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Islamic finance taking strong roots, exciting future ahead

Modarabas are playing significant role for the promotion of Islamic finance within the country
More availability of trained employees and awareness within the public key path to make progress
Interview with Muhammad Shoaib Ibrahim — MD & CEO, First Habib Modaraba

Profile:

During his service tenure, Muhammad Shoaib Ibrahim has worked in almost each and every department of the company and has gained extensive experience of banking and finance particularly in Islamic Finance both in support and core function of the institution. At present, First Habib Modaraba (FHM) is well positioned in Islamic financial market with sound equity base, highest assets size and strong profitability within entire Modaraba sector of Pakistan. Extensive work experience with Non-Banking Islamic Financial Institutions has given him excellent learning with rich experience of Modaraba sector in Pakistan. This expertise has given him insight into the financial and technical aspects of the non-banking Islamic financial activities. In his service tenure, he has seen various ups and downs in Pakistan’s financial market and also has witnessed the emergence of Islamic banking within the country. His experience has given him tremendous support to handle the affairs of FHM in an efficient manner as a CEO of the company. He says responsibility as “Captain” of the ship is massive and needs more consciousness and responsiveness. At present, his concentration is on progress of FHM through innovation and development of Islamic financial products. He always remains keen in promotion and enhancement of outreach of Islamic Finance within Pakistan. Various research papers have been presented by him on Modaraba model and other Islamic financials products at different international forums in Malaysia, Singapore, Hong Kong and South Africa. On number of occasions, he remained Executive Member of NBFI & Modaraba Association of Pakistan. In the year 2015, he had portfolio of Chairman of the said association.

PAGE: HOW WOULD YOU COMMENT ON THE INTEREST IN ISLAMIC MODARABA IN PAKISTAN OVER THE PERIOD OF LAST 10 YEARS?
MUHAMMAD SHOAIB IBRAHIM: In Pakistan, the process of Islamization of the economy was initiated in early 80s and in the light of the recommendations made by the Council of Islamic Ideology, the Government of Pakistan introduced certain changes in the Banking Companies Ordinance. Besides, the Modaraba Law was also promulgated to provide a legal framework for Islamic financial system. In fact, Pakistan has the privilege of being the only jurisdiction which has instituted the concept of Modaraba with elaborate legislation and effective regulatory regime. Within Islamic Financial sector Modarabas are playing significant role for the promotion of Islamic finance within the country. The concept of Modaraba introduced in Pakistan was the first Islamic Shariah business model with statutory framework and proper regulations. Modaraba’s business model remains extremely versatile and dynamic. These Modarabas were not only trendsetters of Islamic modes of financing in a predominant conventional financial system in Pakistan but also built confidence among the general public regarding practice of Islamic modes of financing. Modarabas are established as a well understood Shariah compliance instrument of financing in Pakistan.

10 YEARS SUMMARY OF MODARABA SECTOR (Rs in Million)
Financial Data
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
Assets
36,806
30,736
30,212
30,549
28,320
25,191
23,390
25,191
24,156
21,106
17,498
Equity
20,439
15,894
14,488
13,824
13,186
12,421
11,849
10,839
11,456
9,715
7,606

Both the regulators, SBP and SECP have played vital role for the promotion of Islamic Finance within Pakistan. Islamic banking carries large share in overall size of Islamic Finance in Pakistan and posed an impressive annual growth rate of over 20 percent overall the last five years. By the end December 2016, the share of Islamic banking has reached to 11.7 percent in terms of assets, while in terms of deposits its share is 13.3 percent, with a network of 2,322 branches of 21 Islamic banking institutions.
However, achievement of around 14% to conventional size is not at desired level. There is still room for further growth since Alhamdulillah, in our country we have 99.9 percent Muslim pollution and there is still huge untapped market to explore. The key approach should be to educate the masses widening the outreach to improve visibility and accessibility of Islamic products in order to bring the financially excluded segment under the financial net particularly in Islamic Finance.

 

PAGE: WHAT ARE THE CHALLENGES FOR ISLAMIC FINANCE IN PAKISTAN?
MUHAMMAD SHOAIB IBRAHIM: The Islamic banking industry in Pakistan, as elsewhere, faces some key challenges. Among these challenges, the limited availability of trained employees and lack of understanding and awareness within the public. Furthermore, effective liquidity management is also key challenge and has prime focus in Islamic banking industry in Pakistan. With particular respect to Islamic banking industry, this issue is more prominent owing to factors like dearth of Shariah compliant investment opportunities, limited availability of Shariah compliant money markets and capital market instruments. In Pakistan, issuance of domestic sovereign Sukuk did provide some relief to the domestic industry for its liquidity management, however, due to weak issuance private Corporate Sukuk the Islamic bond market has not developed at desire level.
Besides, Islamic financial institutions with their prevalent model also having limited product mix and outreach to compete with conventional banks. In order to gain the true potential of Islamic finance, the industry needs to revisit its existing basket of products. There is a need for Islamic financial institutions to move away from the traditional business model and explore new opportunities and potential markets by developing more innovative products and reaching out to untapped markets.

PAGE: HAS THE GOVERNMENT DONE ENOUGH FOR THE PROMOTION OF SHARIAH COMPLIANCE AND ISLAMIC FINANCE?
MUHAMMAD SHOAIB IBRAHIM: Government of Pakistan has done great job for the promotion of Islamic Finance within Pakistan. A year back, Finance Minister, Mr. Ishaq Dar, formed committee for the promotion of Islamic Finance within the country. The committee has made several recommendations and most of them have already been implemented by the government through SBP, SECP and Federal Board of Revenue (FBR). Recently government announced tax neutrality on Sukuk and two percent income tax rebate on Shariah compliant companies are very important steps for growth of Islamic finance including Islamic capital market of Pakistan. In the budget of 2017-18, the government has also made few changes in tax laws for benefit of stakeholders of Islamic finance.

PAGE: GIVE YOUR VIEWS ON FUTURE PROSPECTS OF ISLAMIC FINANCE IN PAKISTAN:
MUHAMMAD SHOAIB IBRAHIM: The future outlook of the Islamic Finance industry is very positive. The Government of Pakistan and both the regulators i.e. SBP and SECP are playing vital role for the growth and promotion of the Islamic finance industry within the country. However, despite its impressive growth there is still huge untapped market for Islamic Finance Industry. Given its strong fundamentals and increasing public acceptability, the further growth prospects of Islamic finance in Pakistan are very promising. So far, the Islamic finance industry has not penetrated deep enough to serve the financial needs of small and medium enterprises, agriculture, microfinance and low-cost housing. Pakistan’s massive infrastructure needs especially those under the China-Pakistan Economic Corridor (CPEC) represent lucrative Islamic finance public-private partnership opportunities in high potential sectors of energy and constructions.
Islamic finance is taking strong roots in Pakistan with the support from the government, SBP and SECP. Besides the growth in Islamic financial assets, a sustained progress is being made on long term basis in regulations, legal framework and capacity building of market players. The Islamic Finance Industry is establishing on a robust footing and it has very bright future in Pakistan.

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