Islamic finance prospects brighten, but challenges persist

The prospects of Islamic banking in Asia have brightened, but challenges for Pakistan and other countries of the region are yet to be tackled.

By M. Aftab (Analysis)

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Published: Sun 16 Dec 2007, 9:01 AM

Last updated: Sat 4 Apr 2015, 9:40 PM

The central banks of the region's Muslim countries are now concentrating to tackle these problems, and are of the view that once overcome, expansion of Islamic Finance and Banking (IBF) will experience a major spurt. The challenges and expansion were the key concerns at the just-concluded Third World-Asia Islamic Capital Conference (WAICC) at Karachi.

IBF Growth

But, WAICC participants were encouraged by the fact that during the last decade, IBF has recorded an annual growth ranging from 15 to 20 per cent. This is faster than the conventional banking and financial market. IBF has by now, grown into a global market. Huge demand for Shariah-compliant financial products, from a large number of Muslims, including immigrants in Western countries, petro-dollar, increasing oil-wealth in the Middle East and attractiveness for Shariah-compliant investment and financial services for non-Muslim investors, are the factors which contributed to the growth of IBF, IMF says.

At the WAICC Asia Conference, Joseph Tan, economist at Global Research, Standard Chartered Bank, said "introducing innovative Islamic products in the financial sector has become necessary, as there is an increasing demand for Shariah-compliant products, in both developed and developing countries.

Dr. Ishrat Hussain, the former Governor State Bank of Pakistan (SBP), the central bank, asked the Asian participants to face up to challenges that still remain to be overcome by IBF. "Very little has been done to explore the unique features of Islamic Finance (IBF) for the larger good of the society, particularly in the context of economic growth and poverty alleviation, Dr. Hussain said.

Most of the attention on IBF was, so for, focused on its regulatory framework, products and services offered comparatively with conventional finance, risk management characteristics, Shariah compliance, and expansion and penetration issues. The key question is how far IBF can go to reduce the appalling poverty in most of 53 member nations of Oraganisation of Islamic Conference (OIC).

The traditional banking and International Financial Institutions(IFIs) since their inception more than 60 years go, have failed to answer these questions. Income inequalities, for instance, according to an IMF study indicates, are widening. Regional, inter-personal, rural-urban, and gender income disparities have widened, and even, getting worse.

Dr. Hussain says the poor have only unskilled labour as their resource which, needs to be assisted by some credit which can be eased by Islamic banking by locating their branches in under-served areas, catering to neglected economic activities.


Experts at WAICC stressed, IB has to take extra-precaution and must meet the exhaustive requirements to be Shariah compliant. Funds must be directed towards identifiable and acceptable productive activities. Most Islamic modes should be asset-backed, and these are invested to finance specific physical assets including machinery, inventory and equipment.

SBP's is promoting IBF "as a parallel system, providing a level playing field with conventional commercial banking, and building a broad-based financial system to enable all sections of people to access financial services. Its specialied Islamic Banking Department is doing just that. IBF is spreading its wings fast, from its 3.2 per cent market share with its Rs160 billion assets. Its market share of deposits is 2.9 per cent, and financing and investment at 2.5 per cent.

It is gaining depth as 10 to 15 per cent people coming to IBF are new customers. The customers chiefly comprise corporates and individuals. They included Shariah sensitive individual and corporate depositors and borrowers who insist on Riba-free transactions, those looking for products more competitive than conventional banks, and those who expect high return on their investment without involvement of Riba.

The products, so for being offered in Pakistan, according to Dr Muhammad Imran Ashraf Usmani, in his Meezan Bank's Guide to Islamic Banking, include nine modes of financing under IB. These include: "Musharaka, Modaraba, Diminishing Musharaka, Morahaba, Salam, Istisna, Istijar, Ijrarah, and Ijarah Wa Iqtina, according to Dr Usmani.

IBF is so upbeat about its potential and prospects that multinational Standard Chartered Bank, the biggest foreign based bank in Pakistan, this week, launched its Saadiq VISA Credit Card — the first Shariah compliant and Riba-free credit card. It has been approved by an independent Shariah Supervisory Committee.

"Saadiq will facilitate Muslims who will like to use credit card facilities according to the laws of Shariah. It is based on Ujrah concept, and on the fee structure. Only a fixed fee will be charged to the customer. It will not have any floating fee percentage dependent on the outstanding balance. The card was approved by Sheikh Nizam Yaquby, an Islamic Scholar from Bahrain, and Dr. Sattar, Sharia Adviser and director, Department of Financial Instruments, AlBaraka Investment Company, Saudi Arabia.

IBF Products

IBF is attractive to bankers, too. In Pakistan, it is yielding an average 8.7 per cent spread-compared to 7.19 per cent, recorded by conventional banking. Both are the region's highest, the convention and Islamic banks highly attractive to foreign investors and buyers of Pakistani banks. It has led to a number of mergers and acquisitions (M&As) of Pakistani banks by foreign investors, particularly those from the Gulf.

The key products offered by IBF include autos and housing finance. But a range of other products and instruments are offered too, and many more are being developed, keeping in view the Sharia, and practical experience in the Gulf, Saudi Arabia and Malaysia.

IBF stakeholders at WAICC have also asked Pakistani Ministry of Finance to step up efforts top issue Islamic Sukuk bonds or Shariah-compliant Treasury Bills (TBs) in the form of Baitul Maal certificates. Sukuk will provide the Islamic banks an opportunity to invest in government securities. Islamic Banks, they said, are facing difficulties in managing their liquidity in the absence of such instruments. Islamic banks are now at a disadvantage, compared to conventional banks, in optimising returns on excess liquidity, IB representatives said at the conference. Islamic banking and modes of financing are headed to a big spurt as these steps are taken and more attractive opportunities are offered both to the customers and the bankers themselves.

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