Yaseen Anwar: Developments of Islamic banking in Pakistan
Keynote address by Mr Yaseen Anwar, Governor of the State Bank of Pakistan, at the
Islamic Finance News Pakistan Roadshow, Karachi, 27 August 2013.
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Thank You for inviting me to speak at today's event. I am honored to have this opportunity of
addressing such a distinguished audience. My appreciation to the organizers for once again
having assembled a strong list of speakers at this year's Islamic Finance News Road show
and a warm welcome to the international delegates. With all of us gathered here at the
central bank sends a strong signal about commitment and determination of the State Bank of
Pakistan and the Government towards ensuring sustainable growth of the Islamic finance
industry in the country. As I look around I am optimistic that the collective experience of
speakers will lead to rich debates that will not only help us in understanding the key issues
but will also enable us to map out the future of the industry.
The Islamic finance industry has come a long way to be recognized as a viable alternate to
conventional finance. Islamic financial institutions are currently offering a wide range of
services catering to both Muslim and non-Muslim communities. The unprecedented growth of
the Islamic finance industry can be associated to efforts of dedicated regulatory, Shariah and
academic institutions along with the presence of diversified players in the field i.e. Islamic
banks, investment banks, takaful companies, Islamic fund management companies, Islamic
brokerage companies etc. The Introduction of Sukkuk and Islamic stock market indices have
also added the necessary depth and breadth to the Islamic financial markets. In particular
Sukuk; has proved to be a powerful tool in attracting investors and building their confidence
in Islamic finance while fulfilling financing needs of the public and private sector in a Shariah
compliant manner.
Pakistan is no exception to this; rather the country has remained at the fore front in
promoting Islamic finance by being a key member of International Islamic finance institutions
established to develop necessary legal, regulatory, supervisory and Shariah compliance
infrastructure for Islamic finance institutions. Pakistan's active engagement with the Islamic
Financial Services Board (IFSB), the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) and the International Islamic Financial Market (IIFM) and
collaboration with other central banks has helped the growth of the Islamic banking industry
both locally and at the global level.
Islamic banking in Pakistan has witnessed significant growth during the last decade and now
constitutes over 10 percent of the country's banking system with an asset base of over
Rs.900 billion and a network of more than 1,100 branches. Given the interest of all
stakeholders and a relatively high level of financial exclusion in the country, we believe this
expansionary trend is likely to continue and the industry is well set to double its market share
by 2020. This success could not have been possible without the leading role of the central
bank in setting the direction of the industry and providing unusual support for its promotion
and development. Promoting Islamic finance as a viable and competitive component of the
financial system through an enabling legal, regulatory and supervisory environment has
remained an important component of SBP's strategic goals. Considering the evolutionary
stage of the industry, we are continuously engaged in refining and improving the legal and
regulatory framework to ensure: a) its responsiveness to the evolving industry dynamics and
b) its effectiveness in identifying, measuring and mitigating the risks associated with Islamic
finance. In the recently concluded fiscal year we issued detailed instructions for Profit & Loss
Distribution and Pool Management to bring standardization, improve transparency and
safeguard interests of Investment Account Holders (the savings depositors). The instructions
developed through rigorous consultations with the industry have been well received both
domestically and globally.
Similarly to further improve the Shariah compliance environment in IBIs, our Islamic Banking
Department has completed industry consultations on the draft Shariah Governance
framework and will soon be issuing the same. The framework will be another key milestone
achieved, which will institutionalize the Shariah compliance function and crystallize the
Shariah compliance related roles and responsibilities of all key organs of IBIs including
BODs, executive management and Shariah Boards Moreover, to encourage standardization
and Shariah harmonization, SBP over time has issued permissible Islamic modes of finance
model Islamic financing agreements besides adapting AAOIFI Shariah Standards for the
Pakistani market in a gradual manner.
The continuation of growth momentum achieved during last the 4-5 years is contingent on
making an objective assessment of the successes, failures and future challenges and
developing consensus strategies and action plans to build on the successes and address the
challenges. We have accordingly developed the five year Strategic Plan for Islamic Banking
industry again through a rigorous and meaningful consultation with all key stakeholders. The
plan to be issued soon lays down the future road map of the industry, highlight areas of
improvement in legal, regulatory and taxation environments, emphasize diversification of
products and markets covering non-traditional but strategically important sectors of
agriculture and SMEs and increasing the Islamic banking market share to over 15% of the
country's banking system during the next five years.
SBP has also played a vital role in raising awareness and building capacity of the industry.
To address the awareness and misconception issues, SBP launched an awareness
campaign that consists of seminars, conferences, targeted programs and focused
discussions for the business community, academia, bankers and policy makers. A recent
significant milestone is the launch of a Mass Media Campaign where the whole Islamic
banking Industry joined hands under the ambit of SBP to target the challenge of
misconceptions related to the Islamic banking business model and practices. Similarly a
number of initiatives have been taken to build the industry's human resource capacity and
enhance its skills mix. In this regard support from international organizations like the Islamic
Research and Training Institute (IRTI) and Islamic Financial Services Board (IFSB) is also
being leveraged.
One key benefit of the promotion of Islamic finance is its potential to contribute significantly to
financial inclusion by extending the outreach of the financial system to the masses who are
out of the system due to faith reasons. Islamic Microfinance, a confluence of two industries;
Islamic Finance and Microfinance, can not only be an efficient tool for financial inclusion by
catering to both voluntary and involuntary financially excluded but also towards poverty
reduction due to its inherent characteristic of being prudent and asset based. The Islamic
finance industry has so far not done much to tap the potential of Islamic microfinance due to
its perceived high risk and its preoccupation in serving the financing needs of the
government and large corporates.
I would thus urge the industry to make individual as well as collaborative efforts to develop
this sector, which would improve their market perception besides enabling them to diversify
their clientele. The IBIs may also develop partnerships with Islamic microfinance institutions
to serve the low income population.
Similarly, Agriculture and SMEs are areas that have so far been missed out by both
conventional and Islamic banks due to the perception of high risk despite their paramount
importance for the country's economy. Financial inclusion is one of the key strategic
objectives of SBP and as most are aware, very near to my heart; I would thus strongly
emphasize the industry to come out of these perception myths and develop capacity to tap
these strategically important sectors and create value for your shareholders, depositors and
the country's economy as a whole. SBP will provide every support and facilitation to the
industry in s efforts to build and expand its portfolio in these sectors.
Islamic capital markets, mutual funds and Takaful industry are also very important
components of the Islamic financial system and need to be nurtured and developed along
with Islamic banking. We are working closely with the Securities and Exchange Commission
of Pakistan (SECP), regulator of capital markets to help develop these non-bank financial
institutions. We appreciate and acknowledge the important steps taken by SECP, including
review of Mudaraba guidelines, issuance of Sukuk guidelines, establishment of central
Shariah advisory board etc, and believe that these are likely to help in development of the
overall Islamic finance industry.
Lastly, I would like to emphasize the critical importance of investment in research and
development particularly for the evolving sectors of Islamic finance. Unfortunately we are not
making adequate investment in this area, which is limiting our capacity to develop Shariah
based solutions for various business and economic needs of the real economy. The research
and development is also needed to develop solutions for bringing monetary and fiscal
policies and practices in conformity with Shariah principles. The strategic plan for the next
five years has envisages a number of such initiatives and I hope that the collaborative efforts
by the regulator and practitioners would be instrumental in improving investment in R&D and
developing better solutions for serving the financing needs of the real economy.
In conclusion, I thank all the speakers and participants for coming here and hope that the
deliberations and discussions during the Road show will help the industry in moving towards
more inclusive growth and equitable distribution of gains in the economy.