June 23 - 29, 2008

While Islamic financial industry is making its headway to offer alternative and competitive solutions because of its enrooted benefit, relevance, and practicality for the financial intermediation seeker, the economy, and the conventional financial structure its consulting from worldly-devised and celestial-guided principles concurrently to progress is creating a challenging scenario for its expansion in the local and the global perspectives.

That is why experts of the industry are trying to formulate a framework that is capable of accommodating conventional prerequisites into the Islamic financial structure without distorting its shape. Will it be possible? State Bank's regulatory and monitoring department for Islamic banking institutions in Pakistan has projected a congenial atmosphere for Islamic financial industry world over provided that innovativeness is immersed in its financial product designing. This clearly indicates that designing must go through a mind-boggling exercise which must not lose its balance to secure Shariah sanctity.

While in five years many investors have entered into the emerging Islamic banking industry of Pakistan and globally too the industry has shown its visibility in the Muslim as well as the non-Muslim countries, speed of this industry's development will further be expedited after developing a workable financial model. According to the quarterly bulletin of Islamic banking division, State Bank, till December 2007 Islamic banks in the country have assets worth of Rs. 205,946 million-4.3% of the total banking assets-depicting an increase of 73% as opposed to the figure last year in which growth rate was 66.8%. It reads, "Though Islamic banks have major share of 68% in comparison to Islamic Banking Divisions" share of 32 % of total assets. Yet, in absolute terms the increase of Rs. 23.6 billion in IBDs assets, depicting the increasing interest of conventional banks in the Islamic banking."

State bank has suggested that through financial engineering and innovation, establishment of global financial centres, prudential regulation and supervisory guidance, cost effective and simple legal framework, and flexible application of Shariah principles growth rate of Islamic financial industry will be increased. It considers innovation is a key driver to attract global economic and financial player's interest in the local IFIs.

As per IMF recent study there are over twenty odd different variants of Sukuk, which is ideally considered an ideal mode of investment in the conventional system. But, Sukuk-Musharka and Moharba have created an opportunity for the IFIs to avail this mode of investment also. In association with the global banks, scholars, academics, and practitioners are working to discover a method that can deliver wide range of wholesale, retail and trade financing banking solutions.

Unlike for conventional finance, derivative markets for Shariah-compliant finance have neither been sizeable nor in agreeable numbers, hence, making liquidity blemish of engrossing prohibited factors. But now Islamic derivative market started offering Islamic option equivalent of interest rate. This fulfils the requirement of asset backed transaction.

Apart from this, advent of diversified telecommunication services has become an important causing factor to augment the Shariah-compliant network. Through ATMs, online and telephone banking personal banking services of Islamic banks are penetrating in the market. The rate of penetration is although remarkable; it can further be expedited if collaboration and coordination in the Islamic finance industry strengthens. For instance, banc-assurance may serve as a tactic to expand the outreach of both Takaful product and Islamic banking services. But factually, numbers of Takaful operators are very limited in Pakistan and altogether there is unwillingness in most of the people to get insurance cover.

Islamic finance discourages mainly speculation, uncertainty, and vagueness of financial transaction. Accordingly, at the time of starting any transaction pros and cons of the same are to be thoroughly assessed and decided upon by the parties. Along with this an agreement between a typical Islamic financier and a customer must despise interest or Riba margin. At the same time, however, financial service charge is determined by the conventional benchmarks. This stems controversy amongst critics; however, Islamic bankers defend the dependence on conventional structure and maintain that they are more cautious rather about underlying bank to bank dealing, and whether liquidity generated is based on the real asset.

Dr. Shamshad Akhtar, Governor State Bank, in one of her speech about effective Islamic financial system said, "there is [a] scope for deepening financial engineering and innovation and exploiting its edge to promote equity based financing or structure hybrid debt: equity instruments. This will allow Islamic banks to offer richer and multiple options to customer, while allowing banks opportunities for proper fund mobilization and asset diversification. It will [too] allow avenues for proper diversification and integration of financial services and pooling of risks through blending of Islamic and conventional financing to epitomize risk sharing between stakeholders and align rewards to be consistent with the risks."

As Islamic finance can not strike out core essential of its framework that disallows riba out rightly, there is a doubt that how intermingling or blending of Islamic and conventional principles or making of hybrid product is possible. Especially, in the light of an Islamic banker-having renowned for his eruditeness over Islamic economic doctrine-opinion, "intermingling is not permissible", can then synergy be developed at any time?

Compounded innately with a fundamental of equitable wealth distribution Islamic finance has crossed a step ahead of conventional finance, which facilitates mutual profitable cash inflow and outflow irrespective of numeric value of end user, and too adopted a role of economic manager who controls monetary and fiscal affairs. Its egalitarian approach and concern about end user is appreciable and certainly can lead to wiping out of exploitation of customers in the banks' clutches and mal practices such as money laundering and speculation. IFIs should persist on the independent financial structure and must deliver financial solutions in consonance of public-welfare principles in order to give customers a genuine banking experience.