Feb 25 Pakistan's central bank has published a
detailed five-year plan to promote Islamic finance through an
array of proposed legislative changes, product incentives and
instructions to market participants.
The plan aims to double the branch network of Islamic banks,
which now have about 1,200 branches, and increase the industry's
market share to 15 percent of the banking system by 2018 from
roughly 10 percent now.
The document says it would create a level playing field for
Islamic banks in the world's second most populous Muslim nation;
their financing-to-deposit ratio would reach a level that was at
least on a par with their conventional peers.
The central bank said the plan would focus on improving the
public's perception of the industry, and it included a detailed
timetable for the gradual roll-out of initiatives.
"Despite strong growth momentum, the industry perception is
still not very positive, largely due to limited awareness and
similarities between conventional and Islamic banking products,"
said Saleem Ullah, director of the central bank's Islamic
The regulator aims to encourage Islamic banks to not only
obey industry rules but also follow the spirit of Islamic
principles, such as an emphasis on transactions based on real
economic activity rather than monetary speculation.
"Product offerings are overwhelmingly debt-based, which
though they meet the minimum sharia requirements don't meet the
sharia objectives of risk- and reward-sharing, and equitable and
broad-based distribution of economic gains," Ullah said.
As of September, Pakistan had five full-fledged Islamic
banks and 14 others offering Islamic banking products; they held
a combined 926 billion rupees ($8.8 billion) of assets or 9.5
percent of the total, central bank data showed. That compares
with around 25 percent in the Gulf Arab region.
The central bank intends to develop a distinct legal
framework for Pakistan's Islamic banks by 2018, and to propose
changes to its own charter and review other legislation to
eliminate any confusion and inconsistencies.
It will work with federal and state governments to provide
tax neutrality for Islamic banks to limit extra product costs.
The regulator will also step up adoption of guidelines from
the Malaysia-based Islamic Financial Services Board and the
Bahrain-based Accounting and Auditing Organisation for Islamic
Financial Institutions, the global industry's two main
A sharia governance framework is scheduled to be released in
Pakistan this year which will specify roles and responsibilities
of management, scholars approving Islamic finance activities,
and sharia compliance and audit officers.
Guidelines for development finance institutions to start
offering Islamic banking are to be issued by 2015. An alternate
resolution mechanism for resolving Islamic banking disputes is
planned for 2016.
An Islamic pricing benchmark for money market transactions
and short-term lending would be devised by 2015, as well as
guidelines for treasury products. By 2016, the central bank is
to have rationalised minimum capital requirements for
full-fledged banks, Islamic windows and Islamic banking
subsidiaries of conventional banks.
This would be complemented by a media campaign to promote
the industry which was launched last year and is to be
The central bank's complex plan would be challenging to
implement for any regulator, even in more developed economies
than Pakistan. Success in all of the initiatives is not entirely
under the central bank's control; it will need the cooperation
of other institutions such as parliament and the finance
ministry, which may be distracted by other issues.
Nevertheless, the central bank appears willing to invest
considerable effort in the scheme. Last month it named a new
deputy governor to focus on Islamic banking and enlisted
renowned scholar Muhammad Taqi Usmani to its sharia board.
Its plan addresses some challenges, such as the need to
develop a short-term Islamic money market, which have dogged
Islamic finance globally for years and have not been resolved by
regulators in many other countries.
To harmonise industry practices, Pakistan's central bank
plans to review major products and issue instructions by 2016 on
products' essential requirements. It will restrict certain
mechanisms in Islamic banking transactions such as agency
agreements, hiba (gifts) and waad (unilateral promises) which it
believes can be criticised by scholars.
Incentives would be introduced by 2015 to stimulate
profit-sharing transactions such as musharaka and mudaraba,
which are widely known but relatively rarely used Islamic
By 2017, housing finance products would be designed based on
market prices and rentals, rather than the current practice
which uses interest-based pricing benchmarks. Guidelines would
also be developed by next year for project and infrastructure
sukuk (Islamic bonds).
The regulator will encourage Islamic banks to increase
financing to the agriculture sector and to small enterprises. By
2015, the banks are expected to allocate at least 5 percent of
deposits or 10 percent of financing to each sector.
Similar efforts will encourage financing of low-income
housing, where there is unfilled demand of 7.5 million housing
units that is accumulating by 350,000 units every year, the
central bank said.
It plans to revamp an existing sharia-compliant export
refinance scheme and develop a long-term financing facility by
($1 = 104.9650 Pakistani rupees)
(Editing by Andrew Torchia)