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ISLAMABAD: State Bank of Pakistan (SBP) Governor Jameel Ahmad said Monday that collaboration among regulators, financial institutions, industry players, and Sharia scholars is essential for bringing standardisation of Islamic financial contracts and transforming the financial sector into a Sharia-compliant system.

The SBP governor was addressing the inaugural Islamic Capital Markets (ICM) Conference, jointly hosted by the Securities and Exchange Commission of Pakistan (SECP) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), here on Monday.

In this regard, the SBP and SECP are jointly playing their roles in transforming the financial sector into a Sharia-compliant system.

Ahmad spoke at length on key issues and challenges in development of Islamic capital market. He was; however, convinced that the solutions are well within reach and hoped that the insights and knowledge exchanges during this conference will help in developing a roadmap for sustainable, diversified, and inclusive Islamic Capital Market in Pakistan.

Currently, the Islamic banking has 20 percent share in the overall banking system. The SBP has put in place a comprehensive Sharia compliance governance framework for Islamic banking industry.

“One of the biggest challenges in the implementation of the federal Shariat court judgement is the conversion of the public debt into the equivalent Sharia-compliant mode,” he said.

Currently, out of total government domestic debt obligations of nearly Rs35 trillion, the volume of outstanding Sukuk stands at around Rs2.8 trillion. Thus, there exists a huge gap between the overall financing requirements and Sharia-complaint financing through Sukuk. Despite regular issuances, the secondary market of GOP Sukuk is less diversified, he stated.

Meanwhile, the size of Pakistan’s corporate debt market both conventional and Islamic remains very small, i.e., equivalent to less than one percent of the GDP. The secondary market is also not developed. A cross-cutting issue for Islamic finance is the lack of harmonisation in some existing Islamic products and the difference of opinion among various Sharia scholars is the hindrance in building investors’ confidence.

To develop the corporate Sukuk, it is necessary to provide an enabling tax regulatory and policy environment coupled with additional incentives for issuers and investors. This needs to be augmented by raising awareness level among the corporates about the potential of raising Sharia-compliant funding through the capital market.

Highlighting the challenges pertaining to the development of Islamic capital markets, particularly of the Islamic Debt Market, the governor reminded the conversion of public debt into Sharia-compliant instruments remains the biggest challenge. The lack of adequate sovereign assets has remained a major impediment to the regular issuance of asset-based Sukuk until recently.

For building a robust Islamic corporate debt market, the governor emphasized the need for developing coordinated and sustained efforts on multiple fronts to provide an enabling tax, regulatory and policy environment. Noting the importance of retail investors, he stressed the need for investor education programs to complement the efforts for strengthening the market infrastructure.

He also emphasized the need to embrace Islamic Fintech, digital finance, climate finance, and innovation with a futuristic view to achieve holistic and sustainable development of an inclusive Islamic capital market.

He envisioned Pakistan’s Islamic Capital market to be a fair, modern, efficient and globally competitive market, responsive to the needs of its stakeholders, and based on sound regulatory principles, which should provide the impetus for sustainable economic growth.

The governor noted that Islamic finance as a global industry has crossed the US$3 trillion mark and the Islamic capital markets account for around 31 percent share of this growing pie. He, however, noted that Islamic capital markets are in the nascent stages of development in most jurisdictions.

He attributed this to gaps in institutional, legal and regulatory frameworks, inefficient price discovery and lack of diversity in instruments and investors. The Governor showed satisfaction that Islamic banking has grown into a systemically important sector in the country both in terms of assets base and current market share.

In his speech, SBP Governor Ahmed said, “We are committed to transforming the financial sector into a Sharia-compliant system. To this end, the SBP and the SECP, as part of the federal government’s steering committee, are playing their roles in achieving the aligned goals for the transformation towards an Islamic economic system”. The committee will also provide guidance in the implementation of the Shariat court’s judgment.

He added that the development and deepening of Islamic capital markets are imperative to support economic growth, mobilise savings, improve resource allocation, and provide diverse funding resources to economic agents.

The SBP governor added that the main impediments to the growth of Islamic capital markets include gaps in institutional, legal, and regulatory frameworks; a lack of efficient ways for price formation and discovery; and a lack of diversity in Islamic capital markets instruments and investors.

The SBP under the guidance of the steering committee has constituted a high-level working group to develop practical solutions to the alternate Sharia-compliant structures, especially assets like Sukuk structures.

SECP Chairman Akif Saeed also addressed the conference. He said that the aim is to promote the Islamic capital market in the next two years.

He informed the audience that several companies and financial institutions have approached the SECP to launch Islamic services and products. He said that after the decision of the Federal Shariah Court for the elimination of Riba, several important steps have been taken to promote the Islamic financial system in the country.

He informed participants that the SECP is implementing comprehensive reforms through legal amendments to the Modarba Ordinance. The SECP also launched its fourth cohort of its Regulatory Sandbox and we have kept a separate window for Islamic products, he said, adding that the SECP has established a special window for the promotion of Islamic finance products. He said that government support is still needed for the development of the Islamic capital market.

SECP Commissioner for Islamic Finance Abdul Rehman Warraich and Chairman of the AAOIFI Board of Trustees Sheikh Ebrahim-bin-Khalifa Al Khalifa also spoke at the event.

The SECP and the AAOIFI also signed a memorandum of understanding (MoU) for mutual and joint cooperation in areas of common interest that support the development of the Islamic banking and finance industry.

Copyright Business Recorder, 2023

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