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Islamic financing, banking system on the road to success in Pakistan

First Habib Modaraba is well positioned in market with sound equity base, highest assets size and strong profitability
Interview with Muhammad Shoaib Ibrahim — Managing Director & CEO, First Habib Modaraba

PAGE: Tell me something about yourself and your organization, please:

Muhammad Shoaib Ibrahim: I remained Chairman of NBFI & Modaraba Association of Pakistan and have also served as Executive Member on several times. Currently again I am holding portfolio of Chairman of said Association. This is my second time of Chairman of the Association. Presently, I am a country correspondent of Islamic Finance News, Malaysia, also remained speaker, and presented research papers on the Modaraba and other Islamic financial products at different local and international forums.

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 me excellent learning with rich experience of Modaraba sector in Pakistan. This expertise has given me insight into the financial and technical aspects of the non-banking Islamic financial activities.

In my service tenure, I have seen various ups and downs in Pakistan’s financial market and also witnessed the emergence of Islamic banking within the country. As I stated earlier, I worked almost in all departments and this experience gave me tremendous support to handle the affairs of FHM in an efficient manner as a CEO of the company.

The non-bank sector constitutes a diverse set of financial intermediaries under various business models. In the presence of robust banking sector with deep resources and offering matching products continues to give strong competition to said sector. Alhamdulillah, at present, FHM is well positioned in the Islamic financial market with a strong equity base, sound assets size and profitability within the Modaraba sector of Pakistan. FHM holds a strong credit rating scale of AA+ in long term and A1+ in short term. Moreover, FHM has secured several awards/accolades on best performance, best corporate report, best corporate disclosure and corporate excellence from reputable bodies, such as NBFI and Modaraba Association, ICAP and ICMAP, Management Association of Pakistan, and SAFA an apex body of SAARC.

PAGE: Kindly tell us about the regulation of the Islamic financing activities?

Muhammad Shoaib Ibrahim: The financial system in Pakistan is playing a vital part for economic development of the country. This system is being headed by State Bank of Pakistan (SBP) and Securities & Exchange Commission of Pakistan (SECP). The major part of financial system i.e. banking is being supervised by SBP. The SBP monitor entire banking sector, Development Financial Institutions and Micro Finance Bank. The non-banking segments i.e., leasing companies, investment banks, Modarabas, Mutual Fund, Insurance and REIT management are being supervised by SECP. Islamic finance is also one of the key components of overall financial system.

For promotion and development of Islamic finance in Pakistan, both regulators are very keen for further progress of IFSI and playing their due role for shaping and development of said sector on solid footings through enabling legal, regulatory and Shariah-compliance framework. Both supervisors have been continuously updating existing regulations, for further facilitations of the industry and also providing conducive operating environment for further growth of Islamic finance industry within Pakistan.

 

PAGE: Kindly tell us about the growth of Modarabas?

Muhammad Shoaib Ibrahim: Within Islamic financial sector, Modarabas are playing significant role for promotion of Islamic financial within the country. The concept of Modaraba was introduced in Pakistan in early 80s as the first Islamic Shariah business model with statutory framework and proper regulations. The Modaraba sector being the pioneer in providing Islamic financial services in Pakistan is an important segment of the financial sector. 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.

Modaraba’s business model remains extremely versatile and dynamic. During last 10 years, Modaraba sector has performed very well. The assets size reached to around Rs.52.0 billion from of Rs.25.0 billion in 2009. The said progress clearly reflects better performance of the sector and growing interest of investors in Modaraba model and Islamic finance as whole.

PAGE: How would you comment on Islamic finance in Pakistan?

Muhammad Shoaib Ibrahim: Until the first half of 20th century, the Islamic finance was more or less just idea or hypothetical concept. Alhamdulillah, now the shape of Islamic finance has been completely changed. It has been now turn into a practical shape with various models and modus operandi. Starting from a local bank in Egypt in sixties, the Islamic financial framework has come up with a full-fledged operating system with Shariah discipline. The concept has been clear to great extent by user and service provider of Islamic services. The Islamic finance has made a remarkable growth during last several years.

In Pakistan, the demand of Islamic finance was remain well. The work on Islamization process on country level was started in early 80s. It was an extensive task for the Government of Pakistan and the same implemented in phases. The process of Islamic finance in Pakistan began in 1980s and in said period some landmark changes were introduced in the legal framework included amendments in the Banking Companies Ordinance, enactment of Modaraba Companies and Modaraba Framework etc. However, the experiment of the 80s could not produce desired results mainly due to abrupt transformation without having proper operational and regulatory framework. Efforts towards Shariah-compliant banking system in Pakistan were re-launched. In 2001, the SBP issued its first Islamic Banking Policy. This policy stated that the Islamic banking should be promoted side-by-side with conventional banking. 2002 is marked as a year when the first Islamic bank in Pakistan was given the license to offer complete range of Islamic products. The new paradigm was based on a model that allowed Islamic banking to operate in the country as an alternative and parallel system as full-fledged Islamic banks or as separate and dedicate Islamic banking branches of conventional banks. This approach has proved to be a success as reflected by its considerable progress. The notable growth of overall Islamic finance would not have been possible without sound regulatory, supervisory and Shariah foundations laid down by the SBP and SECP along with firm commitment and determination of the Government of Pakistan towards development of conducive infrastructure for growth of IFI within the country.

PAGE: How do you see the growth of the Islamic banking sector of Pakistan?

Muhammad Shoaib Ibrahim: Islamic Banking Industry (IBI) of Pakistan has continued to emerge as a banking of choice within the country. It has managed to increase its market share with higher corporate and individual deposits along with offering of various types of Shariah-compliant financing and other products for prospective customers. This growth has also greatly encouraged and motivated investors to earn Shariah-compliant profits on their investment with IBIs. The sector has made impressive growth and its share has increased from scratch in 2002 to nearly 16 percent of the overall banking industry in terms of assets of overall size of conventional banks.

At present network of IBI consisted of 22 Islamic banking institutions i.e., 5 full-fledged Islamic banks and 17 conventional banks having standalone Islamic banking branches having total branch network of 2,913 by the end of June, 2019. SBP has been playing a leading role in the promotion and development of Islamic banking in the country on sound footings.

The Islamic financial industry has witnessed a phenomenal growth in the past decade in terms of the number of Islamic financial institutions and their asset base which is a strong indicator of its steady demand at the grass-root level. In Pakistan, this demand is evident from the growth of full-fledged Islamic banks as well as Islamic windows of conventional banks.

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