An exclusive interview with Pervez Said, Director
Islamic Banking Department, State Bank of Pakistan

Aug 15 - 21, 2005

The first full-fledged Islamic bank commenced its operations in Pakistan in the year 2002. Keeping in view the brief span of time in mind, the progress made in the country on the Islamization of the financial system is remarkable. However, a lot more remains to be done. There is a latent demand but the central bank is moving a little cautiously and monitoring the progress very carefully.

The growth of Islamic banking is driven by the keen interest of people. The State Bank of Pakistan, being the regulator of banking system in the country, is discharging its duty prudently and efficiently. The single largest contribution of the central bank is the creation of enabling environment and capacity building. One may say that the expansion process is a little slow. However, our best effort is to consolidate at each step rather than trying to make speedy progress and end up committing few mistakes. We can afford this simply because our mistakes will be propagated by the opponents of Islamic banking. We are cognizant of the fact that even the smallest mishap may give the critics a chance to say that the system suffers from some inherent weaknesses. Our best effort is to develop a system, which is fully compatible and comparable with the conventional banking system. We are fortunate that global efforts provide us the basic guidelines. Saying this I am also proud to say that Pakistan is playing a key role in the evolution of Islamic financial system.

In Pakistan the first concrete effort to Islamize financial system in the country was made with the floatation of the first-ever Modaraba in mid eighties. The history spread over nearly two decades is a display of the confidence of players as well as those, who are using the concept. Another milestone was achieved when the first full fledged commercial bank commenced operations. Then the country saw flotation of Musharika-based Term Finance Certificates (TFCs). The latest achievement was flotation of Sukuk by the Pakistan government. The offer was oversubscribed. Now, the Water and Power Development Authority (WAPDA) is busy in completing formalities for the first local issue of Sukuk. Simultaneously, rules and regulations are being prepared for the commencement of Islamic insurance (Takaful) in the country. Along with this the central bank has prepared standard agreements for Morabaha, Muskarika and Ijara.

It is important to recognize the efforts of central bank and all the players concerned. Now the central bank has its own Religious Advisory Board. Along with this all the banks undertaking Islamic banking have their own Religious Advisory Boards. This has accelerated the process of product development, both in the liability and asset sides. The presence of Religious Advisory Boards at institutional level allows them to develop new products, to achieve the status of being the first, and reap the benefit. This also saves them from the hassle of approaching the central bank even for the smallest clarification.

Meezan Bank was the first full fledged commercial bank, which started its operation in Pakistan. Three other banks namely Al-Baraka, Dubai Islamic Bank and Bank Islami Pakistan have been granted licences. It is worth noting that initially Al-Baraka was operating as an investment bank, which subsequently applied for conversion of its licence into commercial banking licence. Dubai Islamic Bank and Bank Islami Pakistan are in the process of establishing their branches. Besides this, three other applications are being processed by the central bank.

The point of satisfaction is that the network of Islamic banking is growing at a very fast rate but it is free from the chronic disease of non-performing loans (NPLs), common in the conventional banks. One may say, for the sake of argument, that the first Islamic bank established in the country is carrying some load of NPLs. However, to put the record straight it is necessary to mention that this load is not due to any sluggishness on the part of the bank. It got the burden from the other bank merged with it. Some one may also say that the absence of NPLs looks a bit unnatural, because there could be some circumstantial defaults. The fact is this that Islamic banks are more cautious and prudent in undertaking any liability.

The success achieved in a very brief period gives courage to all of us to work with extra zeal. The country has produced many bankers of international stature and our objective is to produce Islamic bankers of international reputation. Along with this we are busy in creating regulatory framework and strengthening the regulatory regime. With each and every success we raise the bar and fix new targets and work with full dedication to achieve those. We do not have external pressure but it is our religious pursuit. All of us must pray to Allah to give us the courage to fully implement Riba-free economic system in the country.

Pervez Said is the Director of Islamic Banking Department of State Bank of Pakistan (SBP). He is also Advisor to Governor SBP on Islamic Banking. He also handles issues relating to the central bank and Sharia Board. He has worked as Head of Marketing and Business Development at Pakistan's first Islamic bank, Meezan Bank. Most probably he is the first Pakistani banker who has got the experience of developing Shaira-compliant products and actually marketing those at the initial stages of process of Islamization of banking system in Pakistan. Pervez did his MBA from Ohio University, USA, in 1980. Outside Pakistan, he has worked on Islamic banking with Citibank, Standard Chartered Bank and Mashreq Bank. At Standard Chartered Bank he was responsible for developing a comprehensive range of Islamic financial products, along with underlying contracts, business models, marketing strategy and requirement documents. Following are the excerpts from an exclusive interview with Pervez Said.