Economic Analysis of Islamic Banking in Pakistan

Abstract

Islamic banking has achieved substantial growth in Pakistan and all over the world in the last two decades or so. Despite the financial and economic crisis of 2007 and afterwards, the Islamic banking industry has witnessed exemplary and uninterrupted growth. In Pakistan, it has achieved market share of almost 9% in the banking industry. There is vast literature available on explaining the features and mechanics of Islamic banking; however, limited attention has been paid on the thorough analysis of Islamic banking architecture from finance, economics, and development and distribution point of view. Though, there exists substantial body of literature explaining the negative effects of interest based institutions in Capitalism. But, little has been written on conducting a meaningful and objective economic analysis of Islamic banking practices. In this paper, we attempt to touch upon an overlooked area which is a thorough and objective analysis of Islamic banking with its economic merits and shortcomings. The paper is structured as follows. Section 2 explains the problem with interest based financial intermediation. Section 3 describes the essential features of commonly used Islamic contracts and modes of financing. Section 4 presents the economic analysis of Islamic banking and modes of financing by explaining the merits. Section 5 presents the economic analysis of Islamic banking and modes of financing by outlining the shortcomings.