Islamic banking

Growing popularity of the Islamic banking system seems to have constrained some of the multilateral financial institutions to analyse the subject more thoroughly and find ways to integrate it with the international system. In this connection, the IMF on 21st February, 2017 called for establishing a policy framework and environment that could promote financial stability and sound development of the Islamic banking. The guidelines released by the IMF in Washington noted that such a framework was particularly needed to be developed in countries where Islamic banking had become systematically important. It was also mentioned that Islamic banking continues to grow rapidly, contributing to financial deepening and inclusion in many countries but this poses a challenge to the supervisory authorities and the central banks. In particular, Islamic banking involves operations, balance sheet structures and risks that differ from their conventional banking counterparts. There was, therefore, a need for putting in place an environment that is critical to promoting sound banking development including prudential financial safety nets, anti-money laundering and countering the financing of terrorism, and improving liquidity management frameworks. The IMF Executive Board concurred that Islamic banking presented an opportunity for many countries to enhance financial intermediation and mobilise funds for economic development but the complexities of Islamic banking posed new challenges and unique risks for regulatory and supervisory bodies. The Board also expressed support for an approach to develop and provide policy advice on Islamic banking-related issues in the context of Fund surveillance, programme design and capacity development activities. Directors also saw merit in considering a proposal to formally recognise the "Core Principles for Islamic Finance Regulation for Banking" prepared by the Islamic Financial Services Board. The IMF also emphasised the importance of putting in place robust Islamic banking resolution regimes and other financial safety nets for countries where Islamic banking operates.
It may be mentioned that the IMF has been associated with the progress on Islamic finance for a long time and providing technical advice to its member countries on the relevant issues for the past 20 years or so. It has also been co-operating with relevant standards setters and other international organisations on efforts to develop the necessary parameters for Islamic banking in areas that are not covered by existing international standards. As the number and complexities of Islamic banking issues have grown over the years, the IMF has been increasingly called upon for its assistance for capacity development with least risks. Its latest initiative speaks about the relevance and seriousness of the new phenomenon and its interest in resolving various issues which could be confronted by the Islamic banking institutions. Not only are they needed to be integrated with the old formal banking system because they are fishing in the same pond but, they are required to ensure that their products are risk-free and they meet the international standards in every respect as the size of these institutions is growing rapidly. The efforts and association of the IMF with the exercise will lend more credibility to the system at the global level and give the needed confidence to the clients that their money is safe and they are not being exploited in the name of religion.
As far as Pakistan is concerned, Islamic banking segment is growing at an exceptional pace. This is mainly due to the substantial demand of Shariah-compliant products by the general public and the enabling environments provided by financial institutions, including the SBP. At present, the share of Islamic banking in total assets and deposits is nearly 12 percent and 14 percent, respectively. According to the strategic plan of the SBP, Islamic banking industry envisions a 15 percent market share of the aggregate banking industry by the end of 2018. However, the potential problem areas continue to be liquidity management and the proliferation of products involving complex risks. The challenges of Islamic banking industry would increase with the growth of its share in the overall business. Hopefully, the initiative of the IMF would provide a platform to devise a mechanism to streamline and fine-tune the Islamic banking industry which is both in sync with the fundamental principles of Islam and the modern day requirements.