© 2012Introduction Islamic banking is a corporate banking activity that operates within the confines of the principles of sharia law in developing Islamic economies. Sharia law as explained by Ansari (2005) does not allow for fixed (and/or floating) payment, as well as interest on loans, otherwise referred to as riba or usury. Any business that provides goods or services against the principles of Islamic law is considered haraam, translated to mean “sinful and prohibited” (Banaji, 2007). However, only in late 20th century have these principles been applied by Islamic banks in private and public commercial banks in most of Muslim communities as noted by Imam and Kangni (2010).
Definition of the research problemThe aim of this essay is to critically examine and evaluate the corporate governance of Islamic banking in comparison with traditional banking. To achieve this objective, an Islamic bank - Meezan Bank Limited (MBL) - in Pakistan has been chosen as a case study, reason being that it is the first Islamic bank in Pakistan. This bank will be compared with traditional banks in the country by evaluating its performance in terms of liquidity, profitability, efficiency and risk for a period of five years from 2003.Essay structure and presentation This essay has, first and foremost, defined the research problem in the foregoing section before laying out the structure, presentation and depth of the essay in the present section.
A comprehensive review of current literature on traditional banking compared to Islamic banking is carried out in the forthcoming Section 4. Section 5 explicitly outlines the major differences between traditional and Islamic banking, giving way to a case study in Section 6 of this essay. The fact that data about this bank is readily available and that it is a domestic and private Islamic bank forms the main reason for selecting it for the case study.
To conform to the nature of this bank, the four banks that are used in comparison with it are also private banks in Pakistan. Furthermore, this essay does not use foreign banks, whether traditional or Islamic, so as to restrict the comparison analysis only on domestic banks. This essay selected MBL for the case study since there are numerous commercial banks – including six Islamic banks – in Pakistan, and as mentioned elsewhere, has operated for more than five years.
For this reason, the bank is relatively large and is experienced in banking business (Muhammad, 2008). Moreover, a set of only four banks have been selected to contrast with MBL because of limited space for this essay and lack of data availability for majority of other banks. Literature review Islamic banking was started in a town in Egypt in 1963 on experimental basis. The good results from this experiment opened a market for Islamic banking and finance that culminated in full-fledged banking services in 1970, subsequently starting to operate on moderately medium scale in Asian and Arabic countries.
According to Fadzlan (2007), this mode of banking operates in slightly more than 60 Islamic countries with total assets amounting to roughly $165 billion and an annual growth rate of 12.5% on average. Presently, the credit market share of Islamic banks in Muslim countries is approximately 16%. These figures and facts indicate that Islamic banking can be as efficient and viable as the traditional banking.