Pakistan is a major contributor towards the growth and development of Islamic finance industry. After global financial meltdown in 2008, the ability of Islamic finance to introduce greater discipline into the financial system owing to its inherent strengths indicates this system is a viable option to avert financial crises. Islamic banking is a growing reality, which has transcended outside the traditional borders of Muslim countries into western economies. At present global Islamic financial assets have reached US$1.8 trillion in 2015 from US$150 billion in the 1990s and are expected to exceed US$6.5 trillion by 2020. According to Islamic Financial Services Board’s (IFSB) Report, 2015, Pakistan is among potential leaders of Islamic finance.
Despite its impressive growth, Islamic finance industry has to go a long way as there is still a huge untapped market that needs to be catered. Enabling regulatory, supervisory and legal environment, a suitable auditing and accounting framework and supportive financial market infrastructure are some of the challenges being faced by the Islamic finance industry. It is agreed that prudential supervision on banks is just as necessary in an Islamic system as in conventional systems; however, the supervisory framework needs to take into account special characteristics of Islamic banks in order to be more effective.
Shariah governance framework
One significant example is the issuance of Shariah Governance Framework for Islamic finance institutions which has enhanced the earlier issued Shariah compliance regulations for the industry. A balanced tax regime, enhanced disclosure requirements, strengthening of insolvency framework and standardizing practices will further reinforce regulatory and legal infrastructure. The need of the hour is to initiate a dialogue at global level for harmonization and standardization of practices all across Islamic finance industry.
Recent research reveals that the customers of Islamic financial industry are not only faith sensitive but also responsive to efficient operations and high quality services. This signifies that Islamic banking industry should strategize to be customer centric in its proposition, delivery and service. This calls for widening product range, improvement in operational efficiency and service quality. As a system, Islamic finance facilitates in stimulating economic activity and entrepreneurship towards promoting comprehensive human development and addressing poverty and inequality.
Lack of skilled, credible professionals and relatively young age of the industry are also among few challenges being faced by the Islamic finance industry. Closer interaction between industry and centers like CEIF & WIFF is critical in making Islamic Finance & Banking successful in Pakistan.
Information Communications Technology (ICT) could also be used to minimize cost. By expanding the range and reach of financial products, Islamic finance can help in improving financial access and foster the inclusion of those deprived of financial services whether voluntary or involuntary.
Finally, some of the key elements of financial architecture and infrastructure such as liquidity management instruments, rating and external credit assessment, statistics and information gathering, research and development, market micro structures and Shariah screening technologies have not yet been fully embedded and integrated in the nationwide or cross-border systems.
While growth is likely to continue at reasonably fast pace, issues and challenges confronting the industry need attention and ownership on part of all stakeholders. The huge untapped potential market of Islamic finance can be harnessed by capitalizing on its distinct characteristics. All Islamic financial institutions have to actively engage themselves and map out a strategy for industry’s sustainable growth and be recognized as value embedded, efficient financial players committed towards contributing to the overall economic growth.
The writer is a Karachi-based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan