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.


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