OVERWHELMING IMPACT OF ISLAMIC FINANCE IN 60 COUNTRIES

AMANULLAH BASHAR
Sep 17 - 23, 2007

Dr. Shamshad Akhtar, Governor State Bank of Pakistan has said that Islamic Finance has gripped the world with a strong fervor and passion. Interest in this discipline has proliferated to almost 60 counties going beyond Islamic countries to World and Asian leading financial centres. Every day, we hear of Islamic finance breaking new boundaries and new frontiers; besides leading Islamic banks fast spreading their tentacles from home base to develop a regional and global reach.

Speaking at Daw Asia Finance Conference on " Islamic financial Services" the SBP Governor added that motivation and renewed interest in this industry stems from its strong economic, financial, and social considerations backed by its unique features, dominant among which is its appeal to tap oil revenues of Islamic countries and savings of about 1.6 billion Muslims.

HISTORICAL CONTEXT OF PAKISTAN'S ISLAMIC FINANCE.

These measures resulted in a country-wide roll out of Islamic banking. However, the premature and sudden changeover coupled with the lack of preparedness and understanding among financial institutions and public of Islamic banking, posed difficulty in implementation.

Some basic issues emerged from 1980s experience. First, a lesson to be drawn is that rather than adopting a revolutionary approach, it is more prudent to allow industry to adopt an evolutionary process which nurtures effective acceptance and development of Islamic finance industry. Second, flexibility rather than rigidity allows for effective accommodation and innovation of changing needs of a dynamic market. Third, to ensure sanctity of the system, steps need to be taken to lend confidence to markets and customer of Islamic finance industry's proper Shariah Compliance. Last, all the stakeholders involved, including the regulators and industry, have to be properly equipped and prepared for the eventual launch of a new system.

Based on the experience, Islamic Banking Policy was launched in December 2001 to promote Islamic Banking parallel to the conventional finance industry under a structured approach. Backed by this elaborate structure, today 6 full fledged Islamic banks and 13 conventional banks offer network of 200 branches. Total assets of Islamic banks is closed to Rs 159 billion, accounting for 3.4% of market share. Islamic deposits and financings stands at 3.1% and 3.3%, respectively.

Global interest and wave in Islamic finance industry and Pakistan's success in laying basic foundation and core infrastructure of Islamic finance industry lends confidence that the country has good potential and prospects to further exploit this industry. Going forward however it is important that Pakistan adopts a more calibrated, coordinated and collaborative approach and strategy for the development of Islamic Finance industry. In designing this strategy, Pakistan will conform to the standards being promoted by the Islamic Financial Services Board (IFSB) where each member of the Council is Governors of central banks with several associate and affiliate members - whose chairpersonship Pakistan assumes effective January 2008.

The goal and objectives of the forward looking strategy should be to offer an alternative avenue of financial intermediation which is competitive and promotes efficient allocation of resources in an equitable manner. Strategy should aim to complement and supplement conventional banking industries efforts to broaden and deepen the process of financial intermediation and financial penetrations. Islamic banking can serve as a key vehicle to improve and strengthen the access to development finance, while ensuring it nurtures faith based system consistent with the Shariah principles and brings in financial innovation that can cater adequately to diverse demands of the population, corporate sector's and country's infrastructure financing requirements.

Major elements of this strategy would require both industry and SBP to work together closely on multiple fronts. Some of the key areas that industry needs to promote include:

Aggressive deposit mobilization to augment domestic financial savings of the country.

Diversification and innovations of financial structures.

Extend the outreach of the financial services in a holistic manner with focus on underserved regions and poor vulnerable groups.

Promote financial industry diversification

Enhance understanding and capacities of Islamic Banking Risk Management

Promote development of liquidity management instruments to ensure investor confidence, while effectively managing Islamic banking systems systemic risk.

Promote international standards and best practices in Islamic Industry.

Promote good corporate governance in Islamic banking.

Industry-SBP will launch joint capacity building efforts for Islamic finance industry

CONCLUSION

Islamic finance industry in Pakistan has substantial work ahead. With the promising potential and prospects, Islamic banks will need to grow at least by 40-50% annually to be able to raise its share from 3.5% in total banking system to about 15% - this may appear ambitious but currently Islamic banking in some countries have achieved these results. Given that banking industry as a whole has been growing at substantively fast pace, the level of effort required for Islamic banks would have to be steeper to claim this share.