Experts say Islamic finance to ease debt woes

ISLAMABAD: Pakistan can transform its external debts, by opting for Islamic financial modes of IMF and World Bank, and domestic debts, through mechanisms like Mudarabah, Musharakah, and Murabaha, provided that the necessary steps are taken in a timely manner and strict priorities are set by the legal authorities. Along with this, enabling an 'Islamic First' mindset at state and organizational levels is crucial to establish an Islamic economic system.

This was emphasized by Ahmad Ali Siddiqui, director, Centre for Excellence in Islamic Finance, IBA, during a detailed presentation and discussion on ‘Road Map for Conversion towards Islamic Financial System in Islamic Republic of Pakistan: Enabling Mindset and Strategies’, held with IPS' research team associated with the Institute's economy desk. The session was moderated by Naufil Shahrukh, IPS' GM Operations.

The talk was aimed at understanding the status quo, exploring the required legal measures for the development of the Islamic Financial System in Pakistan, and forging a strategic roadmap with recommendations for converting the financial system into a complete interest-free system.

In presenting a snapshot of the current state and the share of the Islamic Finance Industry in Pakistan, he highlighted a significant increase in the industry's share in the government's local borrowings. Currently, it stands at 8 percebr in the form of Sukuk, out of the total domestic borrowing, a stark contrast from the nearly zero percent observed in 2018. Furthermore, the Islamic Finance sector now accounts for almost 15 percent of the domestic debt of Public Sector Entities, and the Islamic share of the government's borrowings for commodity operations has reached 40 percent, and in some cases, even 50 percent. Non-Bank Institutes and Mutual Funds have also made substantial strides in adopting Islamic modes, with Islamic Non-Bank Finance Institutions holding a 36 percent share, and Islamic Mutual Funds capturing a 43 percent share of the market.

In his talk, Siddiqui discussed the importance of adopting an 'Islamic First' mindset and having strong political will to bring about desired changes.

He highlighted the need for the government to transform government-owned financial institutions, schemes, and instruments into Shariah-compliant ones, such as National Savings and Treasury bills to sukuk. Siddiqui also pointed out the feasibility of converting external debt to Shariah-compliant forms, given that the World Bank and IMF accept such financial modes. He explained methods for Public Sector Enterprises (PSEs) to convert their debts and suggested that conventional banks could easily transition to Islamic ones with a coordinated effort by the State Bank and SECP, supported by legal and regulatory frameworks, comprehensive acts, laws, and Islamic banking courts.