Sunday June 16, 2024

ICM conference: Dar urges transparency in Islamic finance growth plan

By Israr Khan & Erum Zaidi
May 30, 2023

ISLAMABAD/KARACHI: Pakistan’s Federal Minister for Finance and Revenue, Ishaq Dar said on Monday that Pakistan has a comprehensive strategic plan in place aiming at promoting the growth of Islamic finance, but asked financial institutions including banks to be fair and transparent in its implementation.

Speaking at the inaugural Islamic Capital Markets (ICM) Conference here, Dar emphasised Pakistan’s commitment to a financial inclusion strategy that encompasses all the necessary components for Islamic financing.

At the conference jointly hosted by the Securities and Exchange Commission of Pakistan (SECP) and the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI), Dar said, “We have a financial inclusion strategy that covers all the components needed to create Islamic financing, however, the price has to be fair and competitive so that the first choice to have Islamic finance products to raise funds can be fulfilled.”

“We need to develop the secondary market to get away from multilateral donors – and the Islamic financial products have to be launched in this sector too,” Dar said, adding, “We need to work hard and the Islamic financial system will overtake the conventional financial system.”

He commended the SECP and the State Bank of Pakistan (SBP) for their role in establishing a well-developed regulatory framework for microfinance institutions in Pakistan. He highlighted that Pakistan stands out as one of the few countries with such a robust framework. Furthermore, Dar pointed out that Islamic finance has already been integrated into major financial markets worldwide, running parallel to the global financial system. He expressed his belief in the potential of Islamic finance to address extreme poverty and foster shared prosperity.

Sheikh Ebrahim Bin Khalifa Al Khalifa, Chairman of the Board of Trustees for AAOIFI highlighted the principles of Islamic capital markets, which foster social and economic development, sustainable growth, job creation, poverty alleviation, and the overall well-being of communities. He expressed his [AAOIFI] commitment to the Islamic finance industry and capital market of Pakistan, pledging full support for improving the quality of AAOIFI standards implementation in the country. “This conference will help define the future direction for Islamic capital markets in Pakistan,” Sheikh Khalifa said.

He added that, unlike banking which basically is based on elements of interest and works under a regulatory regime that follows a specific banking mindset, the capital markets are fundamentally based on equity investments and similar instruments.

“Hence, these provide more Shari’ah compliant solutions for investments and raising capital,” the chairman AAOIFI board said and suggested that the governments should launch Sukuk bonds to raise finances against the conventional bonds.

The theme of the one-day conference was “ICM development with ecosystem completion: innovation, growth, and transformation.” Major industry players in the non-bank financial sector, such as the Asian Development Bank (ADB), Pakistan Stock Exchange (PSX), National Clearing Company of Pakistan Limited (NCCPL), Central Depository Company (CDC), and Almeezan Investments, supported the event.

An MoU was also signed at the occasion between the AAOIFI and the SECP, where the international body will help the SECP to launch sharia-compliant products, under the guidance of accounting and other standards set by AAOIFI in Islamic finance.

SECP Chairman Akif Saeed addressed the conference, stating that the aim is to promote the Islamic capital market within the next two years. Saeed highlighted the interest from various companies and financial institutions in launching Islamic services and products and emphasized the potential of Sukuk issuance to accelerate the development of the Islamic financial system. He also noted that important steps have been taken to promote the Islamic financial system in Pakistan following the Federal Shariah Court’s decision to eliminate Riba (interest).

Saeed further explained that SECP is implementing comprehensive reforms through legal amendments to the Modarba Ordinance. The Regulatory Sandbox, launched by SECP, includes a separate window dedicated to Islamic products. However, Saeed emphasized the need for government support to facilitate the development of the Islamic capital market, expressing confidence that the conference would contribute to the promotion of Islamic finance.

Governor of the State Bank of Pakistan (SBP), Jameel Ahmed, reiterated the commitment to transforming the financial sector into a Shariah-compliant system, aiming for an interest-free economy by 2027. Ahmed highlighted the significant growth of Islamic banking in Pakistan over the past ten years, while acknowledging the need to address gaps in institutional, legal, and regulatory frameworks, as well as inefficient price formation and discovery methods, and a lack of diversity in Islamic capital market instruments and investors.

The conference brought together prominent speakers from Bahrain, Turkey, Malaysia, the UAE, and the UK, alongside local industry experts, scholars, and practitioners. Panel discussions and breakout sessions focused on growth opportunities in various segments of the Islamic capital market and non-bank financial sectors. Participants reached a consensus on the necessity of introducing and implementing a strategic development plan for the organized growth of Islamic finance across all sectors.

Experts agreed that special focus and facilitation are required for tech-based products and services within Islamic fintech, given the fast-changing dynamics of the market driven by technological advancements and the growing demand for innovative products in emerging sectors.

All participants unanimously resolved to collaborate for the shared prosperity of the Muslim Ummah (community) through the development of a sustainable and efficient Islamic financial system.

Meanwhile, the central bank’s governor on Monday said the conversion of public debt into Shariah-compliant instruments remains the biggest challenge, a statement said.

The lack of adequate sovereign assets has remained a major impediment to regular issuance of asset-based Sukuk until recently, the governor State Bank of Pakistan Jameel Ahmad said at the International Conference on Islamic Capital Markets, which was organised by the Accounting and Auditing Organisation for Islamic Financial Institutions and Securities and Exchange Commission of Pakistan.

He highlighted the challenges pertaining to the development of Islamic capital markets, particularly of the Islamic debt market. He informed the audience that the SBP has constituted a high-level working group to develop practical solutions for alternate Sharia-compliant structures, especially asset-light Sukuk structures. Ahmad said that collaboration among regulators, financial institutions, industry players, and Shariah scholars is essential for bringing standardization of Islamic financial contracts and simplifying the processes.

The governor noted that Islamic finance as a global industry has crossed the $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 expressed satisfaction that Islamic banking has grown into a systemically important sector in the country both in terms of assets base and current market share.

For building a robust Islamic corporate debt market, Jameel Ahmad emphasised 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 programmes 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 achieving holistic and sustainable development of an inclusive Islamic capital market.