Dec 17 - 30, 2007

Research and Development (R&D) is an essential aspect of today's industry and has an important place in the financial world. Any industry incapable of following a dynamic approach towards its own product development cannot meet the demands of the modern sophisticated market.

The financial sector in Pakistan has witnessed many ups and downs and it is not difficult to find out the reasons for dismal performance. It was neither the weakness of the system nor the regulatory framework but the outcome of "discretionary powers" vested among the few.

However, as the government decided to liberalize, deregulate and privatize commercial banks operating in the public sector and also allowed establishment of the banks by the private sector, the turnaround has been remarkable.

Commercial banking has history and traditions spread over centuries, which has facilitated in making the systems more articulated and users friendly without compromising the security and quality. The ultimate objective of all the developments is to ensure security of funds, ease in conducting the transactions and minimizing the human element.

Initially induction of technology was considered a threat by the people working in the banks as well as the clients. However, development of "fire walls" helped in ensuring "safe transaction". Since people have been used to dealing with people encounter with computer terminals was a little frustrating. But soon people got friendly with the machines and now involvement of human element is often considered an "irritants".

Similarly, induction of technology in the stock trading was a deliberate effort to attract more investors in the capital market. The various initiatives included computerized trading system and evolution of "paperless securities system". In this endeavor all the stakeholders played their role. The input by the market participants, stock exchanges, Central Depository, issuers and financial institutions has helped in constant improvement.

Conventional banking, which has evolved over centuries, is robust only because of following an ongoing R&D program and still spending millions of rupees annually. As against this Islamic banking is a relatively new concept in the country and needs a lot of spade work to be done.

The banks have to follow two-pronged strategy: 1) to draw the attention of Islamic bankers to launch effective R&D programs through lectures and research papers and 2) to conduct in-house research as well as commissioning research by experts based in various countries. The focus is on developing new instruments, documentation for various transactions and legal rulings concerning Islamic banking operations.

To create awareness about the Islamic financial system as well as the range of Islamic financial products and services bankers as well as clients has to be informed. To provide effective information about its activities and to support its own research and statistical monitoring the institutions have a bigger role to play.

Islamic banking dubbed a "utopian dream" about two decades back has become a reality in short span of time. It has been accepted globally an ethical and a viable financial system. It presently manages funds of over two hundred billion dollars, which is only the tip of the iceberg. Islamic banking was pioneered with the setting up of two conglomerates, Dar Al-Maal Al-Islami (DMI) and Al-Baraka. The DMI having its headquarters in Geneva and Al-Baraka's headquarters located in Jeddah, Saudi Arabia. Prince Mohammad Al-Faisal was the chairman of the DMI group and Muazzam Ali its vice-chairman. Ali took up development of Islamic Banking as a mission and remained associated with DMI for 19 years.

Financial system around the globe is going through transition at an unprecedented pace. With the induction of new technologies the outreach of commercial banks is increasing but also posing new challenges. On the one hand competition demands constant improvement in quality of services and on the other hand offering of competitive return on deposits and advances.

To promote and develop Islamic banking in line with best international practices, ensuring Shariah Compliance and transparency is a must. The State Bank of Pakistan aims at developing a progressive and sound Islamic banking system that is in line and compatible with the global financial sector, providing innovative Shariah compliant products and services so as to achieve equitable economic growth.

One of the biggest challenges being faced by this growing industry is the dearth of professional Islamic bankers and capacity building in this regard is one of the top most priorities for the promotion of Islamic banking. In order to play its regulatory and supervisory role more efficiently the central bank is working in the areas like risk management, corporate governance, prudential regulations, accounting and Shariah standards etc.

There has been substantive and substantial growth Islamic banking but it has been forced to use conventional insurance to mitigate risk. Lately, the government has made amendments in the Insurance Ordinance to facilitate creation of Takaful companies and Takaful windows by the conventional insurance companies. All this has not been possible without the on going research by the Shariah scholars and professional insurers.

The advantage is that Pakistan is not alone in the quest for the creation of better systems it is taking the fullest advantage of ongoing research elsewhere in the world. Countries like Bahrain, Saudi Arabia, Sudan, Malaysia, Indonesia and Iran are doing a lot and there is no need for Pakistan to reinvent the wheel. However, it is necessary to "indigenize" all the products for better understanding by the Pakistanis.

Though, there has been substantial improvement the way financial services institutions work in the country, a lot more needs to be done. The global research has contributed a lot but availability of trained people has become a serious constraint. To begin with the curriculum being followed by the educational institutions needs radical changes. As the country is moving towards Islamization of financial system, there has to be greater interaction between the professionals and Shariah scholars.