Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else.

In Islam, money represents purchasing power which is considered to be the only proper use of money. This purchasing power (money) cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services. This is what governs the basis for Islamic banking.

Malalysia which is considered the hub of Islamic banking has a 12 per cent share in its banking sector over a period of 24 years since it first started to operate. On the other hand, Pakistan’s Islamic banking initiated since 2002 has been able to acquire 3.2 per cent of the industry share.

People are still not responding as favourably towards Islamic banking as they should have. In fact, the beginning of Islamic banking has been accompanied by an outbreak of ambiguities and queries in the people’s minds. There are a number of questions being asked, such as; can banking be interest free? Is it really Islamic and if so how? But the most important question that is being asked is what actually Islamic banking is and how is it different from the conventional banking that has been and is still followed? The answer to this question given by industry experts is that ‘Islamic banking is Shariah-complaint banking’. This answer is right but from an ordinary man’s perspective, it requires further elaboration.

We simply cannot assume that our every citizen is fully aware of the rules and regulations of the Shariah. Many of them do not know what modarba, murabaha, musharika or ijara is. It is the function of the industry experts as well as the government to increase the awareness regarding Islamic banking. Even though, Islamic banks have spent a lot in marketing their products but they have not been able to fully inform their potential customers of the ways they operate that makes them religiously and ethically correct. What is it about Islamic banking that differentiates it from the conventional style of banking, is what actually needs to be communicated to people, .

With a literacy rate of 54 per cent (PSLM Survey 05-06), there is still a long way to go in the area of consumer awareness. Even for those who are educated enough to gather information on the issue, many of them do not have time from their day to day routines to inquire what different Islamic banks have to offer. An ordinary man, who is willing to keep his money with an institution such as a bank, will most probably opt for one that is well recognised and operational from a long time. Many of the conventional banks certainly fit this criterion.

Very few are the people who would actually consider the element of riba (interest) here, for riba is not considered a taboo in our society unlike pork or other haram food. People in our society have accepted conventional banking and that is why we see tremendous growth in this sector.

One cannot say that Islamic banking began just in the year 2002, with the grant of license for the first full fledged Islamic bank, but in fact steps for Islamization had begun in 1977-78. A number of measures were taken towards the commencement of non-interest based banking by the government earlier as well, namely, the Modaraba Companies and Modarabas Ordinance, 1980 along with the Modaraba Companies and Modaraba Rules, 1981. On January 1, 1985 all financing to federal and provincial governments, public sector corporations and public or private joint stock companies was directed to be only through interest-free modes.

From July 1, 1985 all commercial banking in local currency was made interest free. However, the procedure adopted by banks since July 1 1985, based largely on ‘mark-up’ technique with or without ‘buy-back arrangement’, so it was declared un-Islamic by the Federal Shariat Court (FSC) in November 1991.

In December, 1999, the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan gave its landmark judgment banning interest in all forms and directed that all laws involving interest would cease to have effect finally by June 30, 2001 with the exemption for dealing with foreign parties.

In September 2001, it was decided that the shift to interest free economy would be made in a gradual and phased manner and without causing any disruptions. Accordingly, The State Bank issued detailed criteria of Islamic Banking Policy in December 2001 for establishment of full-fledged Islamic commercial banks in the private sector.

In this way, it can be seen how gradually after the 1980’s, Shariah compliant banking practices were encouraged, and finally in January 2002, the State Bank of Pakistan issued the first Islamic banking license to Al- Meezan. Now there are six full-fledged Islamic banks and 13 commercial banks with Islamic banking branches. With this gradual progress towards interest-free banking, Islamic banking had to capture a larger share than 3.2 per cent. But there are a number of challenges that it faces which have resulted in the smaller industry share. Other than lack of awareness, Islamic banks also face the challenge of low customer confidence. People are not fully satisfied whether Islamic banks are actually Islamic.

Thus there is a requirement of more transparency on the part of Islamic banks. A modern consumer of the 21st century wants to be informed. This is also what essentially Islamic banking aims to promote as well. According to Islamic regulations contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions. Also, parties cannot pre-determine a guaranteed profit. The rationale behind the prohibition is the wish to protect the weak from exploitation.

Therefore, options and futures are considered as un-Islamic and so are forward foreign exchange transactions because rates are determined by interest differentials. But this needs to be communicated in a proper and elaborative manner which calls the attention of the marketing departments of Islamic banks. A lot of ambiguities need to be cleared and answered in process of educating their potential customers to Islamic banks to tap their true market.