In 2012 Pakistan has completed ten eventful years of Islamization of the economy of the country. Now there are full-fledged Islamic banks, Takaful operators and Shariah compliant mutual funds operating in the country. This March asset base of Islamic banking industry (IBI) reached Rs644 billion or 7.7 per cent share of the overall banking industry in the country. By end of the first quarter deposits of IBI grew to Rs530 billion. Appoint of concern has been rising delinquencies. The strength of IBI is evident from the fact that despite surge in NPFs, earnings remained strong as depicted by ROA and ROE which is higher than that of overall banking industry.
Over the years, Islamic finance industry has experienced significant growth with substantial increase in number of financial institutions offering wide range of services ranging from commercial and investment banking to Takaful and from mutual funds to capital markets. Over the years due to the global expansion and need for dedicated regulations institutions like Islamic Financial Services Board (IFSB), International Islamic Financial Market (IIFM), Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Islamic Research and Training Institute (IRTI) have been created that are playing a significant supporting role for orderly and sound development of the industry.
Pakistan remains one of the forefront countries in promoting Islamic finance services. Efforts in this respect can be traced over the last four decades. Over the last decade State Bank of Pakistan has been playing a key role in the promotion and develop of the industry. As a result today Pakistan has an enabling legal, regulatory and Shariah compliance framework that has facilitated the growth and development of the industry.
The central has been following a three tiered comprehensive and credible Shariah Governance framework comprising of Shariah Board at central bank level, Shariah advisor at bank level and a regulatory Shariah compliance inspection practice to ensure adherence to Shariah principles. Detailed instructions and guidelines for Shariah compliance have developed and efforts are being made to adapt the internationally recognized accounting, prudential and Shariah standards that have been issued by bodies like AAOIFI and IFSB. To encourage the use of Islamic modes in areas like micro and agri-finance, specific guidelines have been issued. Keeping in view the dire need of industry, SBP has also played an active role in areas like capacity building and raising awareness.
Despite this much talked about progress at times experts admit that the Islamic finance industry, both globally and locally, faces some serious challenges including low awareness about Islamic banking, limited product diversification with predominance of debt/trade based products, capacity constraints of Islamic banks particularly at branches/field level and lack of effective liquidity management solutions.
It is also felt that Islamic banks are not paying due attention to SMEs and agriculture sectors which not only are strategically important for the economy but also offer huge growth potential as well as opportunities to diversify the existing product base products and serve new markets and sectors of the economy.
The development of innovative Shariah compliant short term liquidity management instruments has been a challenge not only for Pakistan but around the world. The encouraging point is that significant progress has been made. These challenges may be enormous but could be met prudently by focusing on the development of human resource and spending more time on product innovation.