THE Islamic financial sector has emerged as the fastest growing segment of the global financial system — 15-20 per cent per annum — over the last decade.
Presently, more than 1100 institutions offering Islamic financial services (IIFS) operate across the globe, which coupled with a number of dedicated academic, legal, regulatory and supervisor institutions, provide a solid platform for their future growth. The IIFS are becoming increasingly dynamic and diversified.
The assets of the top 500 Islamic banks expanded 28.6 per cent to $822 billion at year-end 2009.
Standard & Poor’s estimates current worldwide Shariah-compliant assets at about $1 trillion. The Islamic fund industry has also played a role in the exponential growth; the number of Islamic funds has reached a total of 517, more than double the 207 funds in January 2005.
Owing to the prevailing economic crisis, security remains an important priority for the investors and Islamic funds.
Of the 517 Islamic funds across the world, 274 are equity funds, 84 mixed assets, 75 money market or commodity murabaha,
67 Sukuk funds and 17, capital funds.
Major global banks and law firms have participated in the structuring and offering of a large number of sukuks issued so far.
Access to western economies has given the Islamic financial institutions entry into large and diversified economies with a
wide array of asset classes for investment, and in the case of most developed countries, strong legal frameworks.
In Pakistan, the birth of Islamic finance can be traced way back to 1948 when founder of the nation, Quaid-e-Azam Muhammad Ali Jinnah at the inauguration of State Bank of Pakistan, said:
“I shall watch with keenness the work of your research organisation in evolving banking practices compatible with Islamic idea of social and economic life.
The economic system of West has created almost insoluble problems for humanity and, to many of us, it appears that only a miracle can save it from disaster that is now facing the world.
It has failed to do justice between man and man and to eradicate friction from the international field. On the contrary, it was largely responsible for the two world wars in the last half century. The western world, in spite of its advantages of
mechanisation and industrial efficiency is today in a worse mess than ever before in history.
The adoption of western economic theory and practice will not help us in achieving our goal of creating a happy and contended people.”
Efforts for elimination of Riba (interest) started during 1970s but most of the significant and practical steps were taken in 1980s. The initiative to re-introduce Islamic banking was launched in 2001 when the government decided to promote it in a gradual manner and as a parallel and compatible system that is in line with the best international practices.
Following the decision to shift to interest-free economy in a phased manner without causing any disruptions, the effort was envisaged to be based on a market-driven and flexible approach.
And it aimed at building a broad-based financial system to enable all segments of the population to access financial services.
Growth of Islamic banking has been impressive. Currently, it is operating with five full-fledged banks having 416 branches and 13 conventional banks, operating with 183 SAIBB and 68 sub-branches.
But there are several factors that are likely to constrain the development of Islamic finance listed as follows:
* The current Islamic banking is based on replication of conventional banking products. This is insufficient to achieve the overall objectives of Islamic financial system which is based on equitable distribution of economic gains and makes Islamic finance less efficient than their conventional counterparts.
* Not all the conventional products have an Islamic equivalent like treasury and liquidity management tools.
* Necessary changes are required in the legal, regulatory and tax environment to accommodate Islamic finance without incurring additional costs to the customers.
* The different interpretations of Shariah rulings have resulted in the lack of standardisation. Common understanding is needed to integrate local market with global market.
* Lack of necessary instruments for liquidity management.
* Limited availability for access to Lender of Last Resort facility by the central bank due to lack of Shariah compatible mode.
* While the Islamic markets have remained resilient to the financial crisis, Islamic secondary market has remained
inconsistent due to its infancy e.g dearth of regular issuances of Sukuk.
* Human resource and expertise in Islamic finance are scarce.
Dawn News
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