The Islamic finance sector has advanced to be recognized as a sustainable alternate to conventional finance. Islamic financial foundations are presently providing a broad range of services serving to both Muslim and non-Muslim societies. The unique development of the Islamic finance industry can be related to efforts of devoted regulatory, Shariah and academic institutions along with the presence of varied players in the field i.e. Islamic banks, investment banks, takaful companies, Islamic fund management companies, Islamic brokerage companies etc. The Introduction of Sukuk and Islamic stock market indices have also added the necessary deepness and width to the Islamic financial markets. Especially Sukuk; has confirmed to be a strong tool in drawing investors and constructing their trust in Islamic finance while satisfying financing needs of the public and personal sector in a Shariah compliant way.
Pakistan has remained at the head in encouraging Islamic finance by being a key member of global Islamic finance foundations established to develop essential lawful, regulative, supervisory and Shariah compliance infrastructure for Islamic finance foundations. Pakistan’s active arrangement with the Islamic Financial Services Board (IFSB), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the International Islamic Financial Market (IIFM) and cooperation with other central banks has helped the development of the Islamic banking industry both regionally and internationally.
Islamic banking in Pakistan has experienced outstanding development during the last ten years and now constitutes over 10 % of the country’s banking system with an resources base of over Rs.900 billion and a network of over 1,100 branches. Given the interest of all stakeholders and a relatively high level of financial exclusion in the country. We believe this increase trend is probably to go on and the industry is well set to duplicate its market share by 2020, by examining the interest of all shareholders and quite high level of financial excepsion. This success could be possible with the leading role of the central bank in setting the direction of the industry and producing extraordinary help for its encouragement and growth. Encouraging Islamic finance as a sustainable and competitory component of the financial system by means of an enabling legal, regulatory and supervisory environment has remained an important component of SBP’s principal purposes. Thinking over the evolutionary phase of the industry, we are continuously engaged in refining and improving the legal and regulatory model to assure:
a) Its reactivity to the evolving industry dynamics and
b) Its effectiveness in specifying, measuring and decreasing the risks related to Islamic finance. We issued detailed instructions for Profit and Loss Distribution and Pool Management to bring standardization, develop transparency and safeguard interests of Investment Account Holders (the savings depositors) in the current concluded fiscal year. The directions developed by means of strict references with the industry have been well received both domestically and internationally.
In a similar way, to further improve the Shariah compliance environment in IBIs, our Islamic Banking Department has finished industry references on the draft Shariah Governance model and will soon be issuing the same. The model will be another key milepost achieved, which will institutionalize the Shariah compliance function and enligthen the Shariah compliance related roles and obligations of all vital organs of IBIs including BODs, executive management and Shariah Boards Moreover, to promote standardization and Shariah harmonization, SBP over time has issued allowable Islamic modes of finance model Islamic financing agreements in addition to adapting AAOIFI Shariah Standards for the Pakistani market in a gradual way.
The continuation of growth accelaration accomplished during last the 4–5 years is dependent on making an objective assessment of the successes, failures and future disputes and improving consensus policies and action plans to build on the successes and address the challenges. We have suitably developed the five year Strategic Plan for Islamic Banking industry again through a sitrict and meaningful reference with all vital shareholders. The plan will be issued soon takes care of the future guideline of the industry, points out areas of improvement in lawful, regulatory and taxation environments, emphasize variation of products and markets covering non-traditional but strategically important sectors of agriculture and SMEs and increasing the Islamic banking market share to over 15% of the country’s banking system during the next five years. SBP has also played a vital role in raising consciousness and building potential of the industry. To address the consciousness and misunderstanding issues, SBP initiated an consciousness action that consists of seminars, conferences, aimed programs and focused discussions for the trade society, academia, bankers and policy makers. A recent outstanding milepost is the start off a Mass Media Campaign where the whole Islamic banking Industry united hands under the ambit of SBP to aim the challenge of misunderstandings related to the Islamic banking trade model and practices. Likewise, a number of actions have been taken to consruct the industry’s human resource potential and improve its abilities. In this respect, support from global organizations such as the Islamic Research and Training Institute (IRTI) and Islamic Financial Services Board (IFSB) is also being taken.
One vital profit of the encouragement of Islamic finance is its potential to contribute outstandingly to financial involvement by extending the outreach of the financial system to the masses who are out of the system because of faith reasons. Islamic Microfinance, a confluence of two industries; Islamic Finance and Microfinance, cannot only be an efficient tool for financial involvement by providing to both voluntary and involuntary financially rejected but also towards poorness reducing because of its hereditary characteristic of being careful and asset based. The Islamic finance industry has not done much to tap the potential of Islamic microfinance up to now, because of its sensed high risk and its preoccupation in serving the financing requirements of the government and large companies.
We would recommend the industry to make individual as well as collaborative efforts to improve this sector, which would develop their market consciousness besides empowering them to variation their customers. The IBIs may also develop partnerships with Islamic microfinance foundations to provide the low income population.
Likewise, Agriculture and SMEs are fields that have so far been lost by both conventional and Islamic banks because of the awareness of high risk despite their main importance for the country’s economy. Financial involvement is one of the vital strategic aims of SBP and as most are aware, very near to our heart; we would strongly emphasize the industry to appear of these awareness myths and improve potential to tap these strategically important sectors and provide value for your shareholders, depositors and the country’s economy as a whole. SBP will provide every support and simplification to the industry in efforts to consruct and enlarge its portfolio in these sectors.
Islamic capital markets, reciprocal funds and Takaful sector are also very important parts of the Islamic financial system need to be nourished and developed along with Islamic banking. We are working closely with the Securities and Exchange Commission of Pakistan (SECP), regulator of capital markets to help improve these non-bank financial foundations. We acclaim and recognize the important paces taken by SECP, including review of Mudaraba directions, issuance of Sukuk directions, establishment of central Shariah advisory board etc, and believe that these are probably to help in development of all Islamic finance sector.
We would also emphasize the strategical importance of investment in research and development especially for the developing sectors of Islamic finance.
To tell the truth, we are not making enough investment in this area, which is limiting our potential to develop Shariah based solutions for different trades and economic requirements of the actual economy. The research and development is also necessary to improve solutions for bringing monetary and fiscal policies and practices in accordance with Shariah principles. The strategic plan for the next five years has imagines a number of such initiatives and we hope that the collective efforts by the regulator and practicians would be instrumental in improving investment in R&D and developing better solutions for providing the financing requirements of the actual economy.
As a result, We thank all the speakers and participants for coming here and hope that the thinking on deeply and discussions during the Road show will help the industry in moving towards more including growth and fair distribution of profits in the economy.
Yaseen Anwar: Developments of Islamic banking in Pakistan.
