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Research Report on
CHALLENGES FACED BY EMPLOYEES OF BANK OF KYHBER
PESHAWAR-PAKISTAN
(ANALYSIS OF ISLAMIC BANKING DIVISION)
Submitted by
Naveed Ur Rahman (T-No. 870401-T694)
Sherwali Khan (T-No.850405-T651)
In Partial Fulfillment of the Requirements of Master of Business
Administration
Karlstad University
Date: 2010-05-19
Acknowledgement
All praises are attributed to the sole creator of the universe “The Almighty Allah” The sympathetic, The Merciful, The Source of all Knowledge and Wisdom.
For this research study, I would like to mention those personalities without them this work could not come up in its present shape.
First of all, we are very grateful to our Parents, and our family members who facilitated us throughout our research. Then a deep measure of gratitude is expressed to our honorable Research study supervisor Sir. Christopher von Koch, faculty member, management sciences Linnaeus University Sweden. Whose guidance, continuous help and encouragement we received at all stages of our research study and who has always been very kind, warm hearted and polite to us throughout this research work.
EXECTIVE SUMMARY
Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at low ebb, in the 19th century. As there are numerous verses in holy Quran and Ahadiaths of holy prophet (PBUH) for interest strictly prohibited and condemnation are there.
It gives the impression that the history of interest free banking could be divided into four parts. First, when it still remained an idea, during 50s, second, when it became a relating during 60s, by private initiative in some countries and by law in others, third part is related to 70s, when in so many countries this system was adopted at a private as well as public and many full fledge Islamic banks were opened and fourth part consist of last 2 and half decades during this period growth of Islamic finance industry was extraordinary.
Bank of Khyber is a pioneer of Islamic banking in NWFP-Pakistan started its operations on 23rd November 2003. Its objective is to convert bank into Islamic banking system. Now a day’s all organizations have to face severe competition. Especially in order to compete and get success in Islamic banking, competent personnel who are capable of running the organization effectively and efficiently are of outmost importance. For this purpose qualification matters a lot.
During the analysis it is noted that bank of Khyber (IBD) employees have faced many challenges like training, communication problem, favoritism, attracting customers, Islamic concepts. These challenges must be eliminated from the bank. Most of the employees themselves have no Islamic account. Most of the employees have no concept about Islamic banking and are not able to answer the queries of the customers, how they can convince other people towards Islamic banking. The bank is not motivating its employees and they have no proper procedure for giving rewards to the employees. There is no proper system for giving suggestions.
Page No
Acknowledgements I Executive summery II
SECTION 1
Chapter 1 Introduction to the Report 1
1.1 Background of the study 2
1.2 Definition of the problem 2
1.3 Purpose and objective of study 2
1.4 Scope of study and sample size 3
1.5 Type of Data 3
SECTION 2
Chapter 2 Literature review 52.1 Interest rate and Islam 6
2.2 Islamic business contracts and theory 6
of Islamic firms 2.3 Agency problems in Islamic contracts 9
and it’s Implications 2.4 The nature and characteristic 10
Of Islamic Theory of the firm 2.5 Conclusion 10 Chapter 3 Islamic banking 11
4.1 Difference between Islamic & 14 Conventional banking 4.2 Words usage in Islamic & Conventional banking 16
4.3 Islamic banking branches in Pakistan 17
SECTION 3
Chapter 5 Tabulation and data analysis 18
5.1 Internal analysis 19 5.2 External analysis 22
5.3 Result & Analysis of questionnaire 24
SECTION 4
Chapter 6 Findings and conclusions 29
Chapter No - 1
Introduction to the Report
General
Islam is one of the three major world religion, demand high degree of ethical standard besides his worship besides its teachings on the other aspects of life it encourage people to struggle for “Halal Riziq”. With the regard to business dealing it suggest partnership based business or partnership financing, Inspired by the same spirit. Islam allows business on the bases of sharing both profit and loss. Therefore the term Islamic banking is correct in this context. However according to banking company's ordinance 1962 sec. 5(b) (2007) banking means the accepting, for the purpose of lending or investment of deposits of money from public, repayable on the demand or with draw able cheques, or drafts order. It is something which Islam does not allow. Islam didn’t allow fixed deposits and didn’t allow the time deposits. Which is not in the depositor knowledge, therefore in the context the term Islamic banking is fallacious. Banking sector play a vital role in devolvement of every economy and now the Muslim countries where people don't like interest and feel hesitation. To transact with banks, the Islamic banking has been introduced in the world which provides its services to the society where no interest will be charged.
Siddique (1997) concluded that “currently the size of the global market for Islamic banks is estimated to between 200-300 billion and this specialized sector is said to growing at the rate of 10% to 15% annually”. The state bank of Pakistan is moving rapidly towards establishing the essential factors of Islamic banks. In this regard it has composed a Shariah board, one of the basic requirements of Islamic banks.
challenge of the Islamic banks in Pakistan is that there is a lack of moral standards. If the people stopped lying and partnership business they depict true profit.
1.1: Background of the study:
By prohibiting interest, Islam has endeavored to do away with a shocking form of oppression and injustice common in the human society. The institution of interest is a great challenge to all those who are trying to rebuild the Islamic way of life in the modern times. Efforts have been made to develop Islamic banking system and many of the banks operate on the basis of Islamic principles. Yet due to non availability of the monetary system and Riba-free investment opportunities, the Islamic banking system is not free of critics and considered dependent of interest based system (Usmani, 2000).
The study will therefore, address the organization of the Islamic banking system and issues relates to its operation and the system with which it consider to operationalize its activities.
1.2 Definition of the problem
Yet the Islamic banking systems face a number of challenges. Among the agitating issues the foremost one is that they have not been yet successful to develop an interest-free mechanism to place their funds on a short-term basis. They face the same problem in financing consumer loans and government deficits. Second, the risk involved in profit-sharing seems to be so high that most of the banks have resorted to those techniques of financing which bring them a fixed assured return. As a result, there is a lot of genuine criticism that these banks have not abolished interest but have in fact only changed the classification of their transactions (Sutlin and Norafifah, 2000).
1.3: Purpose and objective of the study:
doing research in bank of Khyber Peshawar Pakistan, the aim is to inquire into the operation of Bank of Khyber Peshawar Pakistan with regards to its employee and efforts in making Islamic banking successful and analyze the financial position and know the working and practices.
1.4: Scope of the study and sample size:
We live in Islamic country and believe in Islam and it is a religion of peace, as a complete religion consists of all the principles, to keep away from harm things which are one of the Gunah-e-kabira forbidden in Islam and not permissible for Muslims. No one can deny the role of the banks in the development of the economy as they play vital role in the economic growth of a country but out religion do not exercise banks operations in our economy as not permissible but now Islamic banks has been introduced with the aim to help in the developments of the economy and catch those people which do not transact with the other banks and convince them to transact with Islamic banks therefore the main scope of the work includes; Islamic banking operating under conventional system is possible or as a sole system is possible, how they attract the people who are afraid of transacting with the banks due to the involvement of interest factor, what are their problems and issues which they are facing and want to know without the interest, Can banks survive?
In order to have a more focused study, the research has been narrowed down to the practitioners of The Bank of Khyber Peshawar Pakistan. Due to time limitations and lack of agrees of the practitioners of bank the sample size is small but effective.
1.5: Type of Data
Both secondary and primary data will be collected.
1.5.1: Secondary data
Some of the data related to the topic will be obtained from various books, magazines and internet, and also from different articles and journals related to the topic.
1.5.2: Primary data
1.5.3: Time Horizon
Chapter – 2
Literature review
In Islam, interest is prohibited because the interest on the loan is an increase of capital without effort and a false creation of value. The increase of income must result from investment, labor and other activities. There are many arguments about prohibition of interest in Islam. The first argument is that interest rates have no moral foundation. The second is that moderation from consumption is not a justification of rewards. The third reason is that there is no risk to justify the supplement of payment for capital lending if the loan is assured. The creditor/debtor relationship is redefined in Islam with the creditor or provider of funds becoming a partner in the project, assumes the risk activity with the entrepreneur and shares profit at a pre-agreed proportion (and not at a fixed return as in conventional banks). It is fairer for the creditor and debtor that they have a share of profits and losses. The creation of incremental wealth justifies the share of profit between the borrower and the lender of money but not a fixed return.
The new banking system of Islamic countries based on Islamic economic principles is fast developing. This system is important due to growth of investment amount in Islamic banks and the consideration given to the system by Governments. The developments have encouraged many studies on the Islamic banking system. However, little importance is given to application of modern finance theories to Islamic banks. Islamic banks operate on a set of principles based on the Islamic Law (Shariat).
Al-Sultan (1997) develops a model to show the effect of the profit and loss sharing (PLS) principle on the commercial loan market in the Islamic interest-free banks operating side by side with conventional banks. Islamic banks are based on Islamic laws or Shariah. Some of them, Iran, Pakistan and Sudan have Islamized their entire financial systems.
2.1 Interest Rate and Islam
Economic system of Islam based on mutual sharing of revenue and risks to avoid un-equality among the people. For this reason it holds different point of view on interest rate which is called “Riba” in Islamic banking, which is explained in the following section.
2.1.1 The treatment of interest rates or Riba in Western literature
Islamic banks use a profit/loss sharing (PLS) financial instrument. The prohibition of interest rate is not only unique to Islamic literature but also a feature of religious and not religious literature over many decades ago.
Brunner (1937) regarded interest as encouraging a ‘freeloading existence' literature. Aristotle considered money as only a medium of exchange and not a store of value. Others have more recently blamed interest for creating volatility and economic variation. The good reason of interest is based on the state of time is money but it is unnecessary to defend discounting through positive time preference.
According to Dar and Preley (1999), Judaeo-Christian has recognized economic brotherhood and
sharing of risks. Christian teaches to love their enemywhich is in accordance the prohibition of
interest.
2.1.2
Interest rates and the business cycles
There is a strong relationship between interest rates and instability of economy through the inflation, unemployment, negative growth etc. The difference between market and natural interest rates is that the former is determined by monetary forces in the loan able funds market, e.g. money supply growth and bank credit creation while the latter is determined by the profitability of investment.
Klein (1965) describe that investment increases when the natural rate of interest increase from the market rate and vice versa and the deviation between the two rates is responsible for price movements.
2.1.3 The interest rate and Islamic banking
As for the Principles underlying the Islamic banking system the Quran permit the trade but forbids usury and particularly the interest. This fundamental principle differentiates the western from the Islamic banking system.
Usury is forbidden by Quran because the main objective of Islam is to achieve an equitable distribution of profits between entrepreneurs and investors. Indeed, it is unjust to guarantee a return on capital or loan in a situation in which the lender does not make any effort. This implies the application of the profit and loss sharing (PLS) principle in Islamic banks.
The special principle of Islamic banks is that investors share in bank's profits and losses rather than get a fixed interest as in the western system. The shareholders contribute in the results of banks at a profit or loss sharing ratio which depends on the short or long term basis (Khan, 2007).
The long term deposits typically have a higher profit and loss sharing ratio because of their larger risk. For getting profit share, depositors must keep their funds until the end of the contracted period. This feature description the banks to a high liquidity risk if losses are predictable. For this reason the banks have to give notice before taking out their money. Funds can be used in profitable and non-profitable issues. The profitable uses are real investments in trade or on loans on a profit sharing basis and the non-profitable uses are the holding of cash reserves and the provision of interest-free loans to customers and entrepreneurs (Usmani, 2000).
2.1.4 Profitability in Islamic banking
The interest-free banking concept was established by Mit Ghamr saving bank in 1963 at the Nile delta of Eqypt and since then, many Islamic institutions were created throughout the world: in
Muslim, Arabic countries and elsewhere, The Islamic Banking System (now called Islamic
Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia. (Arif 1988).Despite the existence of conventional banks in Islamic countries, some of these countries continue to encourage interest free operations in Islamic banks.
Conventional banking studies are concentrated on the exploration of factors affecting the profitability of banks. Sudan and Guan (1997) established a relationship among profitability, interest rate and market share in Islamic banks. A double banking system is a system in which interest free banks (Islamic banks) work side by side with conventional banks.
Islamic banks are based on the PLS principle through a partnership (Musharaka) or joint investment without participation in management (Mudaraba). They are also based on the mark-up principle all over a resale contract (Murabaha) or leasing contract (Ijara). But, conventional banks control with interest (Bashir, et al 2003).
In Islamic banks, there is no clash between banking operation and Islamic principles. Banking activities contain foreign exchange transactions, domestic and international transfers, letter of credit and availing of safe care. Moreover, the Islamic bank operates with the principle of no interest of PLS principle at an agreed profit sharing ratio. Thus, they share the risk with the borrower (Metwally, 2003).
Deposits in Islamic banks are considered shares and are qualified with dividends in the case of profit. A strong financial position (total liabilities) encourages the bank to expand its investment projects, to minimize the risk and maximize the profits. This may pull towards more depositors and expand activities (Bashir, et al 2003).
2.2 Islamic business contracts and the theory of the Islamic firm
The Islamic economy has as mean objective achieve the entire social and economic justice and guaranteeing an equitable distribution of income and wealth. The goal of Islam is the settlement of ethical notions as brotherhood and justice to promote the well-being or Falah for the entire Muslim community. For this reason, Islamic banks have developed different Islamic investment products in conformity with Islamic principles.
bank has an objective to avoid interest in all transactions and to replace it by Islamic interest free products like Musharaka (joint venture profit sharing) and Mudaraba (trust profit sharing).
Interest is forbidden by Islam. Muslims, through Islamic transactions, can serve an obligation and can also earn profits. Islamic banks expect a minimum failure, so that the supply of loans will increase over the years.
2.3
Agency problems in Islamic contracts and its Implications
Islamic or PLS sharing faces many principal agent problems resulting from costly monitoring and asymmetric information. The bank suffers from limitation of ex-ante information about project quality. PLS banks will attract entrepreneurs despite of their risky projects and borrowers will inflate their declared profit expectations in order to be quoted a lower profit sharing ratio by the bank (Nienhaus 2003).
The borrower reduces his declared profit. Therefore, Islamic banks will support monitoring costs to control the quality of the entrepreneur and the effective profit realization. This ex-post information asymmetry leads Islamic banks to a moral hazard problem. The excessive dead-weight costs resulting from collecting information reduces the competitiveness of Islamic banks with conventional banks (e.g. Dar and Preley, 1999).
Solutions to overcome the agency problems in Islamic banking:
♦ PLS banking system can resolve agency problems because the reward resulting from cooperation induces parties to be more honest.
2.4 The nature and characteristics of the Islamic theory of the firm
The main objective of Muslims is to fulfill welfare as described in Islamic law (Shariah). The process of production in an Islamic firm should be governed by ethical principles of Shariah. Maximization of the utility of Islamic community, prohibition of acts that cause bad things to others, primacy of social benefit over private benefit.
Any firm has to maximize its profit as well as welfare (Falah). Islamic firm is bound by ethical values and the most important is the principle of economic trusteeship that suggests that the main object of an Islamic firm, will not be profit maximization and it is important to do good to please God. Finally, a separate analysis must be applied to corporate Islamic finance because of the prohibition of interest rate in financial transactions (Metwally, 2003).
2.5 CONCLUSION
Chapter No 3
ISLAMIC BANKING
3.1: What is ISLAMIC BANKING?
“Islamic banking can be considered banking with a conscience. Islamic banks each have a Shariah board made up of Shariah scholars as well as financial experts who are responsible for determining what activities are and are not Shariah-compliant. Islamic banking is based on two main financial principles. Firstly, investment is to be made in the private sector through interest-free financing. Secondly, the development of financial instruments is to be done on the basis of profit and loss sharing as well as sharing risks. Further, Islamic banking is built around Shariah, mainly prohibiting the charging of interest. Because Islam considers interest an unjustified increase of capital, with no effort made to earn it, it is considered of false value, and therefore is prohibited. However, there are many arguments about the prohibition of interest in Islam. The first argument is that interest rates have no moral foundation. The second is that abstinence from consumption is not a justification of rewards. Lastly, some argue that there are risks to justify the supplement of payment for capital lending if the loan is guaranteed”. (AL-RIFAEE, 2010)
3.2: Historical development:
According to Haqiqi and pomeramz that in Muslim communities, limited banking activity, such as acceptance of deposits, goes back to the time when the Prophet Muhammad (P.B.U.H) was still alive. At that time, people deposited money with prophet of with Abu Baker Sidique, the First Khalifa of Islam. The first modern Islamic banks, established tool for success of Islamic banks is said to have been developed contemporaneously at the University of Cario. (Haqiqi & Pomeramz, 2005)
Kingdom (UK) Financial Services Authority (FSA) has been showing a more receptive attitude towards Islamic banking. A number of financial institutions such as the Islamic Bank of Britain, the European Islamic Investment Bank, HSBC Amanah and Lloyds TSB offer Islamic banking and insurance products to Muslims in the UK, while LARIBA, University Islamic Financial, Guidance Financial Group, Shariah Capital and others deliver Shariah-compliant products and services to Muslims in the USA”. (Khan & Bhatti 2008 (A))
Ayub (2002) explained in his book that Islamic banking is no longer limited to concepts and
ideas only. Until the mid of the 20th century, it was more or less theoretical concept. Now it has
been given a sensible form with a range of models. Starting from local bank (the Myt Ghamr Savings Banks) set up in Egypt in early sixties, the Islamic banking and financial frame work has developed into a full-fledged structure and regulation. The idea has become to a great degree by now as to what are its fundamental requirements for observance with Shariah.
Chapter # 4
Islamic and Conventional Banking
4.1 Difference between Islamic and Conventional banking:
Islamic banking is based on the Islamic faith and should reside within the restrictions of Islamic Law or the Shariah in all of its events and activities. Shariah is an Arabic word which means 'the way to the source of life' and presently it is become the legal system, will work according to the policies of Holly Quran. While in Conventional Banking there is debtor-creditor association, for example in the case of bank, on one side depositors and the bank are involved and on the other side borrowers and bank. Entire business matters, transaction, business methods, product characteristic, investment focal point, are taken from the Shariah law, which show major difference in many areas of the processes as compare to conventional banking. (Ust Hj Zaharuddin, 2007)
The difference between Islamic and Conventional banking are:
1. The foundation of tasks and operating approaches of Islamic banks is the principles of
Islamic Shariah, while the foundation of tasks and operating approaches of conventional banks are manmade principles. (Ust Hj Zaharuddin 2007)
2. In Islamic banking the implementation of agreements for exchange of goods & services is
compulsory, while pay out funds under Murabaha, Salam & Istisna contracts. On the other hand in Conventional banking they paying out cash finance, running finance or working capital finance and there is no agreement for exchange of goods & services (Mabid & Munawar,2010)
3. Islamic banks tolerate risk while the Conventional banking removes the risk (Ust Hj
Zaharuddin 2007)
4. In Islamic Banking when customers engage with banks in some transaction, Islamic
banks tolerate all the liability, while conventional banks did not tolerate all the liability
5. The basic task of Islamic banking is involvement in partnership business, while the basic task of Conventional banking is lending and borrowing money with compound interest, when customer return back the loan they have to pay the interest.. (Ust Hj Zaharuddin 2007)
6. Product is the real asset of Islamic banking and money is used only medium of exchange
while in Conventional banking money used as a product and value of store. (Mabid & Munawar,2010)
7. Islamic banking is free of interest (Riba or usury), and in Conventional banking is going
on interest, they give and take interest.
8. In Islamic banking the relationship between the bank and with its client is partners,
investors and trader, buyer and seller and in Conventional banking the relationship between banks and client is debtor and creditor.
9. In the Islamic banking, one of the important of task of the bank is to collect Zakat and
they give Zakat. While on other hand Conventional Banking there is no concept of Zakat.
10. The purpose of Islamic banking is to maximize the profit with in Shariah rules, while the
purpose of conventional banking is to maximize the profit without any constraint.
11. In Islamic banking there are no additional fines when a person defaults but pay only
small compensation of money. In Conventional banking when a person defaults they charge extra money (Penalty and Compound Interest).
12. The borrowing of money from market is not easy because the Islamic bank borrow
money within the limitation of Shariah, while for Conventional banking it is easy to borrow money from market without any restriction.
13. Islamic bank can give only assurance deposits for deposit account, which is according to
4.2 Words Usage in Islamic and Conventional banking
:
Islamic banking Words Conventional Banking Words
Murabaha Cost-plus Sale
Mudarabah Passive Partnership
Bay Mu'ajjal Deferred payment sale
Bay' Salam Purchase with deferred delivery
Bay' Istis'na Made to order
Ijara Leasing
Ju'ala Loans with a service charge
Musharakah Active Partnership
Salam Sale Contract
Qard hasan Beneficence Loans
4.3 Islamic Banks and Islamic Banking Branches in Pakistan:
I s l a m i c B a n k s i n P a k i s t a nName Branches
Meezan Bank Limited 62
Al Baraka Islamic Bank 11
Bank Islami Pakistan Limited 10
Dubai Islamic Bank Pakistan Limited 10
Emirates Global Islamic Bank Limited 6
First Dawood Islamic Bank Limited 1
Source: Maryam Ayaz (2009)
I s l a m i c B a n k i n g B r a n c h e s i n P a k i s t a n
Name Branches
MCB Bank Limited 6
Bank of Khyber 5
Bank Alfalah Limited 23
Habib Metro Bank 4
Standard Chartered Bank 3
Bank Al Habib Limited 3
Habib Bank Limited 1
Soneri Bank Limited 2
Prime Commercial Bank 2
Askari Commercial Bank 6
National Bank of Pakistan 1
United Bank Limited 1
ABN AMRO Bank 1
Chapter No 5
Tabulation and data analysis
Monitoring the external and internal environment is important part of the strategic planning process. The internal environmental factors of the organization are its strength and weaknesses, and the external factors are the opportunities and threats. The analyses are called as SWOT analysis. An organization should exploit its opportunities, use the strengths to overcome the threats and avoid weakness. For this research we choose the bank called as bank of Khyber Islamic banking division just to observe the internal and external environment, taking telephonic interviews from the employees and from the manager of the Bank, on that basis we did SWOT analysis, what are their goals and what are the strategies to achieve that goals, and to what extent they are successful to achieve that goals. We analyze their SWOT analysis. After that question were asked from the employees on the basis of that, we made the results of the data analysis. On the basis of the SWOT analysis, from questionnaire, that we developed, we made some arguments to see what really the Islamic banking is.
In SWOT analysis, the focus was on their strengths like other banks have, in order to achieve the goals to convert the bank into the Islamic bank. Most of the bank has some weakness which needs to be reduced, or challenges which is the main theme of the report.
5.1: Internal Analysis:
5.1.1: Strengths:
i. NIC Card form (NADRA):
In order to facilitate the general public to obtain the computer NIC, the bank of Khyber and NADRA singed a MOU to start sale/collection of filled NIC form through all branches of bank of Khyber. This will help the people to get this NIC cards as soon as possible instead of going to NADRA office.
ii. Khyber Bank Rupee Transfer Cheques:
The bank of Khyber has introduced rupee transfer cheque of Rs. 5000 and 10000. The cheques are either sold against cash or debt to the party’s account and no commission is charged on the issuance.
iii. Online Islamic Banking:
The bank of Khyber has introduced its software for the online connection with all the branches, which will carry on all the online transactions. This will facilitate the customer to connect with bank all the time.
iv. ATM Services:
In order to go with the modern field of the technology bank of Khyber has joined the electronic plate form of the M.Net switch. Customers are facilitated with this to access their funds easily, through the existing ATM network of the country. Bank of Khyber has also installed its first ATM at corporate branch Peshawar.
v. Agreement with First Remit:
5.1.2: Weaknesses:
i. Meritorious Recruitment:
In the bank of Khyber the appointment should be based on the pure merit basis, my tenure at the bank of Khyber made me a kind of nepotism in the bank; the skills of the newly appointed must be suited to fulfill the requirements of the job.
ii. Proper and Reliable Training:
In present world the proper training is necessary for all kind of employees , which I found that there is no proper training at the bank of Khyber Islamic banking division ,the board concept , of Islamic banking need a thorough concern into it , proper presentation were needed and highly professionals were needed to deliver the broad items. It has noticed that the training program of bank of Khyber is not so much good. For motivating the customer the employees require a good marketing training. The training program of the bank of Khyber should include scientific techniques to improve the needs of the employees.
iii. Training School:
Proper training is reckoned that fulfill all the necessary training needs with proper equipments, staff and halls, which will definitely sort it out. Retraining of people to conduct business under profit and loss sharing (PLS) scheme and acquiring the practical skills to carry out the task is necessary for the scheme to work effectively. The time, the cost, the need and the ability to recruit the skills indicate that even with connected effort, it would take a generation for banks to acquire all the skills to participate in PLS scheme on the large scale basis. Islamic financial products should be in the compliance with Shariah (Islamic law) and the establishment of any new practice should be compatible with Shariah. There are several theoretical issues that constraint the growth of Islamic finance industry. Given that necessity is the mother of invention, it is perhaps a good thing that Islamic banks face a wide array of problems that they surmount to guarantee the industry future.
iv. Lack of Appreciation:
The rewards and the bonuses offered by the bank of Khyber are relatively weaker , organization regarding its performance appraisal system , although the division earn high profit but the turnover rate of the skills employee is at raised in quest for the better pays and facilities after all a secure future. A detailed and systematic study of the job should be done to know the nature and characteristic of the people to employed. This will help in identifying the training needs, evaluating the job and appraising the performance of the employee.
v. Lengthy Loan Procedure:
The bank of Khyber (IBD) should work on to shortened the procedure of loans, because it is time consuming. Thus they should appreciate a mere eminent policy for providing loans on equal bases to all customers. In the bank of Khyber the distribution of work need further improvement. Some employees have more work to do and are overburdened and some are less work to do. The work should be distributed in such a way that there are no more burdens on a single person.
vi. Promotion:
5.2: External Analysis
:It has been observed that external analysis, by observing their opportunity and threats. So bank of Khyber should exploit their opportunity and to overcome the threats.
5.2.1: Opportunity
:i. International Islamic Banking Branches:
Bank of Khyber should expand its banking branches un other countries specially in middle eastern countries at its first attempt where a number of Muslims believe on this system and it can be a worth full market to explore constant improvements in customer services are needed in the present environment. Personalized banking should be introduced to attract more customers. Equal respect should be given to all the customers.
ii. Management By Objective (MBO)
Employees should be motivated and best way to do that is the introduction of MBO, the subordinate should be given the right to make decision and giving them the feeling of confidence, which will make them realize their importance to certain duties.
iii. Forming a National Level Body:
Forming up the national level body against interest movements (AIM) that would indulge itself in the matters related to the subject. This body should have four basic units each for one province and federal area unit that should operate in region like Kashmir and northern areas, their operation should include research and development. AIM should have economist, bankers, layers, religious scholars and other as required.
iv. Modern Islamic Banks:
v. Marketing:
For attracting more customers, marketing is a tool to attract them. Bank of Khyber ignored the medium of advertisement campaign. The bank of Khyber is a new organization in Islamic banking. In order to increase its customers it should advertise itself. It is suggested that the bank of Khyber should advertise itself and introduce its services in detail through media.
5.2.2: Threats:
i. Lack of Business Opportunities in the Bank of Khyber:
Bank of Khyber Islamic bank division we slacking in its deal with organization of repute, failing to sign Mou with business institute at government level, and private levels, which are major advantage to the other banks.
ii. Changing Political, Economic and Social Condition:
The political condition in Pakistan is unstable that government are changing every now and then , thus these activities discouraging the investors to invest in this part of the world , also the social violence are becoming very common dilemma in these days.
iii. Suffering Domestic Industry:
Pakistan lacking in industry, especially in the NWFP at a very slow rate growth thus the investment in this part is less and also less business means that there is less money circulation and a great competition is faced by banks to attract more customers.
iv. Little Awareness of Islamic Banking Concept:
v. Low Economies of People:
High employment rate and inflation make people ready for the conventional interest based banking to run their homes this avoiding the money to circulate in business making situation difficult for ever. There is a need to educate the people. On the individual level people need to learn the Islamic teaching related to various aspects of life including economic and financial.
vi. Lacking Mere Access and Branches:
The bank of Khyber is lacking mere branches and access within and outside the country which is an ultimate threat to the bank of Khyber as compared to other more established banks.
vii. Lack of Support on Behalf of the Customer:
There are no Islamic banking courts, laws, and potential regulation. Islamic banking does not show assets on the balance sheet, because of the potential regulation. Bank cannot buy assets for itself.
viii. Law and Order:
Some people do not want to transact with this bank because of their existing location, internal environment and wrong management. The bank is infamous because of the political interference because of its head of Islamic banking division, who is loan defaulter of the bank.
ix. Managerial Flaws:
The bank of Khyber was not allowed to convert most of its branches to an Islamic bank branch as it had several managerial flaws and needed to improve upon the performance, capability of its personnel and strength of its financial base. But now to some extent they a lit bit improved and they have 34 branches. But some managerial flaws are still there.
5.3: Results and Analysis of questionnaire:
our research on Islamic banking division Peshawar branch Peshawar-Pakistan. In relation to Islamic banking questionnaire was formulated and send to fifteen employees of the bank. Questioners were received back and after tabulating and analyzing it, we calculated the following results. The results are presented along with questions that were asked.
First question was about the qualification of the employee. In reply 46 % working in bank of Khyber were master and 54 % were bachelor degree holder. Second question was either they are hired from conventional banking system or they hired particularly for this branch. In reply 42 % were hired particularly for this branch and 58 % were hired from conventional banking. Next question was about the experience in this field. In reply 42 % have (1-2) year, 33 % (2-3) years, 25 % (3-4). The next question was about the training period. In reply 42 % says that one month, 25 % said two months, 21 % said six months, 12 % said one year. When they were asked are they satisfied? In reply 33 % said Yes and 67 % said No. when they were asked about that they have themselves an Islamic account , 42 % replied that they have and 58% replied that they have not. The next question was the reason for have an Islamic account, in reply 30 % were self motivated and the remaining12 % replied that was job requirement, and not applied to 58 %.
The next question was the problems they face 33 % employee ranked being overburdened as their highest ranked problem ,60 % ranked communication problem with management and 7 % with convincing the people as their highest ranked problems.
According to 50 % of the employee their second ranked problem is being overburdened, where as 33 % said that it is a communication gap while 17 % marked as convincing people. Being overburdened was faced by 17 % of the employee as ranked third , while communication gap with management was ranked third by 8 % of them employee and 75 % ranked convincing people as third ranked problem. The next question was about having they a system for placing suggestions. In reply 50 % replied that there is a system for placing suggestions, 25 % replied that there is no proper system for placing suggestions and 25 % said that they have no knowledge about placing suggestions.
The next question was about that have they come up with suggestions for the bank of Khyber (IBD). In reply 25 % said yes that they have come up with suggestions and the remaining 25 % said that they have not come up with suggestion for bank of Khyber (IBD) and not applied on 50 %. The next question was about that have their suggestions were implemented, 8 % of the employee said that there suggestion are implemented and 17 % said that their suggestions are not implemented, and not applicable to 75 %.
When the question was asked about the suggestion for the betterment of Islamic banking division, 17 % said that they are giving suggestion for the betterment of the Islamic banking and 8 % said that they are not giving suggestions for the Islamic banking in bank of Khyber; it is not applicable to the remaining 75 %. The next question was have their suggestions for betterment are implemented, 4% said yes and 13 % said that there suggestions are not implemented for betterment and not applicable to 83 %. The next question was about an Islamic course have they studied an Islamic course or studied in academic period, 30 % said yes and 70 % No.
profit. Most of the employees and customers do not open an Islamic account because they think that there is a zero interest, if Islamic banking is implemented in a true sense. They have lack of training about the Islamic banking and they are unable to clear the true concepts of Islamic banking system. They even do not get any rewards for their performance. They face a lot of problems like they cannot communicate well with the management as well as with the customers. If they are not properly communicate with management and the customers how they can show their efficiency and effectiveness. When suggestions are given by the employees for the betterment of Islamic banking they are ignored. Most of the employees are worried about their job and career not for the banking system. They jealous from each other, worried about their earnings, profit (interest) and the bank is going to hire a person on the basis of the favoritism not o the basis of the merit basis.
The results are based on the analysis and findings. We can say that bank of Khyber (IBD) looks like as the normal banks are. As far the employees of the bank are concerned there is still a gap for improvement. The employees are not fully interested in their wok, they work for their own sack and do not share expertise and knowledge with other employee means that there is a lack of coordination. As the training that bank offer is less for the newly appointed employee. As rewards are concerned most of the employee do not get any reward, and those who gets are not satisfied with the package.
Most of the employees are unable to answer the queries of the customers. The employee also face communication problem with management, being overburdened and convincing people problems if ignored that can create harmful results. Bank of Khyber (IBD) can play an important role in the improvement of Islamic banking practice and also its own marketing efforts regarding to Islamic banking by providing a plate form to give their suggestions. It will be very useful for the employees are one who is constantly in touch with Islamic banking tools and instruments as well as the customer. But the bank is not playing a dynamic and effective role in this aspect.
marketing efforts. Being a pioneer of Islamic banking in NWFP, It has been played a great role in implementing in Islamic banking but still can do a lot more for the success of Islamic financing system by overcoming their weaknesses.
It is said that “if you change your attitude towards something, life can be very different”. For the success and full implementation of Islamic economic system , changing attitude of the masses due to their own will while 42 % opened an Islamic account due to the marketing effort of bank of Khyber and 58 % have got Islamic account due to will and motivation.
Marketing effort aiming at the changing attitude and thinking of masses is required a lot. As to deceive the innocent people is not desired but there is a need for more positive steps to be taken to attract more customers. All the employees should not only to open an Islamic account themselves but they will put all their efforts to convince and attract more customers to Islamic banking system. As we know that Islamic banking is not being exercised fully in true sense but we all can put in efforts to make it truly Islamic.
Friendly environment should be created because it will help to gain the interest of the employees in work. As a matter of personal policy, personal department of (BOK) should prepare a career plan, showing their future growth, potential, depending on the job. Performance and evaluation which should be made knowing to the employees. In this regard the employees should be given opportunity to show their performance.
Chapter No 6
Findings and Conclusion
6.1: Findings:
The key findings of the research are listed below.
1 The employees are not so much qualified as required and, most of them have less
knowledge about Islamic banking and also most of them came from conventional banking, i.e. less experience in Islamic banking.
2 The employees are not satisfied with the bank training program, because the low
percentage of the response shows lack of training in BOK (IBD).
3 To motivate customers towards Islamic banking, the employee yes response percentage
is low, because they are not receiving much reward from the bank according to their performance.
4 The marketing effort of the bank is not much effective to attract more customers towards
Islamic banking.
5 The bank is not showing the true picture of Islamic banking because the employees have
less concepts about the Islamic banking, as they came from the conventional banking, as a result a less percentage of employees answer the queries of the customers.
6 There is system for putting suggestion for the bank but not so much effective and many
employees say that they are not giving suggestions, if someone gives suggestion then it is not implemented and rejects it without any reason, even it is better for the bank.
7 The bank is involved in activities like favoritism, almost 90 % of the appointments are
on personal relation, and only 10 % are on merit basis.
8 Many of the employees saying they are going to leave the bank because of the internal
environment, there are communication problem with management and also overburdened.
9 Results indicate that there is a lack of availability of wide range of interest free banking
products.
11 Interest free banking will require some time to challenge the conventional banking.
6.2: Conclusion:
If we analyze the earliest history of the Islamic economic we conclude that it with much simplicity that the focus of the scholars, economist and even writers was not only on the Islamic banking and finance in the narrow sense but Islamic economic system as whole. This was an earlier issue. Generally speaking criticize capitalism, socialism and proceed to draw a system based on Islamic restriction relating encouragement of economic enterprise, helping the poor, avoidance of waste.
It would be argued that the Muslims should not adopt the conventional system of money banking and finance blindly. They must wash out it of to suit the just and poor friendly economic system of Islam.
Professional Muslim economist as well as Shariah scholars made significant contribution to the subject so that by the end of 1960 some kind of a blueprint Islamic banking was available. They tried hard to eliminate interest from the world. Banker and businessmen had also joined the task of evolving a workable model since efforts were on in several Muslim countries to put the idea into practice and due to these efforts Islamic banking system became popular and many people who scare from God punishment so they are believing the government made Islamic banking because many people who are illiterate, uneducated believe in the Islamic name.
Actually the government is playing with their innocence and taking benefits from them. Because most of them are rich and religious while on the other hand these people who are educated or speculated on the banking and finance especially, they do not believe that Islamic banking is not actually interest free banking in this opinion, they think that how is that possible that a bank who survive without interest, because without interest how the bank will earn profit.
many other people who try to deceive the people. May be Islamic banking, the concept was introduced by the European like conventional banking system was also made established by colonial.
At time the Muslim communities did not deal with them but when they traded with overseas then there was only option to deal with convention banking system. It means that colonials only know the methods of operating conventional banks. Muslims were unknown to system of banking.
Now in the modern 21st century, still there are many people who are not dealing with
conventional banking system. And those are dealing they took their money from conventional banks after the catastrophe event of 9/11. They took their money from Europe to the Arab countries. So they were worried that how they captured those Muslims who hate English people or maybe they want to take the revenge.
So after 9/11 Islam was the main issue. Many people (western) studied Islam, and tried to research on Islam because they thought the Muslim are terrorist, they are creating curse in the world. But when they focused that Islam is peaceful, beautiful and prosper religion then many of them embraced Islam and became Muslims.
Then the western people got scare that they must thought if all people of west are becoming Muslims, it would given harm to the Jewish, so they introduced Islamic banking. In order to attract these kinds of people who are extremist, can do anything for the name and prosperous of Islam.
Islamic finance is now reading new level of learning. However a complete Islamic finance system with identifiable instrument and market are still at an early stage of evolution Many problems and challenges relating to this research and devolvement, Islamic instruments, financial markets and regulation, which should be addressed and resolved for it rapid growth.
This study has been introduced with the aim to find out the major problems facing by the industry in the present era during the literature review on Islamic banking and finance problems are observed which can be summarized as under the corporation among the Muslims financial institution is not that much strong that is required, this suffering from proper institutional setup, developed markets is which Islamic financial instruments can be traded, shortage of expertise in Islamic banking, accounting standard and research and development institutions. There is also disagreement over what is prohibited and over terminology used.
There is a shortage of the recognized instruments and lawful use of each instrument is also subject of dispute. Banks regulation of are different at different countries and range from under regulation, the further growth and development of Islamic financial system will depend largely on the nature of the innovation introduced in the market and deployment of financer and human resource are not also done properly.
In previous section we discussed some problems facing by Islamic banking industry for its growth that is hoped that if some extraordinary efforts should be made to by the Muslims financial institutions to resolve these problems the industry will grow much rapidly then it is growing in present situation.
In these circumstances, Islamic finance can provide a viable financial system on global scale, but there are challenges that have to be met to make it possible. Islamic finance has to adopt the best stand of accountability, transparency and efficiency.
The accounting and auditing organization for Islamic finance institution through the efforts of Professor Rifaat Abdul Karim.
The international rating agency. The Islamic financial service board. The international Islamic market and The liquidity management center.
As this architecture emerges, Islamic finance has to develop its own genuinely Islamic financial instruments. So far we have been free riding on financial theories and Interest developed within the context of conventional debt and interest based system, unless Islamic finance develop its own genuinely Islamic financial instruments, it cannot achieve the dynamism of a system that provides security liquidity and diversity needed for a globally accepted financial system. Which could be alternative to the present debt interest based international system.
Unfortunately, there are at present, nothing in the Muslim world close to resembling large endowment institutions, such as the national sciences foundation, the ford foundation, the Rockefeller foundation, and the like to support research in Islamic banking, finance and economics. There is, therefore, an urgent need for the scholarly foundations, institutions, colleges and universities that can train Islamic financial engineers who are well trained in economic and financial theory and, methods, on the one hand, and Islamic Sharaih on the other.
There is now a need for to systematize the process of training financial engineers, experts in the modern finance who are well versed in the Shariah to expand the horizon and the menu of available Islamic financial instruments.
There is theory developed in 1980s referred to as the spanning theory which asserts that if there is one basic financial instrument it can be spanned into infinite number of instruments. Islamic finance has at least 14 basic instruments and financial experts can span these in to a much larger menu to provide great security, liquidity, and diversity to meet the demand of investors on a global scale.
Chapter No 7
Recommendations
7.1: Recommendations:
In the end of this report, the recommendations in order to improve the efficiency of the bank are given. These recommendations are primarily based on the analysis. The recommendation, if followed will have a positive effect on the profitability and the role it plays in the development of the province. The following are the recommendations for the future growth and success of Islamic banks are given; these recommendations are based on the premise that Islamic banking system can be successful and produce full dividends. If the society in which operates, is geared on Islamic principles. It is therefore of outmost importance that sincere and effective efforts are simultaneously made to transform the existing societies, in the Muslim countries, into truly Islamic societies.
It is however, appears that although tremendous efforts for Islamization of banking system and for streamlining and enhancing the scope of the activities of Islamic banks are being made in many Muslim countries, but effective steps for reformation of the societies in the respective countries are not being taken up with same zeal and enthusiasm.This is an essential prerequisite for the success of Islamic banking and deserve serious consideration by all those who are involved in the process of Islamic banking.
The following are the recommendation for the bank.
1 The bank will hire proper and highly qualified employees who know the concepts
of Islamic banking and shares these concepts with the customers.
2 The interest-free industry should expand its product line to create opportunities for
3 They should improve their marketing efforts by advertising, through media, news papers, and giving more incentives to employees to attract more customers.
4 Generally, there is a lack of awareness in people about the concept and presence of
interest-free banking in Pakistan. This hurts the industry in achieving exceptional growth rates. In addition to efforts made by individual banks to introduce Islamic banking, some mechanism should be put in place to launch an awareness campaign from the industry’s perspective as a whole.
5 They should hire persons who have perfect knowledge about the Islamic banking
and can clear the concepts of the customers about Islamic banking.
6 There should be a proper system for giving suggestion to the management, and
also opportunity should be given to all employees to share suggestion with management.
7 The appointments should be made on merit basis to give a chance to a person who
has the ability to do work efficiently.
8 As this sector has only just been developing, there are human resource constraints
and there are not enough trained Islamic finance professionals in bank. Some initiatives should be taken to attract talent and avoid brain drain. Proper training and grooming procedures should be adopted to produce professionals able to play a part in the fast growth of interest-free banking industry in the bank and also in Pakistan.
9 To make the internal environment so friendly that everyone can access everything
in the bank to do is job effectively.
masses there needs to be move towards the Islamic teaching as well as technological developments to Islamic financial institution.
The main issue and challenges confronting Islamic banking as described above are lack of moral standards, Islamic prudential regulation, excess liquidity, the Basel Accord capital requirement, following the bench marks of conventional banking, the nature of risk in Islamic banking, Islamic future exchange, financing government debt, lack of Shariah based products, lack of awareness among the masses and lack of expertise in Islamic banking. Islamic banks have been concentrating on short term trade finance which is the least risky. Long term financing requires expertise which is not always available. Another reason is that there are no back up institutional structure such as secondary capital markets for Islamic financial instruments.
It is some time suggested that Islamic banks are rather complacent. They tend to behave as though they had a captive market in the Muslim masses that will come to them on religious grounds. This complacency seems more pronounced in the countries with only one Islamic bank. Many Muslims find it more convenient to deal with conventional banks and have no qualms about shifting their deposits between Islamic banks and conventional ones depending on which bank offers a better return. This might suggest a case for more Islamic banks in those countries as it would force the banks to be more innovative and competitive.
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Appendix
Bank of Khyber
The Bank of Khyber was established in 1991 through Act No. XIV, passed by the Provincial Legislative Assembly of the North-Western Frontier Province of Pakistan. It was awarded status of a scheduled bank in September 1994. The Bank of Khyber enjoys a unique position, and stands out amidst the other banks operating within Pakistan, and has the privilege of being bracketed amongst the only three government banks in the country. Currently the bank has a total branch network of 41 Branches plus 2 sub branches throughout the country. At present, 18 of its branches functioning as dedicated Islamic Banking Branches, whereas 23 branches are conventional banking branches.
MISSION STATEMENT
To increase shareholders' value and provide excellent service and innovative products to customers through effective corporate governance, friendly work environment, and contributing towards an equitable sub-economic growth.
OUR VISION
Annexure
Questionnaire
1. What is your qualification?
o Master
o Bachelor
2. They are hired particularly for BOK (IBD) branch or from conventional banking.
o From conventional bank
o Particularly for (IBD)
3. How much working experience they have in Islamic banking?
o 1-2 years
o 2-3 years
o 3-4 years
4. How long they were trained?
o One month
o Two months
o Six months
o One year
5. Are they satisfied with the training program?
o Yes
o No
6. Do you have yourself an Islamic account?
o Yes
o No
7. What is the reason for have an Islamic account?
o Self motivated
o Job requirement
o Not compelled
o Account in conventional bank
9. Have you studied an Islamic course or studied in academic period?
o Yes
o No
10. How you motivate others towards Islamic banking?
o By marketing effort
o Self motivated
11. Are they getting rewards for attracting customers?
o Yes
o No
12. Are they showing the true picture of Islamic banking to the people?
o Yes
o No
13. How many customers are attracted towards Islamic banking by each employee?
o 1-2
o 1-5
o 1-10
14. To what extant you are able to answer the questions of the customers.
o Able to answer
o Not able to answer
15. Have you a system for placing suggestions?
o Yes
o No
o Don’t know about it
16. Have you ever come up with suggestions?
o Yes
o No
o Yes
o No
18. Have you come up with suggestions for betterment of bank (IBD)?
o Yes
o No
o
19. Have their suggestions for betterment been implemented?
o Yes
o No
