Karachi:State Bank of Pakistan Governor Tariq Bajwa has said that he sees a positive growth trajectory of Islamic banking and finance in future.
Addressing to the launching ceremony of AAOIFI Shariah Standards – Urdu Version at local hotel here Wednesday, he said we are all aware that national language is an important ingredient of any culture and most effective mode of communication in a country. With this in perspective, translation of global standards into our national language is an important milestone, as it would remove language barriers to understand Shariah Standards. I believe this Urdu version of the Shariah Standards will be instrumental in improving awareness about Islamic finance especially amongst the Shariah scholars, academia and practitioners of Islamic finance.
He said Islamic Finance Industry is relatively new to the Global Financial landscape. Events like these are important not only for dissemination and awareness but also reinforce the emerging significance of fast growing Islamic Finance.
He said the Islamic banking started initially as a niche market for the faith sensitive clientele and is now increasingly becoming an integral component of global financial system. Islamic finance industry has grown at a fast pace. The development of Islamic banking industry especially beyond Muslim jurisdictions is a recognition of its viability as a competitive alternate to the conventional banking. According to Financial Stability Report 2018 issued by Islamic Financial Services Board (IFSB), its asset base has grown by 8.3 percent to surpass US$ 2 trillion mark. With expanding scope and size of Islamic finance, and emerging global challenges, it is gaining importance from financial stability perspective. Inherent strengths of being asset backed and prohibition on speculative activities in Islamic finance lead to better resilience of Islamic banking institutions against excessive risks. However, these strengths alone may not be sufficient to immunize the Islamic finance from risks associated with deficiencies in due diligence, inadequate buffers, lack of transparency and weak risk management practices. The well thought out international standards issued by the global standard setting bodies like AAOIFI and IFSB facilitate in managing the challenges facing the Islamic finance and harmonizing the industry practices.
He said against the backdrop of growth of Islamic banking globally, our domestic industry is also demonstrating quite impressive headway. The industry has posted a healthy annual growth of over 20 percent during the last five years. The market share of Islamic banking industry stands at 13.6 percent in terms of banking assets and 14.7 percent in total deposits. Islamic banking industry has expanded its network to over 2700 branches in 111 districts across the country.
SBP governor said given the potential of Islamic finance to support broad based economic growth and our constitutional obligation to make available Islamic financial services in the country, Islamic banking has remained a priority area for SBP. He added our Shariah compliance environment is considered amongst the best in the world. It encompasses a comprehensive Shariah Governance framework consisting of establishment of Shariah Board, Shariah compliance department and Shariah internal audit in Islamic banking institutions supported with Shariah external audits and SBP regular inspections. Let me also apprise you that SBP regularly reviews the regulatory framework to make sure that it is aligned with international standards and best practices and at the same time caters to the evolving needs of the industry.
State Bank of Pakistan also believes that growth and development of other elements of Islamic finance ecosystem i.e. capital markets, mutual funds and takaful, is essential not only for Islamic banking industry but also for the overall growth and development of the country. In this regard, SBP regularly collaborates with Securities and Exchange Commission of Pakistan (SECP), the capital market’s regulator, to promote Islamic finance. We appreciate and acknowledge key steps taken by SECP in last few years including establishment of Islamic Finance Department, introduction of all share Islamic Index, issuance of Takaful rules and Sukuk guidelines. We believe that these measures shall facilitate the diversity and outreach of the Islamic finance, he said.
Talking about potential risks and challenges that Islamic banking industry need to address for its sustainability and stability, he said affective liquidity management has been the key challenge of Islamic banking industry. This issue has gained more prominence owing to factors like dearth of Shariah compliant investment opportunities, limited availability of Shariah compliant money market instruments and absence of Shariah compliant SBP standing facility. In Pakistan, sovereign sukuk being issued since 2008 provide the key liquidity management avenue to the domestic industry, however, demand for such instruments far surpasses their supply. Being cognizant of this challenge, SBP, in consultation with industry is working to develop alternate solutions for liquidity management for Islamic banking industry.
He said standardization in Islamic finance is essential for addressing various issues facing the Islamic finance in addition to promote disclosure, transparency and integration into global financial system. I think the rapid growth of Islamic banking and finance requires further strengthening of its financial infrastructure. This will augment the ongoing efforts to bring the infrastructure of Islamic financial industry up to the international standards. The alignment of Islamic finance industry with the global best practices would not only help supervisors in their tasks but will also foster the integration of Islamic financial institutions into the international financial community.