Interest Free Banking in Pakistan

Interest (Riba) Free Banking is a basic institution and concept of the Islamic banking. It deals with the primal professional and ethical standards that exclude the “Muslims” from paying or receiving any kind of interest but not encouraged the revenue generating activities or money raving businesses. Islamic Banking and Finance system greatly respect all types of business which don’t involve interest (Riba) or usury. Riba or usury is the charging of interest on the loan.

There are a lot of monetary and fiscal tools launched and introduced by the Islamic finance and business scholars to fulfill these business or profit making requirements. Islamic business system deals with equity financing rather then reflecting on debt financing. In addition, as a replacement of fixed interest rates on the savings account, these interest free banks give a small percentage of return on deposits on an annual basis.

Islamic Banking and Finance system without usury or interest was started around the later part of the nineteenth century when the Muslims were doing well, both politically as well as economically. Islamic Banks started to establish their centers in the big and famous cities of Islamic countries as well as non-Islamic countries to supply their comprehensive business needs.

Generally all interest (Riba) or usury free banks harmonize on the essential values of Islamic banking. Nonetheless, individually all the banks differ from the services and benefits. These differences occur due to the country rules, needs of the inhabitants and the customized bank’s experiences and objectives.

The concept of Islamic interest free banking is becoming widely popular also in the Non-Islamic countries too. The fundamental law that helps a person become debt free at the earliest can be called the most wonderful feature of Islamic banks. The interest free banks work with the rule that the lender must have a share from the profits or the losses that occur to the borrower or the borrowing enterprise. Thus the sharing of the profits as well as the losses is the mandatory in Islamic Banking System. The lender and the borrower are like partners and that plays a major role in characterizing the social order. In turn it helps remove the discrimination and prejudice between the “rich” and the “poor”. The traditional banking system on the other hand collects huge amounts of interest from the borrower regardless of the success or the failure issue. It places a huge amount of risk on any body that is borrowing the money and is proved to be cruel in the Islamic Banking and Finance System.

The Islamic Banking was introduced in July, 1979 in the banking and financial system of Pakistan. The government of Pakistan decided that only Islamic economic system can ensure better standard of life. To make easy the introduction of interest free banking some necessary amendments were made in the Banking laws in June, 1980 in Pakistan. Different companies were allowed to start the business on the basis of interest free system.

Islamic Banking system without the interest (Riba) is very much popular in Pakistan but still there are lots of businessmen and other people don’t know the benefits of this interest free banking system. In this regard, there is an International Conference on Islamic Business and Finance is going to held in Islamabad on 7th February 2011 where famous world renowned Islamic scholars of business and finance would give lectures on interest free banking and how it would be beneficial for the economy of Pakistan.