic securities and transactions. However, such records have their separate identity in internal records but in consolidated statements these records are mingled with conventional commercial banking results. This calls for separate accounting and presentation standards of banking activities compliant with Shariah rules.

These malicious investments include but not limited to:

KSE100, KSE30 common and preferred shares GOP treasury certificates and bonds
Pakistan Investment Bonds Mutual funds
Sukuk bonds Term Finance Certificates

IBIs not only invest in such securities in their own capacity but also as part a consortium of conventional commercial banks. IBIs are also secretly involved in Forex trading and expert professional have been haired to perform such tasks. Deposits collected under schemes of Halal Munafa are also being used for such impermissible activities in the name of Islam.

Backdrop and Principles

In the past two centuries humanity has witnessed devastating wars and millions lost their lives in the name of ideologies primarily pertaining to the field of Economics. First World War caused the demise of mighty Muslim Caliphate and Second World War, which to me was the continuity of first war, gave rise to two super powers at odds with each other. Analyzing the backdrop of these events establishes the fact that these wars were in fact the clash of capitalists, socialists, fascists and communists to drive the world affairs in the direction dictated by their proponents and to establish the utopian state which they have envisioned.However, what remains un-talked of is the collapse of an economic code which was governing the lives of millions of Muslims under Ottoman Caliphate2.

Muslims were disillusioned after the fall of caliphate and their very own economic system and in dire need of an alternative of the modern Riba based economic system reshaping their social fabric. During the last quarter of the previous century Islamic Finance emerged as a ray of hope for Muslims across the globe. The banks and financial institutions promoting the idea of Shariah Compliant investments and financing gained overnight popularity and Muslims looking for a change started transferring their monitory assets from conventional to Islamic institutions across the globe. Since then this infant industry has witnessed a double digit growth. In Pakistan it has gained approximately 10% share of countries’ banking sector since its beginning in 2002. Before we dive into the practices of Islamic banking institutions let’s have a brief look at the differences between prevalent western economic theory and its Islamic counterpart.

Contrary to the modern theories of economics Islam advocates the supremacy of labor over Money and excludes entrepreneurship from the list of factors of production proposed by classical and neo-classical economic theories. Secondly, money and capital cannot be treated as synonyms as per Islamic code. Which means money cannot be rented or leased and can only be rewarded in monetary terms if it changes its form and turns itself into capital. Thus money becomes capital when it takes the shape of land, merchandise and reward for services hence entitled to a fair share of the profits and risks which may arise in a process of production. Now, Entrepreneurs are not the only risk takers, capital providers will have to bear the risk on pro rata basis. This principle empowers labor and reinforces the idea of equality and brotherhood among humans. Along with this Islam proposes the distribution of gains of a business in a fair manner. Neo-classical economics divides capital in two basic categories Debt and Equity, namely. In modern economic practices providers of debt capital get a fixed or floating ( Interest Rate Corridor) returns (Riba), have nothing to do with the actual outcome of the business and virtually have no risk. Whereas equity capital is at the mercy of corporate management for its returns and bears unlimited risk, which of course is limited to the share in the total equity. Moreover, Islamic principles clearly differentiate between assets backed investment and financial securities as derivatives of real assets. Investments only in real assets are permissible and derivative securities have excessive risk, resembling to gambling (Gharar, Maysir), are strictly forbidden3.

Islamic banking Practices

Without bothering my reader with the history of Islamic banking in Pakistan and its evolution I will get straight to the meat of the story. Like Conventional Commercial Banking institutions promoting Shariah compliant financing and investment products collect deposits form clients and provide this money to business for short and long term financing needs and invest rest of the money in market traded securities. However, Islamic banking Institutions (IBIs) are only allowed to invest in assets and distribute the returns generated by these assets among the providers of capital, not money market returns. Progress numbers of IBIs are given below:

Source: SBP4

Source: SBP5

Among theses 19 IBIs only 5 banks are pure Islamic banks and 14 are independent IBDs of commercial banks chartered in Pakistan.

Source: SBP6

As the investments of IBIs show that 44% of deposits are concentrated in Federal Government securities, as of March 2013, denominated in PKR and different other currencies including US Dollar and Lira.

Source: Compiled by DMMD from SGLA Holdings data at PDO, SBP BSC. June, 2013

Total investment of scheduled banks in Sukuk bonds is Rs. 413 billion; where as total Sukuk Bonds issued by GoP are worth Rs. 459.2 billion, as of June 2013.Total banks & non-banks holdings of GoP securitiesare of Rs. 4932 billion. However, IBIs have invested Rs. 307 billion in GoP Sukuk bonds. Although investments in KSE100 or 30 indices (Fully paid ordinay shares) are also debatable yet  Sukuk investment is the area of primary importance where things get problematic. Let’s have look what theses Sukuk bonds are.

Sukuk Bonds

Sukuk are called investment Sukuk and are defined as:

“Certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or ( in the ownership of ) the assets of particular projects or special investment activity, however, this is true after receipt of the value of the Sukuk , the closing of subscription and the employment of funds received for the purpose for which the Sukuk were issued”7.

Theses Sukuk represent undivided fractional share in an asset or project for example Motor way and Wapda Hydel Turbines. By investing in Sukuk investors become owner of the assets equal to the proportion of their investment and become entitled to the proportionate share of the total returns of that asset or project. As per our premise in the introduction section for these Sukuk to be Shariah compliant cash flows from the project shall be distributed among the Sukuk investors on pro rata basis. However, theses Sukuk bear a floating rate of return dictated by money market instruments, primarily KIBOR and LIBOR. This practice is not only unfair but also in direct collision with Maqasid-al-Shairah (Objectives of Shariah).

Ijarah Sukuk Structure Details in Appendix-A

WAPDA Ijarah Sukuk Example

WAPDA, on January 06, 2006, floated Ijarah Sukuk bond, denominated in PKR, worth Rs 8 billion, for seven years, and a Special Purpose Vehicle (SPV) was set up for this purpose namely WAPDA first Sukuk Company. The purpose of these Sukuk bonds was to raise money for capacity development at Mangal Dam and 10 hydel power generation turbines were purchased with the proceeds of the issue. These bonds promised to pay 6month Kibor rate plus 35 basis points and these bonds were insured by the GoP. Although principles dictate to distribute the proportionate net cash flows of the project among the investors yet the Kibor rate was used to price the investment which is a money market rate and all Islamic Scholars are of the this is Riba.


KIBOR stands for Karachi Inter Bank Open-market Rate. It’s the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in the City of Karachi. Money can be borrowed overnight or for a period of in excess of five years. The most often quoted rate is for six month KIBOR. ‘6 month KIBOR’ tends to be used as a yardstick for lenders involved in high value transactions.


“An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year”8.


“Also referred to as a “bankruptcy-remote entity” whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt”9.

In simple word a SPV is a paper company and under full control of the sponsor company.

 Ijarah Sukuk: The end result

As we have discussed earlier that the pricing of Islamic Investment and Financing instruments must be in line with Maqasid-al-Shairah and such products shall not only be compliant with letter of the law but also with the spirit of the law. WAPDA First Sukuk Copmpany was created just to enter into the said lease (Ijarah) contract with the Leasee (WAPDA), other than this it had no other purpose. Without Ijarah contract this whole Sukuk thing is mirror image of conventional bond in every aspect. So, to circumvent the Shariah Law theses devilish men borrowed the idea of SPV from Enron to cheat their clients. After this another company named WAPDA second Sukuk Company was created in 2007 for the second Sukuk issue. This implies that the Ijarah contracts between WAPDA and these SPVs were blatant attempts to paper over the cracks in their practices and to defy the divine laws given to us by The True Prophet (??? ???? ???? ????) of Allah.  Use of Libor, Kibor as pricing benchmark rate and SPVs clearly manifest that the Ijarah (Rent, Lease) contract is merely eyewash. They some how succeed in hiding behind “Ijarha” but couldn’t find any doubious method of pricing this instrument and kept on using Kibor. Members of Shariah compliance boards, Islamic Bank professionals and SBP authorities are deceiving people of Pakistan in the name of Islam. SBP acquiesce that such dubious practices are prevalent and happily accepted among players in Islamic Banking Industry. Here is an excerpt from a document entitled FREQUENTLY ASKED QUESTIONS ISLAMIC BANKING.

“Islamic banks should ideally have their own benchmark system for determination of profit. Since, the industry is in its initial stage of development, it is using the available benchmark for the banking industry. It is expected that once it is grown to a sizable level, it would have its own benchmark.”10


The Hadith of Allah’s Messenger Muhammad (??? ???? ???? ???? ), presented in the beginningof this report, clearly elucidates the strategy of the enemy within our ranks and files. Such Ulama and banking professionals are a blot on the landscape and giving a bad name to the Ummah. The much more serious issue is that these banks are giving HARAM returns and Force us to take it as Halal. Here we must not forget that the money market rate are said to be market determined but state banks and governments have ultrahigh control over the this process and these institutions set such rates (Libor and Kibor) arbitrarily to meet their own desired ends. Which make its Riba-al-Nasiah and consequently ‘Haram'(illegitimate). However, as the IBIs claim to have Asset backed investments and possibility of Riba-al-Nasiah excluded, but this not the case. One thing must be clear in our minds that any investment or financing instrument which is priced using only (or in a mix) money market rates will be Haram. IBIs securities must be priced using factor prices recognized by Islam (Land, Labor and Capital). Considering money as a factor of production and determination of reward of remaining factors solely on the bases of Libor and Kibor and not distributing net cash flows among investors of a project is Haram.

Such are the people about whom Allah’s true Prophet(??? ???? ???? ????) said that they will follow the footsteps of the Jews. Allah’s Messenger said to eat Riba is to commit adultery to one’s own mother. These Shariah Boards are the sinners and making the innocent masses, who fell prey to their oily tongue, to do the same.

Surat At-Tawbah

They have taken their scholars and monks as lords besides Allah, and [also] the Messiah, the son of Mary. And they were not commanded except to worship one God; there is no deity except Him. Exalted is He above whatever they associate with Him. (09-31)

Abdullah bin Amarra relates that Allah’s Messenger Muhammad (??? ???? ???? ???? ) said:

‘Surely things will happen to my people as happened earlier to Israelites, they will resemble each other like one shoe in a pair resembles the other to the extent that if anyone among the Israelites has openly committed adultery to his mother there will be some who will do this in my Ummah as well…’ The companions asked. ‘Who are they O Messenger of Allah,’ Holy Prophet ??? ???? ???? ???? said. ‘They are those who will be like me and my companions.’

(Tirmidhi – Kitabul Eeman)

Adeyy b. Hatim relates that once he went to see the Prophet Mohammed (??? ???? ???? ????) with a golden cross on his neck. “Adeyy through away that idol!” he said. After repeating the verse 31 of surah At-Tawba, the Prophet added: “They did not pray to them (the clerics), but if they (the clerics) claimed something to be helal – permitted -, they obeyed. If they (the clerics) claimed something to be haram – forbidden – they obeyed.” This is how they made them (the clerics) their lords. (Tirmidi, Tefsiru’l Quran p 10)
Note: We will discuss the solution for this grave situation in a fortnight.



1) http://www.sbp.org.pk/ibd/bulletin/2013/IBB-March-2013.pdf

2) Economics As Religion: From Samuelson to Chicago and Beyond [Robert H. Nelson]

3) “An Inquiry into the Usage of Real Assets in Islamic Transactions and Their Benchmarking- The Implications for Islamic Capital Markets”, Zohra Jabeen, Memoona Rauf Khan, 2007

4) Ibid. 1

5) Ibid. 1

6) Ibid. 1

7) Sharia Standards, 1424-5H/2003-4 Accounting and Auditing Organization for Islamic Financial Institutions, p298

8) http://www.investopedia.com/terms/l/libor.asp


9) http://www.investopedia.com/terms/s/spv.asp

10) http://www.sbp.org.pk/departments/ibd/FAQs.pdf

* Manager Research and Development (Finance)


+92 0423-6282867

+92 0423-6282868


Structure Details:

Originator intends to finance Forward Financing Ijarah Contract (or Ijarah Mawsufa Fi Zimmah) through Ijarah Sukuk (Pass-Through Sukuk)

  1. Originator signs a forward Ijarah deal with its Customer.
  2. Originator signs Istisnaa contract with SPV to construct the required asset for its Customer
  3. SPV sub-contracts the construction to Contractor and Consultants
  4. Credit Enhancer provides additional liquidity or security enhancement to the Istisnaa asset for rating purposes
  5. SPV packages the Istisnaa asset into Sukuk units for issuance to potential Investors
  6. Credit Rating Agency provides necessary credit rating to the Sukuk
  7. SPV / Issuer issues Sukuk to Investors at fixed/floating profit rates
  8. Investors subscribe to Sukuk
  9. Sukuk subscription generates required cash proceeds valued USD 100m
  10. SPV disburses progress payments to Contractor and Consultants
  11. Contractor delivers completed asset to Originator
  12. Originator delivers completed asset to Customer
  13. Customer pays periodic instalments and Originator pass-through instalments to SPV
  14. SPV disburses contracted periodic distribution (or lease rentals) to Sukuk Investors
  15. Being finance nature of Ijarah, on lease expiry/termination date, Originator sells the Ijarah asset to Customer and disburses the sale proceeds to SPV

SPV redeems the Sukuk and disburses remaining cash back to Investors.

(Author of Appendix-A in unknown however details are fine)


  1. It means albarka , meezan banks in pakistan are all doing un-islamic banking????

  2. Muhammad Sultan Shah

    Excellent Article…Thanks for sharing your research work and thoughts with us…Keep it up. May Allah bless you dear!

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