The optimistic assessment is based on the success of Islamic banking in a very short time as proved by the opening of 62 branches, a threefold increase that heralded the entrenchment of the new banking system in our country.
Meezan Bank is the torchbearer in the field of Islamic banking and has 26 branches in Pakistan.
According to performance review by the SBP in its annual report 2004- 2005, Islamic Banking industry has achieved a world-wide recognition in the recent years. About 250 Islamic Financial Institutions, including Islamic Banking windows of conventional banks are operating around the world with an asset of $250 billion.
The State Bank of Pakistan (SBP) is playing a leading role in the promotion and development of Islamic banking in the country.
The separate regulatory infrastructure coupled with a full-fledged Islamic Banking Department to focus on all Islamic Banking issues gave the budding industry the necessary impetus to grow and emerge as a banking of preferred choice for the public.
The central bank's drive to promote Islamic banking as a parallel system operating at a level playing field with commercial banking is aimed at building a broad based financial system in the country. It would enable all segments of the population to access financial services and play their due role in economic growth and development.
SBP has adopted a Shariah compliance framework based on international best practices and considering the evolving stage of the Islamic banking industry that needs some handholding by the policy makers and regulators.
The framework consists of (i) a central Shariah Board at SBP that advises SBP on issues referred to it by Islamic Banks; (ii) appointment of a Shariah Adviser in Islamic banks/Islamic Banking Branches for ensuring Shariah compliance in product development, policies and procedures; (iii) periodic internal Shariah review by Islamic Banking Institutions (IBIs), and (iv) Shariah compliance audit of IBIs by SBP as a part of inspection. Further, issuance of license is subject to certification by the Shariah advisor of the applicant bank that the modes, products, procedures and manuals to be used by the bank are in conformity with Shariah.
SBP established a Shariah Board in December 2003 to advise it on modes, procedures, laws and regulation for Islamic banking. Three meetings were held during the year wherein the Essentials and the Model agreements of all major modes of Islamic banking were reviewed and revised after taking the stakeholders in confidence. The Shariah Board also made some modifications in the approved Proper Criteria for Appointment of Shariah Advisor in Islamic banking institutions to make it more objective, broad- based and responsive to the market conditions.
Further, the board examined industry issues highlighted during the first Shariah Audit of an Islamic Bank conducted during the year and gave some recommendations for improvement in the regulatory framework, which would be considered while making Prudential Regulations for IBIs.
The draft Manual for Shariah audit has been prepared in consultation with a consultant firm of repute. For capacity building, the first Shariah audit of an Islamic bank was outsourced to the same firm to develop Shariah audit skills and provide hands-on training to SBP's inspection staff.
The first Shariah audit was completed during the year and Manual would be finalised keeping in view the experience gained during the audit and the observations made by the auditors/Shariah Board. The officers and staff posted in Islamic Banking Department has been imparted extensive training in Islamic banking and finance to enhance their understanding and exposure in this fast emerging market. During the year first batch of officials of the State Bank and the IBIs completed a one-year postgraduate Diploma in Islamic Finance offered by the Centre for Islamic Economics, affiliated with Dar-ul-Uloom Karachi. Further, a number of Islamic finance training and awareness building programmes/sessions were arranged for the benefit of bankers, representatives of the chambers of commerce and industry, journalists, educational institutions and other stakeholders of Islamic banking and finance.
Taking advantage of visits of dignitaries, world-renowned scholars and experts in Islamic finance, special sessions were also organised for all the stakeholders. The initiatives have been instrumental in dispelling many conceptual misunderstandings and bringing new players in the emerging sector of Islamic financial industry.
Approval for the two new full-fledged Islamic banks having foreign sponsor directors who will bring in new technology, systems and Islamic banking products and will be instrumental in attracting further domestic and international interest and investment in the sector. The recent trends both in network expansion and new product development have signalled a faster growth and maturity in the sector in the medium term.