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Pakistan shows impressive improvement & diversification in the growth of Islamic Finance

A need now to start Islamic venture capital funds and investment banks in the country

Pakistan is not at the same level with the Muslim world in the growth and development of Islamic finance but yet it has shown an impressive improvement and diversification in Islamic finance over the past three decades. The decision of establishing a Shariah advisory board under the Securities and Exchange Commission of Pakistan (SECP) is a step forward in this regard. Shariah advisory board will guide Islamic Financial Institutions (IFIs) and Islamic Capital markets in their prospective transactions. It was decided that the board would comprise of nine members including prominent Islamic scholars, jurist and an accountant. The SECP board would undertake educational activities for understanding Shariah principles and introduction and implementation of new models and products based on global research.

Moreover, Islamic banking has been a high priority area for the State Bank of Pakistan (SBP) and it has taken number of steps to make Islamic banking industry robust enough to offer a viable alternative to conventional banking. The central bank is striving for developing a progressive and sound Islamic banking system compatible with the global financial sector, providing innovative Shariah-compliant products and services so as to achieve equitable economic growth. Established in September 2003, the Islamic Banking Department has been entrusted with the huge task of promoting and developing the Shariah-compliant Islamic banking as a parallel and compatible banking system in Pakistan.

Islamic finance can find rich social grounds for its growth and expansion in Pakistan. What primarily concerns the users of Islamic financial services is the Shariah-compliance of the services. Non compliance of Islamic law can result in withdrawal of funds from an Islamic bank. Hence, Shariah-compliance is a serious matter for an Islamic bank. The concept of Islamic finance needs to be introduced for the promotion of Islamic banking and insurance industry in the country. As a regulatory authority of the insurance sector, the Securities and Exchange Commission of Pakistan (SECP) should also take initiatives to tap the country’s enormous potential in the sector by providing level playing fields to government and private sector.

There are 29 Islamic open ended funds 18 voluntary pension funds and 1 closed ended fund in the country. Islamic funds industry has yet to evolve develop and grow with new market players in Pakistan. Islamic principles encourage entrepreneurship in productive sector, or in other words they enhance productive capacity of the economy. The experts, however, believe that there remains entrepreneurial risk, which can only be eliminated at the cost of compromising the basic distinctions of Islamic economic principles. There is a dire need for establishment of institutions, which could promote entrepreneurial culture. Questions have also been raised against the performance of Mudarabah companies and some Islamic scholars have declared investment with these companies as non-compliant from Islamic principles standpoint. Islamic finance, however, faces numerous challenges for its growth in the country and there is, however, a long way to go forward in this regard. There is still a dire need to work for expansion of client base of Islamic funds management industry in the country.

NEED OF ISLAMIC VENTURE CAPITAL FUNDS AND INVESTMENT BANKS

Islamic banking is one of the emerging fields in global financial market. It is growing at very fast pace all around the world. Islamic investment banks and Islamic venture capital funds are yet to be launched in Pakistan. Islamic banking does suit to religious mindset in the Muslim country where the people generally abstain from purchasing insurance policies on religious grounds. Similarly, the people have reservations on banking which also involves payment of interest. The people believe that Islam forbids insurance due to involvement of fixed rate of interest and hence, they are more inclined to buying Shariah-compliant products. Islamic banking is a system of banking that is consistent with Islamic law and guided by Islamic economics. Islam prohibits usury, the collection and payment of interest.

The Islamic funds constitute 12% of the overall fund management in Pakistan. The country currently has the total assets worth Rs58 billion under management of Islamic mutual funds. Islamic funds industry is still at its initial stage. Presently, the country has all types of funds available on the Islamic side. These funds include money market, equity, sovereign, corporate fixed income, capital protected and index tracker. Fixed income, interest bearing bonds are not permissible in Shariah. Islamic funds have actually provided a window to a number of individuals, who were previously reluctant to invest because of their religious beliefs.

Sukuk is a Shariah compliant bond. Sukuk securities are structured to comply with the Shariah and its investment principles, which prohibit the charging, or paying of interest. Dubai Islamic Bank (DIB) has shown interest in promoting Islamic banking in Pakistan and is willing to assist in floating the country’s Sukuk bonds. In a meeting between a DIB delegation headed by DIB chief executive officer Dr Adnan Chilwan and Finance Minister Senator Ishaq Dar in Dubai this month, Chilwan expressed the desire that DIB is keen to work closely with the Government of Pakistan particularly in the promotion of Islamic Banking in the country.

An Islamic mutual fund is essentially a modaraba structure in which the funding is provided by the investors, while asset management companies provide the professional expertise in investment. The SECP regulates the asset management companies and ensures safety of the money deposited in mutual funds. At present, there are about 16 companies that manage 32 Islamic mutual funds in the country. The asset management companies are required to appoint Shariah advisor, who reviews the working of the Islamic mutual funds and provides guidelines and criteria for investments.

The Advisor’s guidelines are binding on the fund manager. Islamic mutual fund industry has witnessed a phenomenal growth all over the world particularly in the Islamic world. About $1.34 trillion of assets are being managed according to Islamic investment principles, according to Global Islamic Finance Report 2012. Such principles form part of Shariah, which is often understood to be ‘Islamic Law’, but it is actually broader than this in that it also encompasses the general body of spiritual and moral obligations and duties in Islam.

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