Yaseen Anwar: Islamic banking potential of Pakistan
Speech by Mr Yaseen Anwar, Governor of the State Bank of Pakistan, at the Round Table
Conference on "Islamic banking potential of Pakistan", Karachi, 15 January 2014.
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Mr. President, Honourable Governor Sindh, Honorable Finance Minister, Distinguished
guests, ladies and gentlemen,
Assalamualaikum,
I am indeed privileged to be here today for addressing this prestigious gathering comprising
all major stakeholders of the Islamic Banking Industry in Pakistan. The presence of foreign
experts have today brings global experience to this roundtable conference and thus will
further enrich the knowledge sharing experience. My appreciation to the organizers for
holding this event to explore the real potential of Islamic banking in Pakistan, which I believe
will give further boost to our efforts and optimism for growth and development of the industry.
Islamic finance during the last four decades has witnessed considerable progress at the
global front. Besides the traditional Islamic finance markets of the Middle East, financial
centers across various Western countries are also accepting and recognizing the viability
and utility of this alternate financial system. In particular the relative resilience of Islamic
financial institutions during the recent financial crisis due to its asset backed nature and
being devoid of speculation and uncertainty, has significantly improved its credibility as a
more prudent and stable system. The scope and range of Islamic finance products has also
widened considerably over the years and Islamic financial institutions are presently catering
to most of the financial services needs of various sectors of the economy. There are
dedicated regulatory, legal and academic institutions at the international level working and
providing support for maintaining the high pace growth of the Islamic finance industry.
Pakistan, with more than 95 percent Muslim population, and a constitutional obligation of
ensuring a riba free economic system, has had a favorable response to Islamic finance.
Pakistan is amongst the pioneers of Islamic finance as we started planning for nurturing the
Shariah compliant financial system way back in 1970s, and made a bold attempt in 1980s to
bring the whole banking and financial system in conformity with Shariah principles. The
pioneering work of 1980s particularly on the legal and regulatory front has been a source of
guidance and inspiration for many countries that initiated Islamic finance in the 1980s and
90s. The attempt to transform the whole system however, met with limited success largely
due to slippages at the implementation and execution stage. This lead us to re-launch
Islamic banking in 2001 in parallel to conventional banking thus allowing both Islamic and
conventional banks to co-exist and enabling the consumers to do banking with the system of
their choice and preference.
This approach has proved to be a huge success in promoting Islamic banking in the country
and ensuring its demand driven development. The industry has been growing at an
impressive annual growth rate of over 30 percent over the last five years with sustained
growth momentum despite significantly increased base. Islamic Banking is currently spread
across 80 districts of the country with a network of 1200 branches offering Shariah compliant
products and services. Islamic banking assets presently constitute almost 10 percent of the
overall banking system in the country while in terms of deposits the share is above
10 percent. The future outlook of the industry is also very positive with bright prospects of
doubling its market share by 2020.
The presence of his Excellency, the President of Pakistan, and the honorable finance
minister in the conference speaks volumes about the strong commitment of the government
for the promotion of Islamic banking and finance in the country. I would like to take this
opportunity to highlight that State Bank of Pakistan has been playing a leading role in
nurturing Islamic banking in the country on sound footings. Being the regulator of the banking
sector, SBP over the years has introduced and implemented key regulatory reforms and
prudential measures to ensure financial stability and to meet the evolving needs of the
industry. We have also given a comprehensive and multi-tiered Shariah compliance
framework to ensure Shariah conformity of Islamic banks' operations. To further strengthen
the Shariah compliance environment in Islamic banks we have also developed a Shariah
Governance Framework, which explicitly defines the Shariah related roles and
responsibilities of all key organs of IBIs including Board of Directors, the executive
management and Shariah Boards. It also institutionalizes the Shariah compliance function in
IBIs.
Moreover, to develop an effective prudential and risk management framework for Islamic
finance, an incremental approach was adopted wherein new regulations for only such areas
and risks of Islamic banks were developed which were not being covered by conventional
prudential regulations and risk management framework.
Further, in order to align its regulatory framework with international regulatory standards and
best practices, SBP regularly reviews and evaluates the standards issued by IFSB, AAOIFI,
and IIFM for their possible implementation keeping in view our local legal, regulatory and
economic environment. Last year we issued landmark Instructions for Profit & Loss
Distribution and Pool Management for Islamic Banking Institutions (IBIs), which were well
received both locally and internationally. The instructions are aimed at bringing
standardization and improving transparency in profit & loss distribution practices of the
industry and will be instrumental in improving the perception of Islamic banking amongst the
masses.
Considering the demand of Islamic microfinance, SBP has offered various options to offer
the services of Islamic microfinance. These options include the establishment of full-fledged
Islamic microfinance banks, Islamic microfinance services by full-fledged Islamic banks and
Islamic microfinance Divisions in conventional microfinance banks. This, coupled with its
inherent checks on end use of the funds provided by microfinance institutions, the outlook for
growth and development of Islamic microfinance in Pakistan is positive.
Similarly for an agro-based economy like ours, there is huge potential for development of
Shariah Based Agriculture financing. SBP is working with the industry to develop Shariah
compliant agriculture finance products particularly Dairy products which can generate more
than $ 500 million in foreign exchange exports.
Islamic finance is an evolving industry and so is its understanding by the masses, the
business community and the policy makers. Despite significant improvement during the last
decade, still a large segment of our population does not have adequate understanding of
Islamic finance and is unable to comprehend its distinction over conventional finance. The
State Bank therefore, besides developing a supportive regulatory and supervisory
framework, is also actively engaged in undertaking awareness creation and capacity building
initiatives through its awareness campaign whereby targeted seminars and conferences are
being organized for the business community, academia, bankers and policy makers
throughout the country. In this context, the most significant milestone that has been achieved
in the recent past is the launch of an industry wide media campaign under the support and
guidance of SBP. This campaign is targeted to address mass awareness issues by using
print, electronic and digital media.
Further, SBP has recently developed a five year Strategic Plan (2014-18) for the Islamic
banking industry in Pakistan in consultation with all key stakeholders, which gives a
consensus agenda and strategy to take the industry to its next level of growth and
development. The plan has an extensive focus on improving public perception of Islamic
banking as a distinct and viable system capable of catering to the varied financial services
needs of various segments of the society. It envisages intensifying the awareness creation
efforts, strengthening consultation mechanism with stakeholders, removing confusion and
inconsistencies in legal, regulatory and taxation environment, deepening and broadening of
product offerings by Islamic banks, doubling the outreach of Islamic banks during the next
five years and increasing the market share to 15 percent of the banking system.
Pakistan has been an active member of leading global International Islamic finance
institutions like the Islamic Financial Services Board (IFSB), the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI), and the International Islamic
Financial Market (IIFM) that are all playing a key role in developing prudential and Shariah
standards for the industry. Being part of the global efforts for the development of global
standards for the industry has certainly helped us in improving our presence on the global
Islamic finance map and adopting the prudential and Shariah standards in Pakistan.
I would also like to mention here that SBP is also a key member of the recently constituted
steering committee for the promotion of Islamic banking by the government which is
mandated to devise a comprehensive policy framework for the Islamic financial system,
suggest practical steps needed to be taken for implementing Shariah-based financial system,
and propose solutions for the Islamic secondary market / money market for liquidity
management. These initiatives on part of the government sends a clear signal that the
present government views Islamic banking and finance as an integral part of the overall
financial system. We at SBP share the same view and believe that steps like these can go a
long way in further increasing the scope of the industry in the country.
Innovation requires research, hence it is imperative that the industry players give utmost
importance to research in their organizations. I am pleased to inform this esteemed audience
that SBP has a dedicated team of researchers focusing on key areas relevant to the industry.
We have recently conducted an extensive survey based study of 10,000 household across
the country to assess the demand for Islamic banking and its attributes. The results of the
survey will be shared with the industry soon and are highly encouraging as there is a huge
untapped demand for Islamic banking in the country; and an even faster pace expansion of
the industry would be needed to fill the demand and supply gap in the medium to long term.
Lastly! I would like to reiterate the full support and ownership of SBP in developing and
nurturing a sound and stable financial system that meets the Shariah principles in letter and
spirit. We will work with the industry and other stakeholders to ensure further strengthening
of risk management practices, and an effective macro prudential framework and
transparency in financial transactions and exposures. The State Bank of Pakistan remains
committed to finding appropriate solutions to these challenges. I have no doubt that the
support and cooperation of all stakeholders exhibited here today will lead to further
strengthening the foundations of this important industry.
A pure Islamic financial system with its inherent focus on equity justice and social
responsibility is ideal and this demands serious and coordinated efforts of all stakeholders on
the continuous basis. I wish the best of luck to the industry and thanks once again to all the
participants and organizers.
Thank you.