The word bank is derived from an Italian word ‘Banque’ which means beanch. The view has the basis that early bankers conduct their business while sitting on benches in Italy. Bank is a financial institution which accepts deposits of money from the public for the purpose of lending or investing and these deposits are repayable on demand or otherwise can be withdraw by cheque, draft order or otherwise (Banking Companies Ordinance 1962). It also converts the domestic currency in the foreign currency. It issues notes and transacting with other financial business.
Attention on the Islamic banking increased due to the contemporary global financial crisis and also decrease the intention on conventional western banking. Islamic banking system refers activities which are in accordance with the Islamic rules, principles and law. Islamic banking laws and principles are the strictly against the concept of usury or riba and also the fixation of profit in which only one party is responsible to bear the whole loss. Similarly the unethical and unsocial practices are also prohibited in Islamic banking. Islamic laws and principles also restrict any kind of dealing in which financial risk exist like Gambling and as well as also restrict parties to invest in such businesses which are totally illegal or haram.
Islamic banking system was introduced over three decades ago. Very first Islamic bank existence came in Egypt 1963. 1975 in Jeddah the existence of Islamic development bank was the base for Islamic banking. To meet the Muslim countries financial requirement Islamic development bank was the first institution. Similarly during 1970 to 1980 in Gulf, Dubai Islamic bank (1975), and the Bahrain Islamic bank (1979) was introduced. Saudi Arabia also took enough progress in this field when Saudi prince Muhammad Al-Faisal in Egypt 1977, introduced Faisal Islamic bank and similar development in Sudan 1978. Pakistan as an Islamic country starts its efforts towards Islamic banking in 1977 in the Gen. Zia regime. The constitution of Islamic republic of Pakistan 1973 in article 38(f) provides that “the state shall eliminate interest as early as possible “In the 1980’s the whole system of banking converts into Islamic banking system in the Pakistan and in the related law number of modifications were commenced which presents the officially authorized cover for Islamic financial products and services. And in Pakistan the industry of Islamic banking continued its progress in the duration of 2008. And the 4.9% share of assets increased in the overall banking system up to the period of December 2008. In the end of the December 2008 the investment and the share of deposits & financing increased. There is the 4.8% increase in share of Deposits & Financing and 4.4% increase in the share of Investment. (Hand book of Islamic Banking Products & Services by State Bank of Pakistan 2008, p.2).
There are following features of Islamic banking system. The system of Islamic banking financial transactions is based on the principles of Shariah. The first characteristics is there should a contract ( Aqad ), the second characteristics is that the transaction should be purely without riba and the last characteristics is that there is no element of uncertainty ( Gharar ) and Gambling ( Maisir ).
It means to make money as much as possible. So the basic principle of conventional banking depends on” more you have, more you can get “In this banking system bank borrowing and further invest money on interest bases. In conventional banking system borrower is responsible for all type of risks, means liability of risk only on borrower not on lender. In conventional banking system rate of return is fixed, which is prohibited in Islam.
The history of banking is closely related to the history of money. The origin of conventional banking can be found back to before Christ. A fundamental desire that played a great role in the development of conventional bank is the desire of credit. These banks are like financial intermediaries who raise funds from the public and invest them in a business or give loan. These banks generate their profit by taking deposits at a low rate of interest and lend this money at a high rate of interest. They also perform the function of agency and general utility.
(Ahmad and Shabbir 1998) The Islamic bank differs from conventional bank in a number of ways including. The conventional banking system is based on interest and the Islamic banking system is free from interest. In Islamic banking system the operations and functions are totally based on the principle of Shariah but in the Conventional banking system the operations and functions are totally based on the rules which are totally made by man. In Islamic banking system the depositors receive fluctuating profit while in case of Conventional banking system the depositors receives the fixed profit. In Islamic banking risk is shared between the investor and the user of funds while in Conventional banking system the investor is assured to receive fixed rate of interest. In Islamic banking profit is maximized within the limitations of Shariah while in conventional banking system the profit is maximized without the limitations of Shariah. In conventional bank since the income from the advances is fixed so in conventional banks give greater emphases on Credit worthiness of the borrower instead of project evaluation and validity but in Islamic banks share profit and loss so it give greater emphases on the evaluation and validity of the project. In case of default in conventional banking additional money (compound interest) charged to the borrower, but in Islamic banking have no provision to charge any extra money from the defaulter.
Treasury Department manage placement of funding with local and foreign Banks at market or competitive price
To manage assets and liabilities is the basic function of treasury department in Islamic banks, Its main function is to fetch funds from Local and Foreign BanksA / Financial Institutions and invest in different projects keeping margin of profit of each transaction. For example Ajman Bank wants to invest USD 20,000,000.00 to Dubai Islamic Bank for one month with profit rate of 7 percent. On maturity of deal Ajman Bank will receive principal money with profit. This Department is play role as back bone of the Bank by fetching huge money and by taking advantage of differential rate of foreign currency rates as well as profit. So it is essential for the treasury department in Islamic banking to manage two types of funds that are shareholders and depositor’s funds. (Yatim 2009) its is the liabilities of the Islamic banks to manage depositor’s fund and shareholder funds which consisted upon current, saving, restricted and unrestricted deposit and retained earning, general reserve, share premium and paid up capital respectively. The funds which are arises are utilized in different investment and financial activities. Means this is use in different mode of financing. After the utilization the excess was managed by treasury department. So the primary and fundamental function of treasury department in Islamic banking is to maintain Reserves. Liquidity. Clearing process with central bank. Excess funds. Liquidity assets according to the shari’ah point of view are “notes and coins” and as well as different govt. investment certificate. (Bonds) Treasury department is also helpful to manage the clearing process of Islamic banks with others banks through central banks. in daily activities different cheques of different banks are drawn on different banks which are cashed through clearing process, in this process we take the services of NIFT. in clearing process central bank locates a location and there all the members of different banks are sitted and exchanged their cheques with others and in case of any deficit or any surplus it will be settled by the central bank. Every bank maintained some amount of reserve to meet the unexpected situation, central bank specified the limit of the reserve amount which a bank has to maintain at every day closing, and excess amount from reserves have to transfer to central bank by each bank at the end of the daily activities. For the issue of excess funds the Treasury department in Islamic banking is responsible to manage excess funds which arise from the customers and shareholder investments and deposits funds. So the treasury department invests excess amount of customers and shareholder funds in different government investment certificate. (GIC)
Real sense of the Islamic financial institution to recognized itself with the basic principle and law which are accordance with the rule of shariah defined by the Holly Quran and the Sunnah. (Chiu and Newberger 2006) Treasury department in Islamic banks also use different term Islamic mode of financing like Murabaha, Ijarah-Wal-Iqtina, istisna’a, Salam, qarz-e-hasna, Diminishing Musharaka, Mudaraba etc. In term of murabaha Islamic banks using the excess amount for purchasing some commodities on the requested by the clients, and bank charges cost plus reasonable profit in advance. In term of ijarah- Wal- Iqtina, Islamic banks used excess funds and provided equipments, buildings, services and other assets to client and charged rents from clients on agreed terms and at the completion of the contract banks transfer owner ship to lessee because bank has covered its principle amount plus profit during the lease period, and it is the unilateral contract on the option of the lessor and not bi-lateral contract In term of istisna’a banks used excess fund and make the contractual agreement to manufacturing the commodities, and also gave the opportunities to provide the financing the facilities for the construction of housing schemes and different mega project like road, bridges and etc Salam is an Islamic mode of finance which is particular suited to the agriculture sector. In Islam the buyer agree to buy goods from the seller at a future date on which a full price is paid in advance. Diminishing Musharaka in this type of financing the financer and client participate in the joint ownership of a property or equipment. The share of the financer is further divided into small units and these units are purchased by the client from time to time. Mudaraba is the mode of financing in which one person (Rab-ul-maal) provides funds to the other persons or party (Modarib) who provides his services to manage the business. In mudarabah the mudariab has only right to participate in management.
Before make improvement in any sector first of all we have need to identify the problems in that sectors. So the problems which we have identified from the different literature review that is “Seeking good financial and strong Banks which are ready to invest and to take risk on the investing bank or on offering bank, means both parties equally share loss as well as profit on agreed ratio.” The second issue which we observed from the literature review and conducting interview from different Islamic banks that is liquidity problems, because due to not well establishment of Islamic banking network some time
We can tackle the problems in the treasury department of Islamic banking by taking different steps, and these steps are: Offering competitive rate of profit Payment principal amount plus profit well in time so that better investment options can be availed. Having good name in the market. Continuous observing financial positionA or risk rating of the banks. So our suggestion about second problem is that, government/ state bank must maintain some percentage for the liquidity requirement of Islamic banks from the revenue which government collected from different source like taxes exports and etc. For this problems state bank has designed a scheme to meet the finance requirement of Islamic banks that is Islamic export refinance scheme (IERS) under Musharakah based concept. Under this scheme both parties share profits and losses equally agreed ratio. in case if state bank charged some more profit then conventional bank rate, state bank convert excess fund into Takaful fund that is “reserve fund that state bank maintained on the behalf of Islamic banks to managed the Future risk and losses “
Bank is a financial institution which accepts deposits of money from the public for the purpose of lending or investing and these deposits are repayable on demand or otherwise can be withdraw by cheque, draft order and bank also act as intermediate entity which act as a bridge between Lender and borrower. Islamic banking system refers activities which are in accordance with the Islamic rules, principles and law and restrict concept of Riba. This Attention on the Islamic banking increased due to the contemporary global financial crisis and also decreases the intention on conventional western banking. In conventional banking system bank borrowing and further invest money on interest bases. In conventional banking system borrower is responsible for all type of risks. Treasury department in banks play role as back bone of the Bank by fetching huge money and by taking advantage of differential rate of foreign currency as well as profit. The treasury department in Islamic banking is to manage two types of funds that are shareholders and depositor’s funds. It is the liabilities of the Islamic banks to manage depositor’s fund and shareholder funds. So the basic function of treasury department in Islamic banking is to manage the reserve, liquidity, clearing process and to manage excess funds. Treasury department in Islamic banks used different types of Mode of Financing that are musharaka , mudaraba , ijarah , istisna , qarz-e-hasna, salam, etc. There are many problems that are arising in the treasury department and we take different steps to tackles these problems by creating the good name of Islamic banks in markets, offering competitive rate of profit and time to time checking the financial position risks of banks.
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