Demand to make Islamic banking mandatory in Pakistan

“In Pakistan Islamic banking is being practiced on the basis of supply and demand, and is not mandatory,” said Director Education Jamiatur Rasheed Abdul Aziz Raja.

Addressing a seminar on “A blend of contemporary and religious education,” held at the Korangi Association of Trade and Industry (KATI), Raja said that a banking ordinance was introduced in 1974 but tabled in-house in 1984, under which Islamic banking in Pakistan should be mandatory and not optional.

He said that Islamic banking should be enforced with the Supreme CourtÕs orders. “Islam is a complete code of life and is not limited to a few rituals. It provides a complete economic system,” said Raja. He added that only five percent of the work required to implement Islamic banking and an Islamic financial system had been completed in the country thus far; 95 percent of the work remains undone.

“Jamiatur Rasheed has introduced various courses on the Islamic financial system and economic principles. It offers graduate and post-graduate courses on banking and finance, accounting, book-keeping, supply chain and marketing. The campus constructed in Ahsanabad is modern and has all the required facilities,” said Raja. He invited trade and industry representatives to visit the campus.

Chairman KATI Ehtesham Uddin said that interest-free banking is the need of the hour. He pointed out that interest-free banking is being practiced in Japan and a number of western countries, while Pakistan’s businessmen are being charged double-digit interest. “At this juncture when religious institutions have forgotten modern and technical education, Jamiatur Rasheed, which is imparting the most modern education, is an asset for the nation,” he said. Ehtesham Uddin said that like Jamiatur Rasheed other religious institutions should also impart technical and modern education to their students. President AKIA Mian Zahid Hussain announced that a delegation of industrialists would soon visit Jamiatur Rasheed. He declared Jamiatur Rasheed a blend of modern and Islamic education.

Sardar Yasin Malik advised representatives of religious institutions to also provide technical education to their students so that they could compete with other people. He proposed the name ‘Al-Rasheed University’ for Jamiatur Rasheed.

http://www.thenews.com.pk/Todays-News-3-119161-Demand-to-make-Islamic-banking-mandatory-in-Pakistan

Islamic microfinance indispensible for poverty alleviation in Arab countries

United Nations Development Program (UNDP) in collaboration with USAID and CGAP jointly organised "Iraq Microfinance Policy Forum" on 10 and 11 April 2012 in Erbil-Iraq.

The forum aimed to set up Policy Goals for Microfinance in Iraq, which was attended by high Government functionaries from Iraq Government, including Advisors to Prime Minister, Central Bank in Iraq, USAID, ILO, UNOPS, CGAP, UNHABITAT representatives.

Representatives from Yemen, Jordan, India, Italy, Poland, UAE, Syria and many other many countries also participated in the conference. Muhammad Zubair Mughal – Chief Executive Officer of AlHuda Centre of Islamic Banking and Economics (AlHuda-CIBE) presented his paper on "Microfinance Policy in Asia and the increasing trend of Islamic Microfinance" which was appreciated by many experts present at the forum.

Zubair Mughal presented a detailed analysis of poverty in 52 Asian countries with their techniques and strategies in poverty alleviation, legal and regulatory reforms, minimum investable funds limits, interest rates and other improvements efforts in microfinance sectors. While declaring the poverty analysis of these countries, In-spite of having oil and other minerals these countries are having 22.9 per cent in Iraq, 18 per cent in Iran, 34.8 per cent in Yemen, 13.3 per cent in Jordan, 12.5 per cent in UAE, 28 per cent in Lebanon and 11.9 per cent people in Syria are living below the poverty line.

Even more worrying point is that 96 per cent of the population in these countries is Muslims and the cause being that they avoid the conventional system of Microfinance as it is based on Riba. So the only solution to alleviate poverty in these countries is to adopt for Islamic microfinance system. These countries can only brought to development by adopting the Islamic microfinance following the Islamic Shari’ah. Yemen Iraq and Syria have already undertaken a start and this will create room for more Islamic Microfinance Institutions to be setup in these countries.

He further emphasised the need for Islamic microfinance through the research and surveys conducted by IFC, CGAP, USAID, Frankfurt School and FINCA wherein it is proved that the Muslim population in these countries prefer Shari’ah-compliant ways instead of conventional system of microfinance. Zubair Mughal added that Islamic banking and finance has taken a healthy growth in these Arab countries, which shows opportunity for Islamic microfinance to successful. AlHuda-CIBE has setup an Islamic Microfinance Helpdesk in order to strengthen Islamic microfinance globally. This help desk is providing state-of-the art services in technical, Shari’ah guidelines trainings to many institutions of the world.

http://www.cpifinancial.net

Kosher finance: Effective governance needed to grow Islamic banking

ARACHI: 

One point needs to be made clear from the outset regarding the ongoing growth of Islamic banking in Pakistan. If it is to prosper, maintain competitiveness, ensure sustainability, preserve efficiency and remain profitable, then external and internal regulatory and governance frameworks must be strong, effective, transparent and stringent.

In Pakistan, there are five fully-fledged Islamic banks with another 13 conventional banks offering Islamic banking services. The share of Islamic banking in the sector now exceeds 7.5%, and there are prospects for future growth in this area. While Islamic banking is expanding rapidly, misconceptions about Islamic banking remain widespread. This calls for a coherent and comprehensive framework for Shariah governance for Islamic banks.

At present, the State Bank of Pakistan (SBP) is responsible for assuring that the banks offering Islamic banking services comply with Shariah requirements. However, there are areas in which there is need for further improvement. This article makes some practical recommendations for the improvement of the authenticity of Shariah advice and its implementation by individual banks.

Central to regulation of Islamic financial services is an effective Shariah governance framework, in the absence of which the confidence of the general public may deteriorate in this alternative form of banking and finance. Leaving Shariah assurance to market forces may lead to the dilution of quality of Shariah applications to banking and finance, and may in some cases result in the development of products that offer no distinct value unique to Islamic banking. In Pakistan, the SBP conducts annual Shariah audits of the banks offering Islamic banking to ensure that the principles of Shariah are upheld.

Shariah governance can be defined as a system in a given financial jurisdiction ensuring that all institutions offering Islamic financial services, which include both fully-fledged Islamic financial institutions and conventional financial institutions involved in Islamic banking through their window operations, comply with the internationally (or nationally) recognised Shariah requirements in developing, offering and executing Islamic financial products and services, as part of their operations.

There are two important pillars of Shariah governance, control and management.

Shariah control comprises the following:

1. Development of Islamic financial regulation by financial regulator;

2. Recognition of Shariah advisory function as a part of Islamic               financial regulation;

3. Compilation of Shariah opinions and creation of Shari’a standards       by an independent body, preferably set up by government; and

4. Development of an independent Shariah audit framework for the          institutions offering Islamic financial services.

Shariah management comprises the following:

1. Assurance of compliance with Shariah requirements by the banks      offering Islamic banking services; and

2. Development of human resources on all levels of management.

An effective Shariah governance framework includes benefits like assurance of Shariah authenticity and promotion and protection of the rights of all stakeholders among others.

Shariah control requires an active role of the government in creating a legislative framework for the functioning of Islamic banking in a country. It requires legislative developments, which would be implemented by financial regulators.

An effective Shari’a control function must include a legal framework in the form of an act or equivalent legislation allowing Islamic banking to operate in the country as well as the setting up of a central Shariah supervisory body in the form of a national Shariah advisory board. It also includes, or must include the development of Shariah standards either on a national level or subscription to international Shariah standards (eg Shariah Standards of Accounting from the Bahrain-based Auditing Organisation for Islamic Financial Institutions – AAOIFI).

In Pakistan, it is only the SBP that plays an active role in assuring that individual players achieve Shariah compliancy. Given the growing size and importance of Islamic banking in the country, it is now important that an Islamic Banking Act is promulgated, which would galvanise the government to be more involved in Islamic banking.

The role of the Ministry of Religious Affairs and Auqaf should be expanded to bring Shari’a governance under its umbrella of activity.

The writer is an economist and PhD  from Cambridge University.

Published in The Express Tribune, February 13^th, 2012.

http://tribune.com.pk

Pakistan Islamic banking assets hit $6.2 billion

A State Bank of Pakistan (SBP) official has revealed that total Islamic banking deposits in Pakistan now stand at PKR $463 billion ($5 billion), while total Islamic banking assets have hit PKR 568 ($6.2 billion), with the sector witnessing a growth of 30 per cent.  

Cisco's Chief Futurologist reckons the number of Internet-connected things will reach 50 billion by 2020, which equates to more than six devices for every person on Earth.

Akhtar Raza, Chief Manager for SBP, said that the SBP are working on a three- pronged strategy for promotion of Islamic banking.

The strategy allows new full-fledged Islamic banks in the private sector and also permitting the conventional banks to set up Islamic banking subsidiaries.

Under the plan, the SBP has allowed the existing conventional banks to open stand-alone Islamic banking branches.

Raza added that the SBP has issued guidelines for conventional banks having dedicated Islamic banking branches for segregation of funds and system and control. The Central Bank has also issued guidelines for Islamic microfinance business.

The SBP is actively working for the development of enforcement framework for Shari’ah compliance in Islamic banking institutions and rolling out IFSB standards/guidelines. The SBP has also issued guidelines for Islamic financing for agriculture.

Raza also added that it has issued Instructions and guidelines for Shari’ah compliance in Islamic banking institutions and introduced Shari’ah compliance inspection of IBIs.

At present five full-fledged Islamic banks are operating in the country with purely Islamic banking products apart from conventional banking. Raza said that there are 841 bank branches in 70 districts across the country.

http://www.cpifinancial.net/

Kazakh hub of Islamic finance

 There are many chances of investment in Kazakhstan regarding International Islamic Banking and financial institutions are in looking on different options for investments in Kazakhstan because the world sees the Kazakhstan a central hub for Islamic banking and finance for CIS countries. These are the views of Zubair Mughal, the Chief executive officer of Al-Huda centre of Islamic banking and economics, which he expressed in his speech in the International finance forum that is held in the Astana the capital of Kazakhstan in this week. In which the Finance minister Mr. Zhamishev Bolat of republic of Kazakhstan, the vice member of the chancellor of Prime Minister Mr. Tolevkhanov Dauren, the member of the area of department of strategic progress and research of President Administration Mr. Sadvawasov Darmen, the senator of the Kazakhstan Parliament Mr. Yensegenov Sarsenbag, the chairman of the committee of national bank of republic of Kazakhstan Mr. Nurpeissov Darkhan, the executive director of Zakat fund Mr. Alpysbay Edige and include International experts. 

The theme of the conference was to make fruitful plan and procedures for the development and expansion of Islamic finance in Kazakhstan. 

By addressing to the forum, Zubair Mughal presented the origin and starting of Islamic banking and finance in Pakistan in the form of case study that how Pakistan make fast success in Islamic banking in a short period of time. 

They said that Kazakhstan while doing Islamic banking and Sukuk should also utilize and use the Takaful, Islamic fund, Islamic microfinance and Islamic Reits side by side and for the development of infrastructure the government and Kazakhstan should issue Sukuk in International market so that the Kazakhstan is recognized as the Islamic Financial state in the international market. 

He said Kazakhstan is one of the ninth biggest countries of world which holds the 70 percent population of Muslims from the 16.5 million populations, that is the sign of huge market of Islamic banking and finance. Due to which by making the Kazakhstan the model of Islamic Finance for the rest of CIS countries so that the implementation of Islamic banks and finance their can easily be done.


http://nation.com.pk

Need for development of robust Shariah compliant risk management infrastructure

There is need for the development of a robust Shariah compliant risk management infrastructure in Pakistan’s Islamic banking industry.

It will enable both the Islamic banks and their clients to mitigate genuine business risks, said Yaseen Anwar Deputy Governor, State Bank of Pakistan (SBP).Inaugurating a workshop on ‘Hedging in Islamic Finance and Master Hedging Agreement,’ organised by International Islamic Financial Market (IIFM) in collaboration with the SBP.He said while conventional banks have access to a variety of sophisticated risk management and hedging instruments, there has been a dearth of Shariah compliant hedging products in the country for mitigating risks arising out of genuine business transactions that put Islamic Banking Institutions (IBIs) at a disadvantageous position viz a viz their conventional counterparts.

Describing the pace of growth and development of the Islamic banking industry in Pakistan as encouraging, he said at present it constitutes over 7 percent of the country’s banking system. Given the healthy growth for the past several years, the enabling regulatory and Shariah compliance framework, the growing HR capacity of IBIs and increasing awareness of the masses about Islamic banking, the share of the industry is likely to increase manifold in the future, he added.He observed despite these positive developments and trends, we need not be complacent as the industry still faces numerous challenges, including development of a robust Shariah compliant risk management infrastructure.

 ‘Moreover, the absence of standardised documentation invariably results in significantly higher transaction costs thus making the transaction unviable,’ he added.He noted notwithstanding the dire need of Shariah compliant risk management and hedging instruments for Islamic banks, it should be explicitly understood that such instruments should cover/hedge the genuine risks arising due to real business and economic transactions and should in no way allow transactions for speculative motives. ‘I presume, the same is the spirit of the Tahawwut (hedging) Master Agreement (TMA). This workshop, I believe, will enable Islamic banking industry to better understand the objectives, the underlying transactions and legal documentation etc suggested in the TMA,’ he said.

He said it would also enable market to develop and offer Shariah compliant hedging instruments. He said the IIFM has played an active role in the standardisation of documentation for liquidity management and hedging products over the past few years, which would greatly facilitate the development of Islamic Capital and Money Markets across the globe. He said TMA developed by IIFM in collaboration with International Swaps and Derivatives Association (ISDA) has been received well globally and is likely to provide a big boost to the Shariah compliant derivatives market.He said the TMA is a major initiative to standardise the hedging document and thus minimise the transaction costs. Also at the institutional level, the TMA will hopefully pave the way for players to provide Shariah compliant and financially viable products as well as broaden the range of risk management instruments available at their disposal,’ he added.While giving a presentation on TMA, Ijlal Ahmed Alvi Chief Executive Officer IIFM said although in recent years Islamic hedging market has grown, yet it was still in the development phase. TMA is a framework risk mitigating document for hedging transactions and is developed for the entire Islamic finance industry especially for Islamic financial institutions (IFIs) as well as for Islamic windows, he added.

Habib Motani, partner, Clifford Chance LLP, London gave a presentation from London through video link and highlighted the key features (legal and documentation) of TMA. Peter M Werner Senior Director ISDA gave a presentation on ‘Islamic Jurisdictions-the Need for Law Reform.’

dailytimes.com.pk

The Islamic financial system has potential to serve better than conventional banking system, a top official of the central bank said on Thursday.

Addressing the inaugural session of the Islamic financial news road-show on Islamic banking, State Bank of Pakistan Acting Governor Yaseen Anwar said that the Islamic financial system has the potential to provide better banking and financial services than the conventional system provided it capitalises on its own inherent strengths and avoids following the conventional system.

Anwar said that the current Islamic banking paradigm, both in Pakistan and elsewhere in the world, is based on replication of conventional banking products.

“While the replication of conventional products to make them Shariah compliant does pass the Shariah permissibility test, it is insufficient to achieve the larger objectives of the Islamic financial system, particularly the broad-based and equitable distribution of economic gains,” he said.

The acting governor said that reliance of Islamic banks on debt-based fixed income products and minimising the risks to almost close to those of the conventional system is not only blurring the distinction between Islamic and conventional finance, but also making Islamic banks relatively less efficient than their conventional counterparts.

“Thus, to sustain the growth momentum, the industry will have to diversify its products mix by focusing on the areas where it has comparative advantage rather than blindly following the conventional system,” he said.

He said that 67 percent of the Islamic banks’ financing in the country is concentrated in the corporate sector through Murabaha, Ijarah, and diminishing Musharaka. With most of the corporate entities having banking relationships with conventional banks, the Islamic banks have to offer significant price discounts to attract corporate clients, he said.

“This improves the quality of their financing portfolio, reduces their profit margins and inhibits their ability to offer better returns to the depositors,” the SBP acting governor said.

It also restricts the access to finance to the well-established businesses and corporates and leaves the small and medium enterprises (SMEs) and start-up businesses financially excluded, he said.

“This is contrary to the natural business model of Islamic finance, which promotes risks and reward sharing and encourages financing to promising start-ups that is critically important for promoting entrepreneurial culture,” said Anwar.

He said that the present scope of Islamic banks’ business model is confined to that of conventional banks, which generally caters to the short-term financing needs of the real economy through interest bearing instruments and facilities.

“While this scope is in line with the business model and deposit streams of conventional banks, it is not sufficient for the Islamic banks, which were originally conceived for catering to the genuine financing needs of the real economy through risks and reward sharing instruments,” he said.

“Islamic banks with this narrow scope will find it difficult to compete with the conventional banks, which are giants as compared with the Islamic banks and are highly efficient and flexible in catering to such financing needs of the real economy,” he said and reiterated that the Islamic banks will have to expand their scope to offer both commercial and investment banking services to be financed by different streams of deposits.

Anwar said that there are numerous areas and sectors, which could be explored to sustain and even accelerate the growth momentum of the Islamic banking industry.

Agriculture is strategically an important sector of Pakistan’s economy with 20 percent share in the GDP and a major source of livelihood for 65 percent of the country’s population living in rural areas, he said.

ìThe sector is also largely un-served or under-served by banks as less than 20 percent of about seven million farm households in the country have access to bank credit,” he said.

He suggested that the Islamic banks can capture a sizeable proportion of this market by reaching out to the growers either directly or through the non-governmental organisations (NGOs) or microfinance institutions.

“The Islamic banking institutions are likely to have better acceptance in the rural areas as the rural population is believed to be relatively more faith sensitive,” he said.

At present, Islamic banking institutions largely concentrate in large urban centres and they would need to expand their outreach to smaller towns and rural and semi-rural areas and optimally leverage the technology to serve the rural markets, he said.

Similarly, he said, there is also a great potential in the SME sector, while Islamic banks can also have partnership with the federal and provincial governments in developing and building low-cost housing projects, which are on the priority agenda of the federal and provincial governments.

Anwar said that the central bank fully recognises and appreciates the potential of Islamic banking in increasing the depth and breadth of the banking system and making it more diverse and stable.

“It is an important component of the SBP’s strategic goals and we are actively engaged with the industry as the regulator-cum-partner to catalyse and facilitate development of the industry on sound footings,” he said.

“We have plans to further improve our legal and regulatory framework to provide the necessary support and flexibility to this budding industry and enhance its commercial viability. There are additional plans to strengthen the Shariah compliance framework to improve the Shariah compliance levels in the industry and give comfort to the masses about the Shariah permissibility of Islamic banks’ operations,” he added.

www.thenews.com.pk 

Microfinance role vital to alleviate poverty: SBP

Governor, State Bank of Pakistan, Salim Raza on Saturday said that microfinance banks/institutions have a key role to play in creating economic opportunities for the poorest sections of the society by broadening their outreach.
Delivering a keynote address on “ Economic Empowerment for the Base of the Pyramid “ at the Acumen Community Gathering here, Mr. Raza said that the regulatory role develops infrastructure of service delivery, cross fertilizes from researching and encouraging use of successful global practices , and guides the provision of rules and oversight that would enable Microfinance Institutions (MFIs) build sources of public funding and deposits, said SBP release.
In developing economies, the symbiosis between the regulators and the operators will be a critical underpinning for this vital function to pull its weight as a major solution to poverty, SBP Chief said.
Referring to SBP role in supporting the development of microfinance in the country, he said the State Bank is facilitating setting up a microfinance-exclusive credit information bureau to reduce risks associated with microfinance operations and their clients.
SBP has encouraged mobile-banking by issuing branchless banking guidelines and funding a pilot to provide access to remote areas of Pakistan, he said and added that SBP is a pioneer in regulation in branchless banking in South Asia.
He said several initiatives have been taken by the State Bank to support low income financial development. These together form a strategy, which includes measures to address most common causes of banking exclusion; to facilitate and create an enabling environment for banks to address needs of under-served and un-banked segments through dedicated prudential regulations, and through guidelines for Microfinance, SME finance, Agricultural finance and other areas; and to provide alternative finance models such as Islamic Banking which can operate in parallel with conventional banking.
SBP Governor said MFI Ordinance-2001 has been instrumental in catalyzing growth , creating investor confidence and protecting depositors. State Bank has recently amended the Prudential Regulations for Microfinance Bank (MFBs) removing regulatory bottlenecks pointed out by the industry.
He said now MFBs have an increased ceiling on lending limits and relaxed borrower criteria to allow for client graduation. MFBs can now extend micro loans of up to Rs 150,000/- for general purpose and Rs 500,000/- for housing-loan.
Similarly, he pointed out that NGOs are encouraged to restructure into licensed banks, so that they can operate transparently with an adequate capital base, while providing comfort to depositors and borrowers.
To encourage transformation of NGOs into MFBs, the Federal Government in June 2007 allowed a five-year income tax holiday to such institutions and now some large NGOs are in process of transformation into Banks.
SBP Governor also talked about Central Bank’s partnership with the UK department for International Development for a Financial Inclusion Program, which promotes market development through well considered subsidies.
A Microfinance Credit Guarantee Facility (MFCG), worth GBP 10 million has already been launched, he said and added that facility is aimed at increasing wholesale funds for MFBs and MFIs.
Moreover, SBP has recently allowed the microfinance banks/institutions to raise foreign currency loans from international financial institutions and from other social and commercial investors, he added.
He stressed that developing strategic alliances is increasingly important for MFIs to partner with the wider private sector or public sector entities.
As these arrangements capitalize on the comparative advantages of vastly different institutions, they can take many different forms, he said and added that in this context SBP encouraged partnership between the post office (PO) network and MF providers.
Post offices already manage over 4 million savings accounts, mainly small accounts below Rs 10,000, through more than 12,000 branches. Syed Salim Raza pointed out that social entrepreneurs act as the agent of change for society, seizing opportunities others miss and improving systems, inventing new approaches, and creating solutions to change society for the better. While a business entrepreneur might create entirely new industries, a social entrepreneur comes up with new solutions to social problems and then implements them on a large scale, he said and added it is through these new, innovative solutions that we will be able to achieve economic empowerment for low-income populations.

He pointed out that one of the biggest obstacles to the growth of micro, small, and medium enterprises is lack of credit making this available to the poor has the ability for large scale impact.

Link: http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/13-Dec-2009/Microfinance-role-vital-to-alleviate--poverty-SBP/1

SBP chief lauds Islamic banks performance

State Bank of Pakistan Governor Salim Raza has said that the performance of Islamic banks has been impressive compared to their conventional counterparts during the last two years.

Speaking at a opening ceremony of 10 more branches of Dubai Islamic Bank here on Wednesday, the SBP governor said due to active support of the central bank the total assets of Islamic banking industry had grown to Rs323 billion up to September 2009 while their deposits reached to Rs245 billion.

Mr Raza said that in terms of market share the total assets and deposits of Islamic banks account for 5.3 per cent and 5.5 per cent of the conventional banking industry, respectively.

He said cumulative growth rate of Islamic banking industry had remained above 55 per cent since inception despite a healthy growth in conventional banks.

The growth rate had slowed down during 2008 and 2009 due to global economic down turn, however, when compared with their conventional counterparts it was impressive by all counts, he remarked.

The SBP governor said that last year the central bank had unveiled its Strategic Plan for Islamic banking that broadly outlined the future direction of Islamic banking until 2012.

‘Our target is to increase the share of Islamic banking to 12 per cent of total assets of the banking sector,’ he added.

He pointed out that branch network of six full-fledged Islamic banks and 13 conventional banks with dedicated Islamic banking branches increased to 560 branches.

Raza said that the central bank was determined to ensure a level-playing field for the Islamic banking industry and it had put in place a robust regulatory framework with a strong focus on Shariah compliance and competitiveness.

He said State Bank played a key role in issuance of Ijara Sukuk, which has paved the way for effective liquidity management of Islamic banks.

‘We have also ensured a tax neutral regime for Islamic banking transactions through amendments in tax laws,’ he said.

He said that the SBP had introduced a comprehensive Shariah compliance framework which includes inspection of Islamic banks coupled with joint audit of profit distribution to depositors by the external auditors and Shariah Adviser of the bank.

Each bank is also required to publish report of their Shariah Adviser on Islamic banking operations in annual accounts, he added.

Link: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/news/business/09-sbp-chief-lauds-islamic-banks-performance--szh-04

‘SBP Law includes steps for promotion of Islamic Banking’

Muhammad Kamran Shehzad, Deputy Governor State Bank of Pakistan said here on Monday that draft State Bank Law also includes the steps for the promotion of Islamic Banking in the country.

He also said that there would be no threat to the banks in case federal ministries development funds held by commercial banks are transferred to the government treasury.

“World Bank, in its Pakistan Economic Update report had criticized the government’s policy of not transferring these funds (equivalent to $10 billion) from the commercial banks to the government treasury”.

Talking to reporters at Convention Center after inaugurating a seminar on Islamic Banking organized by Alhuda Centre For Islamic Banking and Economics, Deputy Governor said that these funds would definitely be transferred from commercial banks to government treasury over a two or two and half year time period and this would have no threat to these banks, he explained. These funds were placed with banks falling in the definition of A-Rated Banks and different banks i.e. small as well as big banks hold all the said funds, he added. However, he does not believe that the government has fixed any deadline for transfer of these funds from commercial banks to government treasury. While addressing the seminar, Deputy Governor said that draft State Bank Law also includes the steps for the promotion of Islamic Banking mainly relating to deposits, legal advisory framework and Sharia advisory. He also said that tax laws and SECP instruments relating to the Islamic Banking are being fine tuned so that this mode of banking is promoted and potential existing in the country is fully taped.

World financial crisis that resulted into taking big banks of the world in deep waters, have impacted Pakistani banking system to the extent of 2 percent to 3 percent only and Islamic Banking has remained totally safe from the impact of this crisis.

He said that there is a general acceptance of Islamic banking in the country and this would provide sound basis to this mode of banking. At present total deposit held by the banks stand at Rs 3 trillion and out of which some 5.2 percent are held by Islamic Banks and value of total assets of Islamic banks stands at 5.1 percent in the country.

SBP has already fixed a target of increasing Islamic banking Share in local banking sector to 12 percent by 2010 from existing 5.2 percent. If the SBP is able to increase Islamic Banking share to over 8 percent or 9 percent even than it would be a great success. To build the capacity of the Islamic banking industry of the country the State Bank of Pakistan is planning to establish Islamic Banking Industry Training Institute.

Deputy Governor informed the participants that Islamic Banking is gaining due importance around the world as its deposits are estimated at $700 billion now and it is projected that these deposits would increase to $1.6 trillion by 2012.

SBP is promoting Islamic Banking sector to increase their presence in Small and Medium sector, Micro finance Sector and Agriculture Finance Sector. The main target is to promote Islamic Banking to take the lead in micro-finance sector in next five years to enable the poor of the poorest of the country to have access to finances.

Amir Khalil, an expert of Islamic Banking demanded the SBP to facilitate conversion of entire banking sector into Sharia Complaint sector as the Islamic principles prohibit the present practices.

S.M.H. Farazi, an expert of Islamic Banking from Sri Lanka speaking on the occasion stressed the need for development of international regulations so that non-Muslim countries easily adopt this safe and sound mode of banking. At a time when interest based banking system have met a failure in major developed countries, the promotion of Islamic banking is the need of the hour, which have proven to be safe.

Prominent Scholar on Islamic Banking, Tahir Mansuri in his presentation on Islamic Banking explained the objections that are normally raised against Islamic Banking and with the help of his research on Islamic Teachings, he proved the allegations wrong.
Link: http://www.dailytimes.com.pk/default.asp?page=2009\11\03\story_3-11-2009_pg5_6

Pakistan's experience in Islamic banking

Growing outreach and promising future

ISLAMIC banking industry in Pakistan remained least affected by the global financial crisis. It experienced some problems only after this crisis had snowballed into recession in advanced economies affecting growth prospects of Pakistan and other developing countries.

More importantly the industry has almost overcome these problems and now most of its indicators are showing a "reversion towards the usual high growth trend," according to the latest State Bank report.



The share of the assets of Islamic banking in overall banking industry grew from 3.4 per cent in June 2007 to 5.1 per cent in June 2009: in terms of value these assets increased 97 per cent-from Rs159 billion to Rs313 billion.

Total deposits jumped 120 per cent-from Rs108 billion or 3.1 per cent of the banking industry to Rs238 billion or 5.2 per cent. And total financing and investment also rose from Rs90 billion to Rs 195 billion showing a handsome growth of about 117 per cent.

In last two years, the share of financing and investment of Islamic banks in overall banking industry also went up from 2.6 percent to 4.2 per cent.



Three things have apparently helped in this phenomenal growth in Islamic banking. "First, it had a narrow base in June 2007," says head of Islamic banking at a large local bank. "Second, Islamic banking has a mass appeal in Pakistan both on religious grounds as well as being a relatively new concept. And third, it has some inbuilt characteristics that offer a better cushion against man-made crises."

That the unique features of Islamic financial institutions do protect them from the elements of man-made crises is all but evident: Total assets of top 100 Islamic banks grew more than 66 per cent to US$580 billion in 2008 from US$350 billion in 2007. In contrast to this the asset of top 100 commercial banks in Asia (the region that was not in the centre of the financial crisis) posted only 13.4 per cent growth. And according to reports, global Islamic banking is set to grow up to 30 per cent in 2009 as well.

What has boosted the reputation of Islamic banks as the institutions that can shield their clients against crises is their conservative approach to business, a balanced and ordered appetite for growth, a more equitable risk sharing and focus on the basics of banking as opposed to innovation.

"All these factors, which used to be perceived as weaknesses before the credit crisis began, are now being used as shields against the potential damages of imported stress," says a Moody's report adding that in the short term, in times of crisis, "clients may find it more comfortable doing business with an Islamic bank."



In Pakistan clients have really begun to find it comfortable doing business with Islamic banks-a fact that is evident from the growing numbers of the Islamic banking branches across the country. In June 2007 there were 162 bank branches providing Islamic banking. These included the branches of six fully-fledged Islamic banks as well as those of the conventional banks. In June 2009 the number of Islamic banks shot up to 18 and the number of total bank branches providing Islamic banking more than tripled to 528.



One of the reasons for the popularity of the Islamic banking in Pakistan is its growing outreach. Islamic banking facilities are available in almost all parts of the country and they have a strong presence in Karachi-the hub of commercial banking. Besides, Islamic banking now offers a wide range of products for both depositors and borrowers.



The availability of suitable modes of financing has attracted corporates as well as consumers towards Islamic banks. These banks have also been able to attract deposits of various types and from different classes of bank clients.



Lately, Islamic banks expanded their corporate clientele also because conventional banks became a bit averse to lending to the private sector after their NPLs went up. A conservative approach to banking has also kept consumer loans portfolio of Islamic banks more stable than that of the conventional banks. And Islamic banks have a better mix of fixed and saving accounts than the conventional banks. This is primarily because it is possible for Islamic banks to design fixed deposits schemes without the element of Riba. Despite all these plus points of Islamic banking it did not entirely escape the aftereffects of the global financial crisis and recession. The pre-tax profit of the Islamic banking industry declined about 18 percent in the last fiscal year. But here again the rate of decline was lower than in case of conventional banks that saw their earnings fall by 31 per cent during this period.

Officials of Islamic banks, however, point out that profitability of Islamic banking has picked up from April-June 2009 quarter wherein its pre-tax profit showed an increase of more than 150 percent.

They hope that the trend would continue as the economy is showing signs of a higher growth after posting a growth of just two percent in the last fiscal year.

They say that in case of Islamic banks it is the domestic economic slowdown that directly affects them rather than the global financial crisis and recession. Islamic bankers say that Islamic banking would grow faster in future once they are able to penetrate into so-far-unexploited area of agricultural financing and increase their portfolio of SMEs financing. Till June 2009 Islamic banking had very negligible exposure to agricultural financing and the share of SMEs in overall financing by this industry was a mere 8.6 per cent.



Islamic bankers admit that despite a rapid expansion of Islamic banking branches rural areas are still least-served. And even in those rural areas where Islamic banking outlets operate they focus on consumer financing rather than on agriculture loaning.

The State Bank has already issued guidelines for agricultural financing by Islamic banking outlets and Islamic banks have made a modest Rs100 agricultural financing, for the first time, in April-June 2009. Islamic banks are drawing strategies to tap this area of financing keeping in view the thorniest issue of recovery of loans.

Mohiuddin Aazim is a senior Pakistani journalist with two decades of experience in print and electronic journalism. He worked as an Executive Producer at CNBC Pakistan. He writes for Pakistan's Dawn; Outlook Afghanistan, in Kabul, and The Financial Express, in Dhaka. He contributed this article to The Brunei Times.

Link: http://www.bt.com.bn/en/business-asia/2009/10/29/pakistans-experience-islamic-banking

Pakistan Center of Excellence and landmark for Path Solutions

Pakistan, famed for hosting among its people the most talented resources in the Islamic Finance and Information Communication Technology sectors, is an ideal environment to develop Islamic banking.

Pakistan, famed for hosting among its people the most talented resources in the Islamic Finance and Information Communication Technology sectors, is an ideal environment to develop Islamic banking. “Pakistan has shown high commitment and dedication to Islamic finance; our market studies show that the annual growth of Islamic banks in Pakistan will double by 2013; thus Pakistan became the first choice in Path’s expansion plan”, commented Naji Moukadam, Path Solutions’ President, during the office inauguration reception that took place in Karachi on May 6th, 2009. “We are not only opening a support office in Karachi to serve our existing clients, but rather a new resource hub that will cater to all our clients in South Asia, the Middle East and Europe”. “We have great faith in the Pakistani level of expertise in both information technology and Islamic banking and finance”; he then added: “our aim is to boost the service level for the banks in Pakistan, assist our banks whether local or international in the product engineering through our business analysts and subject matter experts, innovate solutions and tools to match the new market trends, promote diversity and innovation in products and services”. Path Solutions has 16 years of market experience using unrivalled software implementation expertise at forward-thinking banks and financial institutions. Path Solutions’ strong market share is testament to its ability to maintain technology advantage. The company is now present in 17 countries around the world and plans to shortly add Central and Eastern Europe to its network. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3725&Cat=0