primarily engage in such businesses. second differentiating aspect is the nature of contractual arrangements that drive deposits mobilized by conventional banks as compared to islamic banks. conventional bank deposits are interest based contracts with guaranteed interest return whereas islamic banks raise deposit on a profit and loss sharing basis in either a mudaraba or musharaka structure. mudaraba / musharaka contracts transform the islamic banks ’ deposits into essentially a fund management product ( although currently most regulators recognize these as equivalent to conventional deposit contracts ) and this impacts the corresponding asset portfolio. there is a need therefore that islamic banks acquire assets on a pls basis as well and eventually move beyond fixed return products, like murabaha and ijara. this pushes an islamic bank towards universal banking since in order to manage the portfolio profitability ; it needs to invest across sectors in businesses based on shariah principles, like equity and sukuks in the capital market and trade contracts like commodity murabaha, musharaka, ijara and takaful. thirdly, further development of islamic banking itself depends on concurrent development of islamic capital market. for instance, development of islamic debt market is key to the provision of adequate liquidity support while providing additional investment avenues. likewise, takaful development is critical to provide insurance coverage to islamic banking products, like auto and consumer financing, while strengthening secondary capital and islamic bond markets by being a major buyer of islamic instruments. it is the confluence of these factors that have induced regulators to encourage and ifs to promote rapid and deeper financial inter - linkages and integration. iii. supervisory challenges posed by cross - sector developments it is some of these above considerations that have augmented strategic alliances and linkages of various types among ifis, both within country and cross borders. as such, ifis are evolving either as part of a global financial concern or as a domestic bank acquiring or establishing subsidiaries and / or the two arms, i. e. islamic and conventional banks coexist. moreover, as the conventional parts of financial institutions move towards cross - sector integration, their islamic counterparts ( either as specialized window or as independent entities ) will also follow eventually. while it has by now been well established that there are significant benefits of enhanced integration and inter - linkages or conglomeration in if, such as the economies of scale, operational synergies and effective use of scarce human resource, there are definitely certain risks. 1 in this area, i would like to offer few

, establishing regional development funds and for dispute resolution should be created. • communication and transport infrastructure between the bordering countries should be improved and upgraded to facilitate increased trade and factor mobility. • legal regulations for investor protection, intellectual property rights enforcement, anti - trust law, commercial law, labor relations, financial institutions should be harmonized. • financial markets should be widened and regulatory changes introduced to promote crossborder investment, listings, syndication, bond issues etc. after laying out the entire edifice of the preparatory measures required i will attempt to lay out an analytical framework for financial sector and banking sector harmonization in south asia and then apply this framework to the case of pakistan. empirical evidence and theoretical literature have now conclusively demonstrated that the more efficiently the financial sector carries out its intermediation role, the greater will be the volume of investment. more efficient financial intermediation also increases the average productivity of investment. two major determinants of this functional efficiency of financial sector are market structure and the regulatory framework. market structure consists of the degree of competition, concentration and interlocking control between financial institutions and business enterprises as well as the degree of specialization within the financial sector. it is influenced by the internal organization and management of the financial intermediaries. these, in turn, are affected by the degree of government ownership and control. the regulatory framework includes regulations imposed both for monetary policy as well as prudential purposes. steps taken to stimulate competition are lowering the barriers to entry, abolishing interest rate ceilings, removing directed credit allocation, and privatizing government owned banks. the privatization of government owned banks is still controversial in most of the region but it must be obvious by now that these banks suffer from three terminal diseases i. e. high volume of non - performing loans, high intermediation costs and loss of initiative and entrepreneurship. • thus harmonization of the banking sector in the south asian countries should be driven by these two considerations i. e. to eliminate the distortions in the market structure and to strengthen the regulatory framework prevailing in each country. this agenda for market structure improvement should therefore aim to achieve the following outcomes : • freeing interest rates so that they are determined by market forces abolishing or lowering reserve and liquidity requirements. • removing directed credit regulations and reservation of certain sectors as preferred ones. • adopting indirect instruments of monetary control instead of credit ceilings. • liberal branch opening and closure policy. • opening up or easing entry into the financial sector including privatization of state