Present government led by Prime Minister Imran Khan is committed to Islamize the financial system of Pakistan and promoting Islamic banking. The State Bank of Pakistan (SBP) is playing a pivotal role for strengthening the regulatory and Shariah compliance framework for Islamic banking industry. Several steps have been taken for implementation of Musharakah and Modaraba modes of financing to be adopted in the country. A comprehensive legal framework has been established for Modaraba financing by Securities and Exchange Commission of Pakistan (SECP) and several laws supporting Musharakah have also been enacted, according to the Federal Minister for Economic Affairs, Hammad Azhar. Some of the key initiatives taken by SBP for the promotion of Islamic banking industry include introducing licensing requirements on Shariah compliance, rationalisation of Minimum Capital Requirements (MCR) for Islamic banking subsidiaries, Shariah supervisory and compliance framework, liquidity management solution for Islamic banking industry as well as other measures.
Islamic banking has been a high priority area for the central bank and it has taken steps to make Islamic banking industry robust enough to offer a viable alternative to conventional banking. The SBP is striving for developing a progressive and sound Islamic banking system compatible with the global financial sector, providing innovative Shariah compliant products and services so as to achieve equitable economic growth. Established in September 2003, the Islamic Banking Department has been entrusted with the huge task of promoting and developing the Shariah compliant Islamic banking as a parallel and compatible banking system in Pakistan.
Islamic banking is one of the emerging fields in global financial market. It is growing at very fast pace all around the world. Pakistan needs to follow other Muslim countries to expedite growth in Islamic finance. For example, Turkey made it a strategic government priority to tap potential of Islamic finance industry and it took initiatives to give incentives such as relaxed banking provisions to enhance the growth of the Islamic banking sector. Similarly, Qatar is thinking of establishing specialized Islamic banks focused on areas like energy, sustainable investment, and venture capital to attract more international business to Qatar. Qatar’s total Islamic finance assets constitute 33% of the nation’s total financial system assets. Pakistan is not at par with the Muslim world in growth and development of Islamic finance, yet it has shown an impressive growth and diversification in Islamic finance over the past three decades. Islamic funds industry has yet to evolve, develop and grow with new market players in Pakistan. Islamic principles encourage entrepreneurship in productive sector, or in other words they enhance productive capacity of the economy.
In Pakistan, the Islamic banks specializing in specific sectors could help bring more international companies to the country. Islamic investment banks and Islamic venture capital funds are yet to be launched in the country. Islamic banking does suit to religious mindset in the Muslim country where the people generally abstain from purchasing insurance policies on religious grounds. Similarly, the people have reservations on banking, which also involves payment of interest. The people believe that Islam forbids insurance due to involvement of fixed rate of interest and hence, they are more inclined to buying Shariah-compliant products. Islamic banking is a system of banking that is consistent with Islamic law and guided by Islamic economics. Islam prohibits usury, the collection and payment of interest.
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The experts believe that there remains entrepreneurial risk, which can only be eliminated at the cost of compromising the basic distinctions of Islamic economic principles. There is a dire need for establishment of institutions, which could promote entrepreneurial culture. Questions have also been raised against the performance of Mudarabah companies and some Islamic scholars have declared investment with these companies as non-compliant from Islamic principles standpoint. Islamic finance, however, faces numerous challenges for its growth in the country. There is, however, a long way to go forward in this regard. There is still a dire need to work for expansion of client base of Islamic funds management industry in the country.
Islamic funds industry is still at its initial stage. Presently, the country has all types of funds available on the Islamic side. These funds include money market, equity, sovereign, corporate fixed income, capital protected and index tracker. Fixed income, interest bearing bonds are not permissible in Shariah. Islamic funds have actually provided a window to a number of individuals, who were previously reluctant to invest because of their religious beliefs. An Islamic mutual fund is essentially a Modaraba structure in which the funding is provided by the investors, while asset management companies provide the professional expertise in investment.
The Securities and Exchange Commission of Pakistan (SECP) regulates the asset management companies and ensures safety of the money deposited in mutual funds. At present, there are about 16 companies that manage 32 Islamic mutual funds in the country. The asset management companies are required to appoint Shariah Advisor, who reviews the working of the Islamic mutual funds and provides guidelines and criteria for investments. The Advisor’s guidelines are binding on the fund manager. Islamic mutual fund industry has witnessed a phenomenal growth all over the world particularly in the Islamic world. The decision of establishing a Shariah advisory board by the SECP was a step forward in this regard. Shariah advisory board will guide Islamic Financial Institutions (IFIs) and Islamic Capital Markets in their transactions. It was decided that the board would comprise of nine members including prominent Islamic scholars, jurist, and accountant. The SECP board would undertake educational activities for understanding Shariah principles and introduction and implementation of new models and products based on global research.
Islamic finance can find rich social grounds for its growth and expansion in Pakistan. What primarily concerns the users of Islamic financial services is the Shariah compliance of the services. Noncompliance of Islamic law can result in withdrawal of funds from an Islamic bank. Hence, Shariah compliance is a serious matter for an Islamic bank. The concept of Islamic finance needs to be introduced for the promotion of Islamic banking and insurance industry in the country.