Islamic Banking looking up
The active participation of prominent stakeholders, financial experts and leaders of Pakistan’s financial sector along with the complete support and patronage of State Bank of Pakistan in hosting the World Islamic Finance Summit 2011 indicates the growing global strength of Islamic finance.
The popularity of Islamic finance, particularly in Asia, with a worldwide demand of Islamic financial products surpassing the value of $1 trillion, account for this growth. The Asia-Pacific nations are among a growing band of countries worldwide that signal their intention to carve out a larger share of the market.
The Islamic banking concept encourages Muslims to save, borrow or invest under Islamic laws which prohibit the charging of interest and speculative trading. Islamic banking does not restrict the participation of non-Muslims; they are catered to with a fiscal option of ethical banking, available for some time in the West, which among other features mainly keeps away from investments in arms or the defence industry. Under Islamic law, the bank does not charge money on money through a lender-borrowers relationship and also does not profit from late payment penalties, which are supposed to go to charity.
Local as well as international players such as HSBC Amanah, Standard Chartered Saadiq, Dubai Islamic Bank, Meezan Bank and Citibank provide the most developed products in Islamic banking in the region. The ‘what you see is what you get’ approach assures no hidden costs. Moreover, it is structured on a risk-sharing intermediation between the bank and the customer.
So far the deposits of entire Islamic banks in the country have reached Rs. 400 billion, with banks looking out for greater investment and low risk opportunities. In this regard, the total worth of Islamic bonds (Ijara Sukuk) issued by the State Bank of Pakistan has reached Rs.190 billion. The development of Islamic finance in Pakistan is moving forward at a fast pace as now the banks have greater opportunity to invest in government papers.
Internationally, the post-revolution scenario in Egypt, Tunisia, Jordan and Bahrain could be interesting for the Islamic Finance industry. Tunisia and Jordan did not have a competitive Islamic sector. In Egypt the growth of the industry lagged due to corruption scandals in the presence of a more secular financial system. After the exit of Hosni Mubarak people are once again moving towards Islamic banking. However, in Bahrain, the situation is not favourable as the unrest has forced the banks to start transferring assets and employees to places perceived as safer. Bahrain is also suffering from competition from the newly-formed Islamic finance hubs of Dubai, Doha and Abu Dhabi.
Moreover, Asia-Pacific countries such as Malaysia, Indonesia and Singapore, along with Hong Kong, have set their sights on becoming hubs for Islamic finance. Interestingly, Britain has also signalled a similar intention. There has been a great influx of women professionals in Islamic financing in Malaysia, which stems from the realization of a stronger pull towards the Islamic sector. Even when the G-7 finance ministers wanted to know about Islamic finance, they preferred a female achiever from Malaysia, Dr Zeti Akhtar Aziz, the central bank governor.
According to financial experts, Malaysia remains the real driver of the Islamic bonds market, but compared to Southeast Asia, there are other large markets, such as Saudi Arabia, Qatar and the United Arab Emirates as they have stronger economic needs and are creditworthy.
Varying interpretations of Islamic laws in various regions have caused widespread confusion among people. Scholars belonging to different schools of thought have not been able to develop consensus over financial products. Global managers regard this as a normal evolution of a young industry from the first phase, where rapid growth often ignores poor practice, to maturity in the second phase, which offers a regulated and standardized industry.
With the return of cautious optimism, there are predictions that assets under management may quadruple to $2.8 trillion by 2015. In Pakistan, the World Islamic Finance Summit 2011 is targeted to address capacity building, product development and creating awareness for the industry, with hopes of growth in the share of Islamic banking in the country from the current seven percent to 12 percent in the next three years