Becoming a preferred mode of financing

Aug 29 - Sep 04, 2005

Islamic banking in Pakistan has emerged as a promising, viable business having capacity to offer total financial solutions in all areas where the conventional banking system was operating so far, yet it gives a sense of satisfaction to the clients being free from exploitation especially in respect of financial charges.

So far the Islamic Banking system has yet to establish itself as the popular financing system at the micro-level as people at the individual level have yet to shift from decades old conventional system. However, the Islamic Banking is taking its roots at the macro level, which is reflected in the flow of Direct Foreign Investment, mostly coming under the Islamic financial norms.

Robust growth in deposits with Islamic banks indicates that the deposit base is likely to reach Rs 780 billion (US$ 13 billion) or 10% of the total deposits of the banking system in Pakistan by next 7-8 years. In comparison, there was

Rs 30 billion (US$ 0.5 billion) in Islamic deposits with these banks in 2004.

Flushed with liquidity from strong oil prices, Gulf investors are increasingly looking towards neighboring markets, such as Pakistan, India and Egypt for investment avenues. Islamic banking remains the preferred mode.

Pakistan is set to reinforce its role in the global Islamic banking industry with the debut international conference on Islamic Banking and Money Market in Karachi next month, focusing on innovation and new product development, including new investment techniques in Islamic money market, such as sukuks or Islamic bonds

The event, that would be the single largest aggregation of investors, bankers and beneficiaries of Islamic banking in Pakistan, will attract more than 300 delegates from key institutions in Pakistan, Middle East and Malaysia.

The event being jointly organized by Ferguson Associates and International Islamic Financial Market (IIFM) scheduled for 14 & 15 September.

Khalid Rafi, Chairman Ferguson Associates (Pvt.) Ltd. said that the objective of the conference is to provide a platform where local and international players can share their experiences and discuss new initiatives in Islamic finance.

Experts from thirty institutions and six countries would share their experiences in Islamic banking.

The event is taking place at a time when Islamic finance is becoming an increasingly important source of FDI for the country. In particular sizeable investment from Arab countries and multilateral institution like Islamic Development Bank are being routed through Islamic modes of financing.

Over the past months, all major conventional banks have launched or are in the process of launching focused Islamic banking initiatives. Pakistan has two full-fledged Islamic banks already operational, and the State Bank has licensed two more institutions that are expected to become functional by later this year.

Mr.Ijlal Alvi, visiting Chief Executive of IIFM, said that as part of its initiatives with regard to Islamic finance industry at large, IIFM plans to bring global experiences into local perspectives through organizing conferences, forum and workshops with emphasis on Islamic Capital and Money Market. The IIFM was established by a number of central banks, monetary agencies and Islamic Development Bank, with the mandate to create and develop Islamic capital and money markets on a global scale.

The Pakistan Conference will discuss new investment techniques with a special emphasis on liquidity management in Islamic banks. In particular, Islamic bonds, or sukuks, are of great relevance to the market, given its ideal fit in funding infrastructure, government and corporate borrowings.

The global sukuk volume tripled in 2004 to US$ 6.7 billion from its modest start just under four years ago, said Ijlal Alvi. The total value is expected to touch US$ 10 billion by 2006, a historic milestone for the industry.

In the Gulf countries, non-sovereign borrowers issued US$ 2.1 billion worth of Islamic bonds between January and June 2005 alone, said a research report published recently. In Pakistan, WAPDA is planning to launch its debut Rs 8 billion sukuk to part fund the Mangla dam project.

We hope this conference would be a valuable learning experience for the investors, bankers and corporates alike, said Mr Khalid Rafi, and would come up with focused recommendations for the industry. He commended the role of infrastructure institutions like IIFM that are taking keen interest in linking Pakistan's Islamic financial market with the global mainstream industry.

The response from the local market has been very encouraging. Those financial institutions which have shown their willingness to participate in the conference are including State Bank of Pakistan, Standard Chartered Bank, Bank Islami Pakistan, Islamic Development Bank, ABC Islamic Bank, UBS Noriba, Dubai Bank, HSBC Amanah, Dubai International Financial Center, ABN Amro, Malaysian Islamic Banking & Finance Institute, Arif Habib Investment Management, MCB Bank, AMZ Securities, Clyde & Co., Norton Rose and Ernst & Young, amongst others.