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Islamic finance industry on the upward swing

Certification process with new products modernization set to take place
SBP issues Enterprise Technology Governance & Risk Management Framework for Financial Institutions

Capable of prospering in a highly competitive and fast-changing banking world, Islamic Finance industry is making all positive authority and taking market lead both internationally and locally. Substantial growth figures in 2015 in terms of asset growth as well as profits and return on equity shows that global Islamic finance market is beginning to compete with the conventional financial sector.

The industry’s total assets moved into negative growth in the 2015 report, after years of double-digit growth up until 2013, and single-digit growth in 2014. In the 2015 edition, total Islamic banking assets fell 8.48 percent, though this was partly due to exchange rate volatility in key markets. But as Islamic finance continues to grow and more products and services are offered by the banks, the sector is becoming increasingly innovative and that is evident from the achievements of the winners of awards in contrarily 2016

The experts and economists were impressed by the number of strong entries this year, and by the range of new products and deals they had brought to market in 2015. Also included Sri Lanka as a new market in 2016 awards which shows there is the continued global spread of the Islamic banking industry.

China’s emerging role in Islamic finance, as well as the involvement among Asia’s Islamic banks, could mean that more markets in the coming years will trade along with Islamic mode and procedures.

Key changes are taking place in Islamic banking, with Oman, Bahrain and the United Arab Emirates all moving, or having moved towards centralized Shariah boards or higher Shariah authorities to better regulate their respective Islamic finance sectors, following the example of Malaysia. Many banks have also continued to improve on their e-banking services, investing heavily in modern technologies, while continuing their investment in Islamic banking education among their employees and the population in general.

The Islamic finance industry is strengthening certification process of Islamic banks and their products to improve the consumer appeal of the sector. Religious scholars who were members of an Islamic bank’s Shariah boards are now prohibited from serving in any external audit firm. External Shariah audits, which review operations to determine whether Islamic banks are operating in accordance with Islamic principles, would also have to cover pool-management practices and technology systems.

The move is designed to separate the verification of profit and loss distribution between the banks and the external auditors, in contrast to the joint verification that was allowed under earlier guidance.

Proper criteria have been applied to scholars serving as part of an external audit. Pakistan is the world’s second most populous Muslim nation, its Islamic finance sector is struggling to gain market share from conventional peers despite double digit growth.

“The growth and expansion of the Islamic banking is moving fast”, This was viewed by some Islamic scholars who spoke at a seminar arranged by the Securities & Exchange Commission of Pakistan (SECP), the official regulator of Islamic banking in the country, recently. At the same time, the World Bank and the Islamic Development Bank, in their first global review of the fast-track movement of the Islamic banking system, have reported that Pakistan is among those countries in which the government and the central bank are “not taking Islamic banking lightly”.

The SECP reports that “there is an even stronger growth of Islamic assets in the non-banking financial institutions. Their market share is now approaching 33 percent, increasing from 14 percent in 2012”.

The strong demand from customers of the country of above 200 million, largely Muslims and the fact that the State Bank of Pakistan (SBP), the Government of Pakistan and the SECP created the regulations environment for this speedy growth. The priority of the regulator like SECP is to develop Islamic capital market. The SECP recently had sessions for consultation with banking sector participants to help investment in issuing Sukuks and Real Estate Investment Trusts (REITS).

The State Bank of Pakistan (SBP) has issued Enterprise Technology Governance & Risk Management Framework for Financial Institutions (FIs). The framework has been developed after extensive consultation with both internal & external stakeholders.

Earlier on March 14 this year the draft of the framework was published for public consultation. The framework, it was pointed out, is based on principles of international standards and best practices for technology governance and risk management including cyber security. It aims to provide enabling regulatory environment for managing risks associated with the use of technology.

The framework will apply to all FIs which include commercial banks (public and private sector banks), Islamic banks, Development Finance Institutions (DFIs), and Microfinance Banks (MFBs). While implementing this framework, FIs are expected to exercise sound judgment to determine the applicable provisions relevant to their technology risk profile.

Senior management of the FIs will monitor the implementation of this framework on an ongoing basis and the Board of Directors will review the implementation process on quarterly basis.

The SBP has advised the FIs to follow a phased approach towards implementation of the framework starting with a gap analysis between their current status and this framework, development/update of the policy framework, on-the-ground implementation and follow up review and feedback. The FIs have been required to upgrade their systems, controls and procedures by June 30, 2018.

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