Abstract:
It has been observed that Islamic Banks in Pakistan mostly use mark up financing on short term basis. Long term financing on profit sharing basis is avoided. One of the possible reasons of this behavior is the structural incompetence of Islamic banks. This paper analyzes whether afore mentioned observations are true. In addition to that the paper analyzes the relationship between net financing provided (by Islamic banks) and the assets of Islamic banks along with macroeconomic indicators. Data was gathered from published papers on Islamic banking, State Bank Annual Publication and survey of banking officials. The research highlights whether Mudarabah is a preferred type of finance or not. Furthermore it also analyzes the structural problem in Islamic banks which are leading to unpopularity of Mudarabah. The paper proves that Mudarabah is not a preferred mode of finance due to risk and other complexities, rather banks prefer to use short term mark up financing. Moreover there is a positive relationship between net financing provided and the assets of the Islamic banks along with macroeconomic indicators. The paper concludes that State Bank should take necessary measures for the development and modification of Mudarabah resulting in the growth of Islamic Banking Industry.
