The Determinants of Truncated Capitalization in Islamic Banks of Pakistan

Pakistan is a Muslim country, almost 96.16 percent people of the total population are Muslims. Only 3.84 percent of the total population are non-Muslims. Muslim market is huge with substantial potential for Islamic Banking but Islamic banks are facing difficulties to compete with conventional banks. Therefore, the purpose of this study is to review the Determinants of Truncated Capitalization in Islamic Banks of Pakistan. Ideologically speaking, Islamic financial institutions in all over the world combined into the entire system of Muslim polity. They need strong support from all state institutions for their survival and success to achieve their objectives. However, it did not happen in reality when attempted to adopt, the nationwide Islamic Banking and Finance (IBF) system were undertaken in Pakistan over the decades. The bureaucrats in the Ministry of Finance did not show any real enthusiasm to implement the IBF system, for their own convenience and vested interests. The SBP did not provide sufficient resources to learn and practice the Islamic system in the banking and financial institutions of Pakistan. It purposefully encouraged the predominant use of conventional mark-up modes in the banking and financial sector of Pakistan. The absence of a fair and expeditious judicial system also discouraged banking and financial institutions in Pakistan from adopting Islamic modes of finance, which run a very high risk of default as compared with conventional lending. The imposition of the Islamic system by force and in superficial ways is absolutely against its own true spirit. But the government made few efforts to seek the compliance in and participation of the people of Pakistan for the Islamization of the economy through education, increasing awareness and moral training. Realistically speaking, the IBF system has yet to be adopted in Pakistan under a truly Islamic and scientific approach.