Dec 22 - 28, 2008

Shariah compliant banking is the most elaborate and the strongest segment of Islamic financial system in Pakistan. State Bank of Pakistan, being the apex regulator and the facilitator of the banking system is playing multi dimensional role from creating awareness among the masses about this system.

The proactive role being played by the central bank has created confidence among all the stakeholders about the Shariah compliant system. Instead of imposing a system the central bank has given an option to the public to choose a system of its own choice. Over the years, the Islamic banking has attracted not only the Muslims who have been looking for a Shariah compliant system but also the non-Muslims who prefer to call it ethical banking.

The central bank with the help of Shariah Scholars and professional bankers has been able to come up with innovative products and has greatly benefited from being the member of Islamic Financial Services Board (IFSB).

It can be said that now Pakistan is in a position to share its experience with other brotherly Muslim countries in evolving a Shariah compliant system. Pakistan has Islamic banks offering full fledged commercial banking services, asset management companies, Takaful operators and Modaraba companies. Successful flotation of Sukuk has opened a new chapter in the history of Pakistan's financial services sector.

At present 6 full fledged Islamic banks and 12 conventional banks are operating dedicated Islamic banking branches. The total assets of the Islamic banking industry are around Rs. 200 billion which accounts for a market share of about 4.1%. Similarly the market share in terms of deposits is around 4%. The total branch network of the industry comprises of over 300 branches with presence in over 45 cities and towns and covering all the four provinces of the country and Azad Jammu & Kashmir.

During January-September 2008 the growth in after tax profit of Islamic banks, including two listed banks remained subdued as they posted Rs257.5 million profit compared to Rs257 million during the same period last year. This was mainly due to substantial provisioning, an increase of 135% against non performing financing.

Meezan Bank can be termed the largest Islamic bank of Pakistan. The Bank contributed Rs527 million in the Islamic banking sector's profits whereas Dubai Islamic Bank (DIB) reported loss of Rs201 millions. The bank had posted Rs341 million loss during the same period last year. Emirates Global is another bank that posted loss after tax to the tune of Rs109 million. Dawood Islamic Bank that commenced its operations on April 10, 2007 posted Rs35 million profit after tax. Bankislami Pakistan posted Rs6.22 million profit after tax. It had posted Rs36.22 million loss during the same period last year. Mark-up income grew by 184%.

Over the years Islamic banks have successfully managed to offer a wide array of products encompassing almost the entire range of Islamic modes of financing that are able to cater to the needs of majority of the sectors of the economy. The segments covered by the industry include Corporate / Commercial, Agriculture, Consumer, Commodity Financing, SME sector, Treasury & Financial Institutions & Manufacturing and Services concerns through various Shariah compliant modes such as Murabaha, Mudaraba, Musharaka, Ijarah, Diminishing Musharaka, Salam, Istisna, Wakala and Islamic Export Refinance etc. Also with the increased issuance of Sukuk their Investment in these Shariah compliant instruments is on the rise. Murabaha, Ijarah & Diminishing Musharaka are the preferred modes used by the industry.

The need for maintaining transparency is seen as an important consideration in following the principles of justice and fairness. Some of the areas unique to the IFSB standard on transparency and market discipline are: 1) Shariah governance disclosures; 2) Treatment of Investment Account Holders (IAH) and retail investor oriented disclosures; 3) Equity of IAH in Capital Structure and Disclosures; 4) Focus on additional risk disclosure such as displaced commercial risk and rate of return risk and 5) Introduces role of Islamic windows disclosures.

The continued progress in setting supervisory and regulatory standards tailored to Islamic banks is necessary to support this process. Indeed, some of the areas of weakness that currently prevail in many countries in risk management, recognition of market and operational risks, information sharing and consolidated supervision are particularly pertinent for effective supervision of Islamic banks and need to be addressed expeditiously.

The 'Instructions for Shariah Compliance in IBIs' cover various areas related to appointment, removal and working of Shariah Advisors; conflict resolution in Shariah rulings; Shariah compliant modes; use of charity fund, introduction of new products and services and schedule of service charges etc. The essentials of Islamic modes of financing, earlier issued by SBP through a press release on April 15, 2005, have now been augmented and made part of these instructions. Furthermore, SBP through these Instructions has specified Shariah compliant modes of banking and finance for IBIs in exercise of the powers conferred under the Banking Companies Ordinance.

The 'Guidelines for Shariah Compliance in IBIs' are meant for providing guidance in areas like Shariah compliance, internal Shariah audit, investment in shares, policy for profit distribution with profit and loss account holders and financial reporting and general disclosure etc.

Necessary flexibility has been provided in these guidelines and IBIs can set up the suggested systems and procedures keeping in view the size and scope of their operations. These guidelines have been issued on "comply or explain basis" and IBIs shall record reasons in writing for noncompliance with any of these guidelines.

The SBP has already put in place a rigorous Shariah compliance framework including its Shariah Board, Issuance of Instructions and Guidelines for Shariah compliance, model agreements for Islamic modes of finance, Fit and Proper Criteria for Shariah Advisors in Islamic banking institutions and introduction of Shariah compliance inspection etc. Similarly it has addressed the issues of conflict of interest by limiting the number and type of financial institutions in which a Shariah Advisor of an IBI can work.