June 29 - July 5, 2009

Presently, financial transactions of Islamic banking are recorded in conventional auditing and accounting system, as this industry in Pakistan has not spent much time to establish and implement its own auditing and accounting system. Besides, State Bank of Pakistan, regulatory authority of banks, as it says, does not want to avoid time-tested conventional regulatory system while nurturing Shariah-compliant banking industry in the country.

Pervez Said, Advisor to the Governor SBP on Islamic Banking says for last three years Islamic financial experts have been working to devise independent auditing and accounting system for recording financial transactions of Islamic banking. When we were about to implement it finally, we encountered twelve issues regarding its implementation, he says and adding this is a highly sophisticated process and over 10 qualified chartered accountants are pondering to resolve the issues. Once passed through trial and error stage, "I am sure this system will break new ground to Islamic finance auditing and accounting treatments for other countries to follow," confidently he said during an interview with PAGE.

Pervez Said established the Islamic banking department at the SBP in 2003, when according to him the Islamic banking was reintroduced in the country with an objective to develop Islamic banking as a parallel system to the conventional banking. Many Islamic scholars in Pakistan, who do not consider existing Islamic finance in letter and spirit of Shariah (Islamic commandments of financial intermediation), are in favour of absolute standalone operation of Islamic financial system. Pervez Said terms this as revolutionary approach, which he believes is not practical in early stage of development.

"When you are on zero, you have to take steps one by one and a leap jump may pull you down. Therefore, those who provoke revolution invoke disaster and social and economic disturbances," said Pervez. 'Alternatively, we chose evolutionary approach and put before people distinguishable choices to let them decide. A market-driven system is sustainable.' When he was asked how this distinction was made in Islamic banking operations of conventional banks, he replied "through segregation of funds on balance sheet". He said it was only technical option to separate conventional and Islamic banking financial transactions. According to him, State bank monitors separation of entries by conventional banks with Islamic bank branches and bounds them to make balance sheet within balance sheet for Islamic banking operations.

State bank projects 12 percent assets of Islamic banking industry by 2012. It is estimated at five percent as of March 2009. Is it not a slow growth given the support of the central bank in setting up a parallel system? "The total share was 0.5 percent six years ago and it was 5.3 percent in March. When this growth pattern is compared with that of other countries, it appears fastest growth of Islamic banking industry," said Pervez, who is also Director Islamic banking department SBP. "Indonesia with world's largest Muslim population has achieved just 1.36 percent market share; Bahrain attained not over six percent within 30 years of Islamic banking and finance history; Malaysia flourishing Shariah-compliant finance since 25 years has not witnessed a substantial growth rate. In an international poll in 2008, Islamic Finance News, a Redmoney Magazine, a subsidiary of Euromoney, ranked SBP at 2nd position among central banks promoting Islamic banking-one rank below Malaysia's BNM and above Bahrain's CBB," he maintained. 'Our aim is to develop enabling environment for the financial sector.'

It is not a spillover effect as conventional and Islamic banks have different markets to cater, he answered when this correspondent referred progress of conventional banking industry in Pakistan during the last six years. Initially, Islamic finance was based on religion appeal to round up investments and deposits of devout Muslims of oil rich countries with excess of liquidity. 'But, it was a history.' State bank is now promoting Islamic banking as an alternative financial system that provides a balanced way through diversification to equity and risk sharing instruments. Islamic banking is getting popular in western world. Vatican has advised banks to get help from rules of Islamic finance to weather global financial meltdown, which also significantly scaled down budget surplus of Vatican City. Pervez Said said Vatican endorsed Sukuk-Islamic financial instrument presently used for investment in properties. "This implies they want to learn lessons. Likewise, British premier Gordon Brown has revealed to make London hub of IBI. Japan has launched Islamic bonds. Islam ensures a classless system and gives economic models that are based on real economic activities instead of speculation," illustrated Pervez.

Is it not cannibalization of current system if sales pitch brandishes it Haram while SBP describes the system in one paper well tested and merit-based and wants to roll out IFI on market demand instead of legal and religious dictates? "State bank is driving market led growth, and not formulating advertisement codes for banks. If such ads make sense to people, then it is ok." Director Islamic banking said guidelines for Islamic microfinance and agriculture financing had been issued. However, mere guidelines are useless until products are designed under its lights. State bank is looking for funds to be tethered to financial innovation and analysing profit dynamics, and after that, we would design Shariah-compliant products for banks. "Yes State bank will become a nursery of financial innovation," he replied to a question.

He said Islamic banking escaped global financial meltdown because of its fundamentals that do not allow trading of debts. He foresees a watershed, a tipping point in future when according to him Islamic financial services will be widespread like cellular phones. When this will happen, he says, no body knows, but adding this will surely do. Pervez has over 14 years of experience in Islamic and conventional banking. He launched Islamic banking business of Mashreqbank in the UAE.