SBP reiterates its policy for Islamic Banking’s promotion



State Bank of Pakistan (SBP), in order to remove any ambiguity and doubt among the general public, on Wednesday reiterated its commitment for promotion and development of Islamic banking in Pakistan.

Due to persistent efforts of the State Bank and the federal government, the share of Islamic banking in total deposits of the banking industry has risen to 12.8 per cent as of June 30, 2015 and is consistently growing with a cumulative average growth rate of over 50 per cent during the past 12 years. To-date, five Islamic banks, one Islamic banking subsidiary and 17 banks with dedicated Islamic banking branches are operating in the country with over 1,700 branches spread all over the country.

Islamic banking in Pakistan operates under the close supervision of State Bank’s Shariah Board. State Bank has developed regulatory and supervisory framework to ensure Shariah compliance of Islamic banking based on rulings of its Shariah Board. Further, it has developed Shariah compliant open market operations for managing liquidity of Islamic banking sector, which is quite unique in the Islamic world. State Bank Shariah Board has also approved structure of government of Pakistan Ijara Sukuk ­ Shariah compliant medium term investment instruments ­ issued in the past and all such structures for future issues will be approved by SBP Shariah Board before their launch.

In December 2013, the government of Pakistan had constituted a Steering Committee to promote Islamic banking in the country and appointed Saeed Ahmad as the chairman of this Committee. Later on, Ahmad was appointed as deputy governor at State Bank of Pakistan to spearhead promotion of Islamic banking. This created synergy between the Steering Committee and the State Bank in their efforts to pave way for advancement of Islamic finance. There is no precedence in the past that a Deputy Governor has been appointed in State Bank of Pakistan with extensive mandate for Islamic banking in the country. Later on, additional disciplines were assigned to him for better coordination on Islamic banking in those areas.

After completion of its first year, the Steering Committee has submitted its interim progress report with a set of recommendations to the federal government. The mandate of the Steering Committee was extended by the Minister of Finance Senator Mohammad Ishaq Dar for another year till December 2015 and it will present its final report to the federal government by January 2016.

Several major initiatives pertaining to promotion of Islamic banking have been taken by the Steering Committee which included establishment of separate Islamic Finance Department at SECP to promote Islamic capital market developments.

With these efforts at State Bank, the share of Islamic banking is expected to grow to 20 per cent by the year 2020 and thereafter Islamic banking could build momentum to achieve faster growth. To provide further impetus, State Bank is finalizing the draft amendments in the relevant banking laws. In order to promote quality research and development in the field and to address the capacity constraints in the Islamic banking industry, three Centres of Excellence in Islamic Finance are being established in renowned institutions like Institute of Business Administration, Karachi (IBA), Lahore University of Management Sciences, Lahore (LUMS) and Institute of Management Sciences (IMS), Peshawar. Other initiatives have also been taken by the State Bank to enhance awareness about Islamic banking through launching of two media campaigns, focus group meetings, seminars and programs in various chambers of commerce and universities throughout Pakistan.

In order to develop the necessary financial infrastructure and capacity building of the Islamic banking industry, State Bank has been collaborating with world renowned international institutions like Islamic Financial Services Board (IFSB), based in Malaysia; Islamic Research and Training Institute (IRTI), a subsidiary of Islamic Development Bank, Jeddah); International Islamic Financial Market (IIFM), based in Bahrain; Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), based in Bahrain; International Centre for Education in Islamic Finance (INCEIF), based in Malaysia and various central banks of Muslim countries devoted to developing Islamic banking. State Bank has also played an active part in the development of international standards for Islamic finance industry by institutions like IFSB, IIFM and AAOIFI.

Equity financing provides the route to establish Islamic finance in its true spirits. Emphasis on participatory modes/equity financing is being made to establish sustainable footings of the industry as well as enable Islamic banking institutions (IBIs) to contribute towards economic growth and financial inclusion.

In the context of Pakistan, Islamic Banking has a great significance as large segments of the population are still financially excluded. In this regard, the government launched National Financial Inclusion Strategy early this year and identified Islamic banking as a key area to focus on besides agriculture, SME and microfinance.