ISSUES CHALLENGES

SOLUTIONS & CURRENT

DEVELOPMENTS IN
ISLAMIC FINANCE
1

Introduction of
Facilitator
BP)
I
A
D
(
H
A
H
S
I
AD TAQ
M
M
A
H
U
M
D
E
SY
TING
E
K
R
A
M
R
E
G
A
GENERAL MAN
. LTD
O
C
E
C
N
A
R
U
S
HABIB IN
N CE
A
L
E
C
X
E
E
E
Y
EMPLO
F
O
D
A
E
H
R
C HI
E
A
R
A
K
F O RM
S
T
N
A
T
ONSUL
C
A
T
A
D
L
A
N
NATIO
T-24
G
N
I
N
I
A
R
T
R
E
Y MANAG
R
T
N
U
O
C
ANK
R
B
E
D
E
I
L
L
FORM
A
,
IG
O U T BS
L
L
O
R
S
E
H
C
N
& B RA
4 5 31 4 ,
6
8
0
0
3
0
#
L
L
CE
oo.com
h
a
y
@
4
1
h
a
h
aqis
E-mail= syedt
2

Issues / Challenges
facing Islamic
banking industry

Today, more than 500 Islamic Financial Institutions are operating th

Islamic Finance is the outcome of

CSR derived from religion and
applied to banking
te
ra l il
po ia ib
or c s
C So on
p ty
es i
R

Accountability
to God

te c
a
r n
o
p rna
r
Ethical
o
C ove e
profits
g

More-thanprofit
mentality

(rather than
profits-atany-costs)

Business
ethics

Shari`a code of
ethics
4

In all, the Islamic finance

industry is developing a global
reach

Growth
Engine
Awakening
Ripe for
Growth
Future
Markets

Source: Standard and Poors The Globalization of

Islamic Finance

The development of the Islamic finance

industry has been fuelled by pioneering
institutions and industry building
organizations

Growth and drive is being led

by customer demand

Government
driven

Sudan
Sudan

Iran
Iran

Islamic Finance was not

Malaysia
Malaysia

Bahrain
Bahrain

Pakistan
Pakistan

Brunei
Brunei
UK
UK
Singapore
Singapore
Kuwait
UAE
Kuwait UAE
Bangladesh
Bangladesh
Qatar
Qatar
Sri
Sri Lanka
Lanka

USA
USA
Japan
Japan
China
China Indonesia
Indonesia

Turkey
Egypt
EgyptTurkey
Source: Central Bank, Reports, industry
estimates

Saudi
Saudi Arabia
Arabia

established by a royal
decree or a presidential
announcement, but it
was the will of the
people which created the
industry.
Growth in the GCC
Islamic banking markets
are primarily driven by
customer demand
Malaysia presents a near
ideal regulatory and
market-driven model for
Islamic business
Key: Bubbles indicate illustrative size of
Islamic banking assets

Market driven
7

THE NEED FOR INTERNATIONAL

FINANCIAL REFORM

INTERNATIONAL FINANCIAL CRISES

HOW TO PREVENT SUCH CRISES FROM

TAKING PLACE IN THE FUTURE?

CALL FOR A NEW ARCHITECTURE

FOR THE FINANCIAL SYSTEM

BASLE COMMITTEE ON BANKING

SUPERVISION (BCBS)
8

Islamic Banking Risk

Does Islamic banking risk differ from

Conventional banking risk?

Not different - just a very special case
Trade credit ?
Asset backed Secured or unsecured ?
Debt or equity ?
Leasing / Ijara
Repos / Murabaha ?
Fund management ?
9

THE 1988 BASLE CAPITAL ACCORD

BCBS,

INTERNATIONAL

CONVERGENCE

OF

CAPITAL

MEASUREMENT AND CAPITAL STANDARDS (1988)

A SIMPLE STANDARDIZED APPROACH FOR ESTABLISHING

MINIMUM

CAPITAL

REQUIREMENTS

BANKS

TO

MAINTAIN CAPITAL ON THE BASIS OF FIVE CLASSES OF

BORROWERS (0%, 10%, 20%, 50% AND 100%)
DID NOT DISTINGUISH BETWEEN THE RELATIVE DEGREES

OF

CREDITWORTHINESS

AMONG

INDIVIDUAL

BORROWERS
APPLIED INITIALLY TO INTERNATIONALLY ACTIVE BANKS

IN THE G10 COUNTRIES

10

BASLE II - 1996
GREATER FOCUS ON RISK

MEASUREMENT AND CONTROL

THE THREE PILLARS

11

BASLE II (1)
PILLAR 1: CAPITAL
ADEQUACY
RISK

ADJUSTED CAPITAL

REQUIREMENTS
THREE

OPTIONS

EXTERNAL-RATINGS
INTERNAL-RATINGS
MODELS-BASED

BASED
BASED
12

BASLE II (2)
PILLAR 2: SUPERVISORY
REVIEW
TO

EVALUATE

PROFILES

OF

THE

RISK

INDIVIDUAL

BANKS
SPECIFY

THE

NEED

FOR

REMEDIAL MEASURES
13

BASLE II (3)
PILLAR 3: MARKET DISCIPLINE

ENHANCING

THE

DEGREE

OF

TRANSPARENCY IN BANKS PUBLIC

REPORTING AND THE DISCLOSURES
THEY MUST MAKE TO LEND GREATER
INSIGHT INTO THE ADEQUACY OF
THEIR CAPITALIZATION
14

THE CORE PRINCIPLES (1997)

BCBS, CORE PRINCIPLES FOR

EFFECTIVE BANKING
SUPERVISION (1997)
SETS OUT 25 BASIC PRINCIPLES

THAT ARE REQUIRED FOR AN

EFFECTIVE SUPERVISORY
15

THE CORE PRINCIPLES (1)

PRINCIPLES

1-5

LICENSING

AND

STRUCTURE
PRINCIPLES6-15:

PRUDENTIAL

REGULATIONS AND REQUIREMENTS

PRINCIPLES

16-20:

METHODS

OF

ONGOING BANKING SUPERVISION

16

REGULATION AND SUPERVISION

OF ISLAMIC FINANCIAL
INSTITUTIONS (1)
TWO RESPONSIBILITIES:
TO APPLY THE INTERNATIONAL

STANDARDS
TO COMPLY WITH THE SHARIAH
17

ISSUES INVOLVED
CAPITAL ADEQUACY
EVALUATION

AND

CONTROL

OF

RISKS IN THE DIFFERENT ISLAMIC

MODES OF FINANCE:
CREDIT

RISK,

RISK, MARKET RISK, LIQUIDITY

INTEREST

RATE

RISK

AND

OPERATIONAL RISK
MUDARABAH,

MURABAHAH,

MUSHARAKAH,
SALAM,

IJARAH,

AND
18

ACCOUNTING STANDARDS
INTERNAL

CONTROLS

AND

EXTERNAL AUDIT
GREATER TRANSPARENCY
DEPOSIT INSURANCE
SHARIAH AUDIT

19

Issues / Challenges

SHORTTERM LIQUIDITY MANAGEMENT

REGULATORY AND TAX REFORMS
I. STAMP DUTIES
II. TAX INCENTIVES FOR INVESTORS
III. REGULATORY RESERVES AND CAPITAL
.
.
.
.
.

REQUIREMENTS
HUMAN CAPITAL
INVESTMENT AVENUES
STANDARDIZATION OF CONTRACTS
PERCEPTION OF USERS
BENCHMARK

20

Key Recommendations
Dedicated R & D efforts to develop viable

short term liquidity products for the industry

Dedicated learning centers at University level
to train and develop competent workforce and
Shariah Scholars
Collective mass awareness campaign by
Islamic banks
State Bank should take measures for
uniformity of Islamic banking contracts and
products
Dedicated research and product development
21

Conclusion
Islamic banking risk
issues
Liquidity under developed money market
Interest rate Risk
Commodity Risk
Communication Risk
Equity risk fund management or banking?
Operational risk
Religious Hallal or Haram?
Language Risk- English, Arabic, Malay or

Urdu
22

SBP Strategic Plan for- Islamic

Banking Industry of Pakistan

2014 growth
2018
To augment the existing
momentum and to l

23

FOCUS ON KEY AREAS

24

ENABLING POLICY ENVIRONMENT

Liquidity
Financial management
accounting & framework
reporting framework

25

B. SHARIAH GOVERNANCE & COMPLIANCE

The focus in this area will remain on
standardization and harmonization of Shariah
practices, as well as on creating distinct
Islamic banking products and services.
C. AWARENESS & CAPACITY BUILDING
Efforts will be made for coordination and
collaboration amongst internal and external
stakeholders, enhancing awareness about
Islamic finance, and building capacity of the
stakeholders
26

D. MARKET DEVELOPMENT
Initiatives will be undertaken for
product diversification and
financial inclusion with the
collaboration of stakeholders.

27

A. ENABLING POLICY
ENVIRONMENT
Legal Framework

Separate chapter in Banking Company

Ordinance(BCO) 1962
Necessary changes in SBP Act 1956
Recovery of Finance Ordinance 2001
Microfinance Institutions Ordinance 2001
Engagement in Real trade Real Estate
Commodities
Investment banking Business
Act as Modarba Management Company
Reaching on consenses of necessary initiation28

Alternate Dispute Resolution mechanism

By devising customized dispute resolution
mechanism
Regulations and Guidelines
Prudential Standards
Guidelines for Development Finance Institutions
(DFIs)
Rationalization of Minimum Capital Requirement
(MCR)
On-site Inspection Manual
Liquidity Management Framework
29
Tax Neutrality

SHARIAH GOVERNANCE &

COMPLIANCE
Adoption of Accounting & Auditing Organisation
for Islamic Financial Institutions (AAOIFI) Shariah

Standards
Issuance of Comprehensive Shariah
Governance Framework
Product Standardization and Harmonization
Guidelines for Treasury Operations/Products of
IBIs
Restricted use of Agency, Hiba & Waad
in Islamic Banking Transactions
30

AWARENESS AND CAPACITY

BUILDING
Coordination and Collaboration amongst
Stakeholders
Building of stakeholders, to make Islamic banking industry distinct and

acceptable by masses, following initiatives are identified as major

components of Strategic Plan.
Given the evolving nature of Islamic finance and multi-faced issues faced
by the industry, effective collaboration and co-operation mechanism
amongst all the key stakeholders is critically important for sustaining the
growth momentum. The plan thus envisages constitution of an Islamic
Banking and Finance Consultative Group (IBFCG) under the lead of SBP
with representation of IBIs, Securities & Exchange Commission of Pakistan
(SECP), Institute of Chartered Accountants of Pakistan (ICAP), etc. This
group will be responsible for developing and implementing strategies for
development of Islamic Banking & Finance in the country.
Moreover, for the sustainable growth of Islamic Banking and Financial
Industry, an active and efficient Islamic capital market and Takaful industry
are essential components. The joint forum of SBP and SECP on Islamic 31
banking and finance will be actively utilized for collaboration between the

Similarly the cooperation and collaboration with International

Islamic Infrastructure Institutions like Islamic Financial Services

Board (IFSB), IIFM, AAOIFI, and Islamic Research and Training
Institute (IRTI) will be strengthened for improving the policy
and business environment and capacity building of the
industry.
Further, being an important and active player of global Islamic
finance having ample technical expertise and resources in this
field, technical and intellectual assistance will be extended to
the countries who are new entrants into Islamic banking &
finance. SBP in collaboration with NIBAF will also design and
offer customized training programs for international
participants from central and Islamic banks of other countries,
especially GCC and Central Asian countries. Efforts will also be
made to market NIBAFs Islamic Banking Certification Course
(IBCC) as an internationally recognized certification for Islamic
32
banking professionals.

MARKET
DEVELOPMENT
Product Diversification
Financial Inclusion
Agriculture Financing
Small and Medium Enterprises (SMEs) Financing
Low Income Housing
Islamic Microfinance (MF)
Refinance Schemes
Market Share
Alternate Delivery Channels (ADC)
33

Way Forward

Legal,
Regulatory
Supervisory
Enabling
Policy and
Environment
Framework

34

35

Liquidity Management
Framework

36

Taxation Regime

37

Financial Accounting
and Reporting
Framework

38

Shariah Governance
and Compliance

39

Awareness and
Capacity Building

40

Awareness Enhancement

41

Capacity Building

42

Market Development

43

44

45

QUESTION
ANSWER
SESSION
46