Pakistan has announced new governance framework to strengthen Shariah-compliance environment of Islamic banks and Islamic financial institutions.
Islamic banking in Pakistan is growing consistently and quite well. State Bank of Pakistan (SBP), the central bank, reports a 23.3 per cent growth in Islamic banking deposits to Rs1.07 trillion in calendar year 2014, up from Rs868 billion in calendar year 2013.
“Islamic banks are significantly improving the process of financial inclusion,” according to Hasan Aziz Bilgrami, chief executive officer of Dubai-based BankIslami Pakistan.
The central bank is earnestly trying to expand and promote Islamic banking. It has revised down the paid-up capital requirement of Islamic banks to Rs6 billion from Rs10 billion to spur growth in the banking segment. SBP is fast tracking development of overall Islamic banking system under its five-year expansion plan that started in 2015. Its near term target is to raise the operations, volumes and transactions of Islamic banking from the current 10 per cent to 15 per cent of the conventional banking.
The deposit base of Islamic banking institutions (IBIs) are projected to rise by Rs300 billion in 2015. This is, partly, due to the fact that the conventional banks are also promoting Sharia-compliant products on the back of customer preference. “A certain amount of conversion of conventional banks into Islamic, too, is leading to a higher growth in deposits as seen in 2014,” SBP says.
Two large conventional banks are planning to expand into Islamic banking windows as a result of the growing customer demand. “The present trend of deposit growth in the banking industry will get still more spur this growth in the next few years,” says Bilgrami.
As of now, 22 IBIs are operating in Pakistan. These include five full-fledged Islamic banks, while 17 conventional banks are operating 1,574 Islamic banking branches. The conventional banks are also operating 929 Islamic windows nationwide, in addition. SBP reported recently that the market share of Islamic banking of assets was 10.4 per cent, and of deposits 11.6 per cent, as on December 31, 2014. Four banks — Habib Bank, Meezan Bank, Faysal Bank, and Summit Bank — are leading the Islamic banking growth, besides efforts by others.
Ahmed Ali Siddiqui, head of the Product Development and Shariah-Compliance Department in Meezan Bank, said the Shariah-compliant model offers considerable growth opportunities as it attracts savers.
“The deposits are the major source of funding for banks which are making efforts to mobilise Islamic deposits. Returns of Islamic financial products (deposits) are derived by profits on assets. These are not influenced by the fluctuation in the discount rate,” he said.
“But, the conventional banks have an edge over IBIs because they pay a minimum of six per cent profit on savings accounts, while returns on Islamic banks deposits are still below six per cent,” he added.
Shariah framework
BankIslami’s Bilgrami is upbeat about the expansion of Islamic system. “The Islamic banking industry is improving the process of financial inclusion.”
The Islamic modes have gained a good deal of popularity following “the derivatives” and the speculation-based financial crisis in the US, which had hit most of the EU and other countries, too, working with the capitalist system. Its after effects are still partly visible.
But Islamic banking, and several countries, including Pakistan, had remained unaffected by the derivatives crisis. In fact, it had flourished which is one of the reasons for its fact track growth in recent years.
SBP has formulated the new Shariah framework after consulting all the major stakeholders, as well as research and study by its own ‘Shariah Board’, its spokesman told this scribe.
“The framework has been expanded, refined and enlarged before its announcement and setting its implementation date — July 1, 2015, when Pakistan’s new financial year 2015-16 starts,” he said.
At the same time, the central bank has also advised all the IBIs to make necessary arrangements to comply with the requirements of the new framework before the timeline of July 01,2015.
The central bank has also warned “any non-compliance with the provisions of the new Shariah governance framework will render the defaulting bank liable to penal action under the rules of the Banking Companies Ordinance 1962.
SBP is trying to ensure that the working of IBIs stays in conformity with the rules and principles of Shariah. In line with this, the central bank has been issuing regulations, instructions and guidelines on Shariah-compliance from the day Islamic banking was re-launched in 2001.
Expansion, popularity
Islamic banking had been originally launched in the late 1980s, under orders of the then president of Pakistan General Ziaul Haq. One of its key features was introduction of “Profit and Loss Account.” The profit among the depositors was distributed out of the income or profit accruing from investment of these deposits or funds in trade and businesses by the borrowers.
The central bank had issued a comprehensive set of instructions, rules and guidelines for Shariah-compliance in 2008. But, in line with major developments which the Islamic banking environment has witnessed since then, “some of the instructions and guidelines have been revisited and a comprehensive Shariah governance framework has been developed. The framework will be applicable to all IBIs which include full-fledged Islamic banks, Islamic banking subsidiaries and Islamic banking divisions of the conventional banks”, the SBP spokesman said.
The popularity and effectiveness of the Islamic banking has been acknowledged by the International Monetary Fund (IMF) in its recent report. But the fund also proposes some improvements and calls for better and more comprehensive regulatory system to govern Islamic banking.
“The ethical-based fast-growing sector of Islamic finance, which bans speculation, still lacks regulatory and supervisory frameworks catering to its unique risks. Islamic finance, which ensures the provision of financial services in accordance with Shariah laws, has so for been governed mostly by frameworks developed for conventional finance,” according to the IMF report.
IMF report further said that Islamic financing has doubled in size over the past four yeas. It is now worth more than $2 trillion as demand for its products rises.
“Around 40 million of the world’s 1.6 billion Muslims are clients of the Islamic finance industry, which has surged in popularity since its niche market days of the early 1970s. But it continues to represent less than two per cent of the global conventional banking assets of $ 140 trillion. Islamic finance has the potential to contribute to the global economy, promising to foster greater financial inclusion, especially of large under-served Muslim population,” the IMF report said.
As SBP has been very active in he field of guiding and promoting Islamic finance, the Security & Exchange Commission of Pakistan (SECP), the equity market regulator, is also getting down to promote Islamic Capital Market (ICM).
SECP’s Islamic finance division, which was established in February 2015, has just unveiled its plans to promote Shariah-compliance in the capital market.
In a statement recently, SECP launched its proposal to introduce an ‘All Shares Shariah-Compliant Companies’ Index (ASSCC) at the country’s biggest bourse — Karachi Stock Exchange (KSE).
As of now, KSE’s KMI-30 index is seen by investors as the Islamic equities benchmark to know about the performance of Shariah-compliance equities. But it is limited to only 30 socks, out of 560 listed on the KSE. KMI-30, however, shows that its member companies are performing quite well.
“About Rs100 portfolio invested in a KMI-30 company on January 01, 2011 rose to Rs266 as on December 2014. If the same amount had been invested in KSE-100 it would have been Rs267 — the first being just Rs1 less than the later,” according to an analyst.
(Khaleej Times / 17 May 2015)
---Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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