Is­lamic fi­nance

The Pak Banker - - FRONT PAGE -

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.

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