‘Islamic finance has potential to blend economic objectives’

KARACHI (October 20 2007): State Bank of Pakistan Governor Dr Shamshad Akhtar has said that Islamic finance has potential to blend economic and social objectives and address the ethical aspects of financing effectively and more than conventional finance, Islamic finance emphasises just and equitable financial system and among others.

Islamic finance offers a financial inclusive option to Muslims who have excluded themselves from financial services in the absence of Riba-free services. Presenting closing keynote address on ‘Islamic Finance Sustainability and Challenges’ at George Town University, Washington, she said that Islamic finance is generally more acceptable in populations with moderate to strong inclinations towards managing their financial relationships in line with their beliefs.

This can thus help in poverty alleviation through inclusion of a larger proportion of population into the banking system giving them access to credit and mobilising their savings effectively, she said.

She said that since a number of Muslim countries suffer from low financial services penetration, bringing in the appeal of Shariah-compliant financing mechanism could turn out to be a powerful tool for enhancing access to development finance and empowering the poor and vulnerable groups.

The SBP governor said that encouraging developments and trends in Islamic finance lend confidence that this industry has taken off. However, there are varying motivation and driving factors for the development of this industry ranging from religious fervour to the opportunities that exist in Islamic finance for broadening and deepening the process of financial intermediation, which augurs well for financial innovation and engineering, enhancing the financial services penetration in national jurisdictions and for cross border capital flows. She said that the size of Islamic financial industry is still quite small. As a proportion of the total world’s financial assets, the current growth trends and the investments in infrastructure in development of its Islamic finance networks and its regulatory and supervisory systems lend confidence that this industry has promising potential.

She said that the emerging solutions and application to structure Islamic finance innovatively had helped cater for all types of markets and financing requirements ranging from retail to project and home financing to equity funds and products and insurance offers a full array of financial options.

Industry effort to benchmark pricing and apply legal, regulatory service standards at par with conventional products and standards has also helped encourage confidence in the system, Akhtar said, adding that “going forward, the sustainability of Islamic Finance would rest in how the international community builds on the momentum achieved thus far”. “It is important to recognise that Islamic finance confines itself to largely socially and development projects and institutions are not permitted to invest in prohibited or socially undesirable investments,” she said.

Emphasis on ethical issues and rigorous self-regulation in terms of Shariah supervision ensures fair play and justice and offers superior consumer protection model. Furthermore it induces higher financial discipline and places stringent ethical standards for all stakeholders that offers a strong and unique model of governance.

Akhtar said that spread across 70 countries, Islamic finance has grown to almost a trillion-dollar industry and despite its growth, given its current size and composition, it is still a niche market in the overall global financial industry.

Prospects for the industry are quite bright, given strong demand for financial services from a large segment of about 1.4 billion Muslim populations and need to channel effectively rising foreign savings and high net worth individuals, she said.

Iran and Sudan declared some time back 100 percent conversion to Islamic banking, while within South-East Asia, Malaysia stands out with $31 billion Islamic banking assets, $1.7 billion Takaful industry and has the largest Islamic private debt market which constitutes 45.5 percent of total Malaysia debt market.

In addition, within South Asia, Pakistan stands out for its proactive and systematic stance to evolve Islamic finance industry. Prospects for sustainability of Islamic finance appear promising, but there are associated challenges which need to be concurrently addressed while one exploits and maximises the opportunities created by this discipline, she said.

The sustainability of Islamic finance stems from recognition that Islamic economic and financial architecture has a lot of appeal and depth going beyond Muslim countries and the confidence in sustainability of Islamic economic system emerges from the better understanding that this economic system is a well conceptualised, consistent and integrated framework.

Akhtar said that there is better understanding of Islamic economics and finance and mechanisms are being found to juxtapose the knowledge of conventional economics and financial engineering and learn to apply this to the Islamic economics and finance discipline without diluting its ideological underpinnings

In addition, market surveys confirm that the potential for retail, housing and project finance1 and innovation emerging in these markets is significant and augurs well for economic and financial services development, she said.

She sad: “Islamic banks have registered double-digit growth in retail markets. Penetration has occurred faster where personal banking solutions have been structured well for saving and investment account offering range of products and where information technology is used to offer online, ATMs and telephone banking services”.

Islamic banking trends are expected to persist, and the industry is set to grow, she said, and added that Standard & Poor Services Rating Agency estimates that the industry has potential to grow to $4 trillion over medium term.

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