Islamic finance

According to a report, Pakistan would host the World Islamic Finance Forum (WIFF) 2018. Centre for Excellence in Islamic Finance (CEIF) at the Institute of Business Administration (IBA), Karach is organising the forum in collaboration with the Lahore University of Management Sciences (Lums) and International Centre for Education in Islamic Finance (INCEIF), set up by the Central Bank of Malaysia. The forum would bring together researchers, academicians and practitioners for generating innovative ideas to stimulate growth of Islamic finance while overcoming present-day industry challenges, Husain said. Experts from global Islamic finance hubs including Saudi Arabia, Bahrain, Malaysia and other Gulf Cooperation Council (GCC) countries will participate in the conference. Research papers and presentation of case studies at WIFF 2018 would focus on areas crucial for the expansion of Islamic finance industry.

Financial experts are of the view that Pakistan has all the ingredients necessary to become a hub of Islamic finance. Islamic finance is growing in Pakistan and the country is expected to emerge as an Islamic finance hub by 2025. According to a survey, 76% people in Pakistan said they would prefer Islamic finance if they had a choice with only 13-14% preferring conventional banking. According to Dr Ishrat Husain, Chairman CEIF: "When it comes to Islamic banking, people talk about Saudi Arabia, Malaysia, the UAE, etc, but few people mention Pakistan which has a huge potential for growth of Islamic finance."

Pakistan lacks awareness of Islamic banking due to shortage of human resources which is why a large number of people consider Islamic banking to be the same as conventional banking. But that is not the case. Islamic finance sector is growing fast and now holds 11.4 percent of all banking assets and 13.2 percent of all bank deposits in the country. It is relevant to mention here that in December 2003, the total deposits under Islamic mode were a meagre 0.4 percent of the total deposits in the banking system. To some extent, the growth is explained by an increasing preference by depositors for Islamic deposits. The State Bank has, over the years, helped in the sector's growth by issuing new regulations and bringing new instruments that help in managing surplus cash, fulfilling statutory requirements and opening up new avenues for investing like Sukkuk bonds.

Some time back, the State Bank of Pakistan amended its regulations to exempt Islamic banks from using interest-based benchmarks for some of their financing products. This is aimed at boosting Islamic banking and finance. Despite a direct ban on charging interest, interest-based benchmarks are used as a pricing reference by a majority of Islamic banks, due in part to the absence of stable and widely-published alternatives. In a circular, the SBP clarified that Islamic finance institutions would have to outline their alternative pricing mechanism for participatory financing schemes, replacing the use of the Karachi Inter Bank Offered Rate or KIBOR. Under the new directive, banks must ensure compliance with sharia standards issued by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, and must receive a sign-off from their internal sharia board.

According to experts, the growth of Islamic banking in Pakistan provides an opportunity to open up new avenues in lending and promoting financial inclusion of the unbanked sections of the population. Islamic banks have the potential to mobilise new depositors who are shy of the formal banking system due to its interest-based nature. This will be a major step forward towards promoting financial inclusion. Islamic banks should also expand lending to agriculture and small- and medium-size enterprises. In this way, they can play a positive role by bringing the benefits of modern credit systems to sectors of the economy long excluded by conventional banking. To this end, the State Bank needs to take all possible steps to remove the bottlenecks that hamper the working of the Islamic banking and financial system.